Valuers need to consider GST on property sales

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FROM 1 July 2018, buyers of new residential property or potential residential land will pay GST to the Australian Tax Office, which could affect the pricing decisions of market participants and valuers need to consider when undertaking a valuation, according to the Australian Property Institute.

The new rules were brought in by the federal government to address GST tax evasion through ‘phoenix activity’ – where companies strip the assets and cash from a business before liquidating and restarting it under a different name. The government said in May last year, the measures will collect an additional $650 million in GST revenue over four years.

The measure has a two-year transitional arrangement to provide certainty for existing contracts. Contracts entered into before 1 July 2018 will not be affected by this change as long as the transaction settles before 1 July 2020.

To provide certainty to purchasers, a vendor must notify in writing whether a purchaser is required to withhold an amount. If the purchaser is required to withhold, the vendor must also notify the purchaser what that amount is and when it needs to be paid to us.

Purchasers do not need to register for GST just because they have a withholding requirement.

The API said the changes will affect how buyers and sellers view the market.

“Most bases of value represent the estimated exchange price of an asset without regard to the seller’s costs of sale or the buyer’s costs of purchase and without adjustment for any taxes payable by either party as a direct result of the transaction.”

The API said this does not mean that the effect of such costs and taxes on market participants and their decision to buy, sell or finance has to be ignored, only that the market value reported is the price that would be agreed in the transaction, not the net receipt that would be received by the seller or the gross cost that would be incurred by the buyer, as a result of the transaction.

“The transaction costs for real property can be significant.

“They do affect the pricing decisions of market participants and should be considered when analysing market data and in the valuation methods adopted,” the institute said.

The API said members providing residential mortgage valuations completed utilising the PropertyPRO Supporting Memorandum and pro-forma report do so in accordance with the following GST Report Clause:

“Valuations of residential property for mortgage security purposes are undertaken on the basis that GST is not applicable. This valuation is prepared on the assumption that the subject property does not constitute a ‘new residential premises’ as defined under ATO Ruling GSTR 2003/3. Further it is assumed that the subject property will transact as a residential property between parties not registered (and not required to be registered) for GST. The market valuation herein reflects a market transaction to which GST is not applicable.”

The API recommends that valuer members take both accounting and legal advice should they wish to clarify.

“The valuation should clearly state the approach to GST and contain a recommendation to the financier to undertake their own investigations into the GST liability if the actual GST situation applicable to the borrower is not clear.”

More information can be found at https://www.api.org.au/news/member-reminder-legislative-changes-gst-property-purchases and https://www.api.org.au/news/legislative-changes-gst-property-purchases

Australian Property Journal