GST and Real Estate Business's - How it can all go wrong

A recent GST decision by the Administrative Appeals Tribunal - (Crown Estates (Sales) Pty Ltd and Commissioner of Taxation. serves as a timely reminder to property managers to consider the nature of their dealings with their property-owner clients for the purposes of GST.

In this case it was generally accepted by all parties that the services agreement in place between the taxpayer and the property owners was a common law agency agreement. Under that agreement, the taxpayer had the authority to make certain acquisitions for use in maintaining or repairing the properties without the need to seek approval from the property owner. The applicant claimed input tax credits on these acquisitions on the basis that it was acting as principal and had made the acquisitions in its own right and passed on the costs to its clients, some of whom refused to pay.

The AAT having regard to the clear nature of the agreement affirmed that the property manager was acting as agent for the property owner and was therefore not entitled to input tax credits on those acquisitions made in undertaking its property management enterprise, which related to repairs and maintenance of its clients properties. This remained the case even where the property manager was identified on the tax invoice as the recipient of the supply.

This case essentially reaffirms conventional wisdom that real estate agents do not incur or charge GST for transactions they undertake on behalf of a property owner, such as the collection of rent and payment of property related expenses.

It should be noted that the decision did not impact those acquisitions made by the taxpayer in carrying on its general enterprise of property management. 

The Penalty

The real sting in this decision was in the tail, where the Tribunal confirmed the 50% penalty imposed by the Commissioner for recklessness, as the argument that the taxpayer was not acting as agent was an unlikely one, and the taxpayer should not have made the error given its access to proper advice.

On reading the factual background, this level of penalty may appear excessive, but nevertheless should serve as a warning to real estate agents and property managers alike involved in similarly structured arrangements.

It should be noted that this decision only impacts those agency arrangements between an agent and a resident property owner. Where the agent is acting on behalf of a non-resident property owner, the general rules of section 57 still apply. Division 57 of the A New Tax System (Goods and Services Tax) 1999 provides for resident agents of non-resident purchasers to get input tax credits (not the non-resident). This doesn’t apply to wholly on-shore acquisitions.