Taxpayer slugged for GST on proceeds they didn’t receive

Taxpayer slugged for GST on proceeds they didn’t receive

This is the sad tale of a taxpayer who sold a property, didn’t receive the full proceeds of the sale but still had to pay the taxman the GST as if they had received the full amount. There’s a salient lesson here for us all about property sales that may not go through as we may have expected, and what we need to do to protect ourselves and clients. The following is a summary of the ATO’s Decision Impact Statement. Facts of the Case (with the figures rounded) On 14 March 2008, the taxpayer contracted to sell a property to the Purchaser for $3.2 million plus GST of (about) $320,000. However, prior to settlement in May 2008, the purchaser notified the taxpayer that it was unable to pay the whole amount of the purchase price at settlement. On settlement, the taxpayer received $2 million from the purchaser and entered into a Settlement Balance Facility Agreement (‘SBFA’) with the purchaser for the balance of approximately $1.5m. The taxpayer secured payment of the balance owing with a (second) mortgage over the property. On settlement, the property was transferred to the purchaser and the documentation recorded the consideration as $3.5m. The taxpayer issued a tax invoice to the purchaser for $3.5m, including $320,000 in GST with a description of the supply as “sale of vacant land…”. The taxpayer did not receive any amount of the balance owing or accrued interest from the purchaser by 30 June 2008 as was required under the SBFA. In February 2009, the taxpayer and the purchaser entered into a Deed of Variation. The parties agreed that in place of the purchaser paying the balance of $1.5m and interest, the Purchaser would pay the taxpayer $500,000 within 21 days and transfer to the taxpayer three developed lots. On 23 February 2009, the purchaser paid the taxpayer $500,000. In May 2011, the taxpayer was notified by Westpac that it was exercising its power of sale as mortgagee in possession over the property. The taxpayer was later notified that there were insufficient funds from the sale of the property to distribute any amount to the taxpayer. The taxpayer did not receive any developed lots from the purchaser per the Deed of Variation. The taxpayer accounted for GST on a cash basis. The AAT’s Decision Basically, the AAT found that, in creating a loan facility for the purchaser, the taxpayer had received full consideration on settlement, being the amount received plus the amount of the monies owing. This view, not surprisingly, accords with the ATO’s that: “in a vendor financing arrangement, consideration is received by a supplier on setoff of the loan against amounts owing to the supplier by the purchaser.” Editor: Clearly, when taxpayers are in similar circumstances, they must clearly look to terminate the contract and possibly obtain advice to redraft the documentation so as to limit their GST liability.