Sunchen Vs FCT

Under section 40-65 the sale of residential premises is input taxed but only to the extent that the property is residential premises “to be used” predominantly for residential accommodation.

The meaning of “to be used” was debated in The Federal Court decision in Sunchen Pty Ltd vs Commissioner of Taxation [2010] FCA 21 (29 January 2010). It was held in that case that the future intention of the purchaser should determine the GST treatment of the sale.

Facts

• Sunchen purchased land upon which a house was erected. The contract included as a component of the purchase price an amount said to be for GST.
• The purchaser claimed an input tax credit for this amount. The claim was disallowed on the basis that the supply was an input taxed supply.
• The purchaser argued that it intended to develop the property and therefore the property was not held predominantly for residential use.
• The evidence did not establish that the taxpayer’s intention was to develop the property.

Issue and decision

The decision was that the input tax credit was not allowed.

The result was inevitable given the evidence but Perram J considered the meaning of the term “to be used” in s 40-65. In Toyama Pty Limited v Landmark Building and Developments Pty Ltd [2006] NSWSC 83; (2006) 197 FLR 74  the Supreme Court of NSW held that this term required an examination of the subjective intention of the purchaser. In contrast in Marana Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 307; (2004) 141 FCR 299 the Full Federal Court held that it was objective purpose or use for which the building was intended that was relevant. Although Perram J preferred the Marana approach he felt bound to follow the Toyama reasoning as this was not “plainly wrong”.

Therefore he held that the subjective intention of the purchaser to use the property as residential accommodation or otherwise would determine whether the sale was an input taxed supply

Until there is legislative correction or further court consideration the intention of the purchaser is relevant in determining the GST status of the sale of residential property. This is a wholly undesirable situation.

In the meanwhile it is imperative that vendors ensure that their Sale Contracts incorporate appropriate GST clauses so they do not incur unexpected GST liabilities and/or undertake steps to determine the intention of their purchaser. 

If you have any questions please contact your Moore Stephens relationship partner.

Author: Stephen Adrian, Director- Taxation, Moore Stephens Melbourne Pty Ltd