The price of new houses could increase by up to $20,000 because of a federal government decision to increase GST payable by property developers, a leading law firm claims.
As reported last week by QBR, changes to the GST law applying from March 17, with retrospective effect, will see the GST margin method applied on the sale of land that had been acquired by the seller as a GST-free going concern or as GST free farm land calculated by reference to the market value of the property at July 1, 2000.
This is expected to have a significant impact on development costs.
Steve Healy, property partner at Gadens Lawyers, says GST is payable on the sale of a new residence to a house buyer or investor. House buyers and investors cannot claim an input tax credit for the GST paid, and so any GST cost is added directly onto the purchase price.
To minimise this cost, he says, house builders use the margin scheme under which GST is calculated on the difference between the price the developer paid for the land and the sale price (instead of GST being calculated on the full sale price). The use of the margin method can reduce GST by up to 50%. On a new house and land package of $400,000 this is a saving of $20,000.
Healy, who is lobbying to have the law changed, says it results in double-dipping by the ATO where there has been a margin method sale since July 1, 2000.
"The passage of time being forced to go back to 1 July 2000 is totally inappropriate. Rather, the margin method should be calculated on the difference between the last margin method sale and the developer's sale price," he says.
Healy says a second problem relates to tracing the history of the block of land.
"Generally, the margin method can only be used if the property has always previously been dealt with under the margin method," he says.
"At Gadens we have found it comparatively easy to look at all sales of a property back to 1 July 2000, but with the passage of time this is becoming more difficult. Often the information will not be available to verify that the margin method has always been used."
When the developer is unable to verify the use of the margin method, to avoid an unexpected liability the developer will need to allow for the ordinary method to apply resulting in higher prices for house buyers.
Gadens is calling for the law to be changed so that developers can rely on the fact that the vendor to them used the margin method, rather than an audit being required of all previous transactions.
"We hope to have answers reasonably promptly on both these matters as they impact transactions which occur every day within our large property practice," Healy says.