When considering the sale of an asset, such as vacant land, capital gains tax isn't the only thing to keep in mind.
Is GST Payable on the Sale of Vacant Land?
Yes! Vendors and their agents need to be mindful of the need to pay goods and services tax (GST) when selling vacant land.
Keep in mind that GST is not payable in respect of the sale of “residential premises”, but it is payable in respect of the sale of many other kinds of land.
Vacant land upon which a residence may be constructed is not “residential premises” for the purposes of the GST regulations. To be considered “residential premises” the land must be either occupied as a residence or be capable of being occupied as a residence.
Is GST Already Included within the Purchase Price of Vacant Land?
The standard REIQ contract for the sale of houses and residential land provides that (unless otherwise specified in the contract) the purchase price includes any GST payable on the sale.
If such a contract is used to sell vacant land then, even if the land is zoned for residential usage, GST may very well be payable on the transaction and the vendor will not be entitled to recover any additional amount from the purchaser on account of GST. The vendor will therefore need to pay to the tax office one eleventh of the purchase price and the purchaser could require the vendor to give it a tax invoice which will allow the purchaser to obtain a credit for the GST paid by the seller.
Vendors and their agents should therefore be mindful of their GST liabilities on the sale of vacant land and, where possible, seek to include a condition in the contract requiring the purchaser to pay the additional 10% on account of GST on top of the purchase price.
Where the purchaser will not agree to this, then the vendor should at least consider whether there is scope to apply the margin scheme to the transaction and obtain the purchaser’s agreement in that regard prior to signing the contract.
In some circumstances, the margin scheme will allow the vendor to reduce the amount of GST payable on the transaction. Even after the contract has been signed, in some circumstances a co-operative purchaser, who is not registered for GST, may be prepared to agree to apply the margin scheme and thereby reduce the vendor’s GST liability.
Please don’t hesitate to contact us if you would like any further information or advice in relation to GST, selling vacant land and property in general.
