Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 9 - GST - supplies to offshore owners of Australian real property
Outline of chapter
9.1 Schedule 9 to this bill amends section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to remove an anomaly that allows supplies of certain services made to owners of residential property to be GST-free if the owner is not in Australia at the time of the supply. This will result in the same goods and services tax (GST) treatment applying to both non-resident and resident entities whether or not they are in Australia at the time of the supply.
Context of amendments
9.2 Broadly, the policy intent of the GST legislation is to tax the supply of goods and services and other things that are consumed in Australia. However, an anomaly has been identified in the GST Act that allows certain supplies relating to real property situated in Australia and made to entities outside Australia to be GST-free. Consequently, these entities receive more favourable tax treatment than entities in Australia.
9.3 The rental or sale of residential properties and certain commercial accommodation in Australia that is owned by residents is input taxed. This means no GST is payable on the supply of the residential premises and the owners are not entitled to input tax credits for acquisitions relating to the supply, such as advertising, trade and property maintenance services. In contrast, non-resident owners and certain resident owners, who are not in Australia when the thing is supplied, can acquire some or all of these services GST-free. This is because of the operation of item 2, 3 or 4 in the table in subsection 38-190(1) of the GST Act:
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- Item 2(a) in the table allows non-residents who are not in Australia to obtain GST-free, a supply that is indirectly connected with real property situated in Australia. Item 2(b) in the table allows unregistered non-resident entities who are not in Australia to obtain GST-free, supplies relating to Australian residential premises as long as they are acquired as part of the enterprise they carry on.
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- Item 3 in the table allows entities who are not in Australia to obtain GST-free, supplies made in relation to Australian real properties (except if they are directly connected with real property situated in Australia).
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- Item 4 in the table allows a supply of rights for use outside Australia or a supply of rights to non-residents who are not in Australia when the thing supplied is done to be GST-free.
Summary of new law
9.4 This bill ensures that a supply which relates (whether directly or indirectly) to making a supply of real property situated in Australia, the supply of which would be input taxed under Subdivision 40-B (residential rent) or 40-C (sales of residential premises), is not GST-free under section 38-190. Therefore the same GST treatment will apply to supplies acquired by both non-resident and resident owners in relation to their Australian residential properties.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| Supplies of things (other than goods or real property) made to offshore property owners will not be GST-free under section 38-190 where the owner's acquisition of the supplies relates (directly or indirectly) to the making of a supply of real property that would be an input taxed supply under Subdivision 40-B or 40-C of the GST Act. (These Subdivisions deal with residential rent and the sale of residential premises.) | Supplies of things (other than goods or real property) made in relation to the rental (lease, hire or licence) or sale of residential property or certain commercial accommodation (e.g. paragraph 40-35(1)(b)) in Australia are GST-free when they are made to certain offshore property owners. This means no GST is payable on the supplies.
However, when supplies of the same kind are made to resident owners of Australian residential properties, these supplies are generally taxable. Even if the resident owners are registered for GST, they would not be entitled to input tax credits for GST paid on these supplies. This is because residential rent and the sale of residential property (other than new residential property) in Australia is input taxed under Subdivision 40-B or 40-C of the GST Act. |
Detailed explanation of new law
9.5 This bill amends section 38-190 to ensure that supplies covered by items 2 to 4 in the table in subsection 38-190(1) that relate (whether directly or indirectly) to making a supply of real property in Australia, are not GST-free if the supply of the real property would be input taxed under Subdivisions 40-B and 40-C of the GST Act. [Schedule 9, item 1, subsection 38-190(2A)]
9.6 Supplies that would be directly related to the making of supplies of real property include a supply of architectural services for a particular property, real estate property management services, building insurance and legal services in preparing an instrument of mortgage over real property. Supplies that would be indirectly related to the making of supplies of real property in Australia include a supply of public liability insurance and advertising services.
Example 9.1
Jane is a non-resident of Australia who lives in Singapore. She owns a rental property in Brisbane. She hires a local gardener to maintain the garden. She also hires a local real estate agent to advertise the property for rent. The supply of the gardening service is directly related to the property while the advertising is indirectly related to the property. New subsection 38-190(2A) operates to ensure that these services are not GST-free.
Example 9.2
Delia, a non-resident landlord of Australia, owns a rental property on the Gold Coast. She acquires tax advice in the preparation of a tax return from a local tax agent which includes advice on the rental property. The acquisition of the advice is indirectly related to an input taxed supply of the rental property. The supply of this advice is not GST-free under section 38-190 because of the operation of subsection 38-190(2A).
9.7 If the acquisition is related, in whole or in part, to a supply of real property and the supply of the real property would be input taxed to any extent then the acquisition is not a GST-free supply under item 2, 3 or 4 in the table of subsection 38-190(1) because of the operation of subsection 38-190(2A). There is no apportionment available to make the acquisition GST-free to the extent the supply does not relate to real property that would be input taxed. If the supply of the real property would be input taxed to any extent then the entire acquisition is not GST-free.
Example 9.3
David is a non-resident of Australia living in Canada. He is a landlord of a complex consisting of a residential premise above a shop in Melbourne. David is not required to be registered for GST because his annual turnover is under $50,000. He hires a painter to repaint the exterior of the complex before he sells the complex. The entire supply of the painting service is taxable. If David chose to register he could claim input tax credits for the part of the painting service that relates to the shop. However, David would not be entitled to input tax credits for the part of the acquisition that relates to the input taxed supply of the residential premise.
9.8 Subsection 38-190(3) is amended to insert a reference to new subsection 38-190(2A) to ensure that if a supply covered by subsection 38-190(2A) is provided to another entity in Australia, both subsections 38-190(2A) and 38-190(3) will ensure that the supply is not GST-free. [Schedule 9, item 2, subsection 38-190(3)]
Date of application
9.9 The amendments will apply to supplies made on or after the first day of the first quarterly tax period following the day on which this bill receives Royal Assent. Quarterly tax period means a period of three months that commences on 1 January, 1 April, 1 July or 1 October. [Schedule 9, item 3]
Example 9.4
If this bill receives Royal Assent on 2 December 2004, the amendments would apply to supplies made on or after 1 January 2005. However, if this bill receives Royal Assent on 10 February 2005, the amendments would apply to supplies made on or after 1 April 2005.