Selling land? Beware GST traps

In simple terms, under the GST law, sales of residential premises are considered to be input taxed supplies and the seller does not have to charge GST on the sales. Seems simple enough. But, as with all tax law, simple isn’t necessarily simple!

The issue hinges on what the GST law considers to be “residential premises”.

In a recent case before the Full Federal Court – Vidler v FCT [2010] FCAFC 59 – the taxpayer lost out. He had bought a property in Ipswich in Queensland in August 2004 for $1 million and sold it in December 2004 for $2.3 million. The property consisted of 2.7 hectares of vacant land which was zoned residential low density. At the time of sale, the property was connected to an electric power supply but was not connected to (but was able to be connected to) gas, water and sewerage infrastructures at the boundaries of the property.

The taxpayer sold the property in the same condition as he had acquired it several months earlier, ie. as “vacant residential land”. The taxpayer contended the supply of the land by him was an input taxed supply under the GST Act on the basis the property was “residential premises”.

The taxpayer had also purchased another property in Ipswich in May 2004 for $175,000 and sold it in April 2005 for $285,900. This property consisted of 2,428 square metres of vacant land which was zoned Character Mixed Residential. At the time of sale of this property, it was able to be connected (but was not connected) to an electric power supply and a water supply available at the boundaries of the property and to sewerage infrastructure which passed through the property. Again, the property was sold as “vacant residential land” which, again, the taxpayer contended was input taxed under GST law.

The Tax Commissioner disagreed with the taxpayer and assessed him as having made taxable supplies of the respective properties. Consequently, GST assessments totalling over $130,000 were issued by the Tax Commissioner to the taxpayer.

The taxpayer argued that vacant land could be “residential premises”. He claimed the words of the law should not be read so that “land” meant land with a building on it, or that “land or a building” was read as if it was “land with a building”, or that “land… that is intended to be occupied and is [so] capable” be read as requiring existing shelter or living facilities be on the land.

The AAT, the Federal Court and then the Full Federal Court disagreed, saying that, for the purpose of the GST law, vacant land is not land that is capable of being occupied as a residence or for residential accommodation.

The taxpayer’s unsuccessful trail through the courts

At first instance, the AAT agreed with the Commissioner’s submission that vacant land (whether zoned for residential use or otherwise) could never be “capable of being occupied” as a residence or for residential accommodation at the time of its supply (ie. sale) because land is not capable of being so occupied unless, at the very least, “it has upon it a structure that contains facilities required for day-to-day living”.

The definition of “residential premises” in the GST law commences with the phrase “means land or a building that…”. In deciding against the taxpayer, the AAT considered that the opening words of the definition must be read as accommodating the two possibilities that residential premises can be constituted by:

• land, incorporating a building, intended to be occupied and capable of being occupied as a residence or for residential accommodation; or
• a building intended to be occupied and capable of being occupied as a residence or for residential accommodation.

The taxpayer appealed against the AAT’s decision to the Federal Court, and in doing so maintained the argument there was no warrant to read the word “land” to mean “land with a building on it”. The taxpayer lost before the Federal Court and then appealed to the Full Federal Court.

The Full Federal Court did not agree with the taxpayer’s contention and so the taxpayer lost there too. It held that vacant land is not land capable of being occupied as a residence or for residential accommodation within the GST law definition of “residential premises”. The Full Court agreed with the Tax Commissioner’s contention that it would be absurd if the mere existence of a tap in the middle of an acre of vacant land could transform that land into “residential premises” for the purposes of the GST Act.

The ATO says the decision confirms the Commissioner’s view, as expressed in GST Ruling GSTR 2000/20 (para 25), that vacant land of itself can never have sufficient physical characteristics to mark it out as being able to be, or intended to be, occupied as a residence or for residential accommodation.

SMEs, or anyone else, considering selling land and claiming it is residential premises under GST law need to be very sure of their ground (pun intended)!

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.

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