Ponder this one: A tricky GST situation

[Stevegoodey]

A property trader who intends to renovate a house then sell it for profit (and so is GST registered) buys a house at mortgagee auction.

Post auction the purchasers are told that the vendor has claimed GST on the property in the last few days and so the bank is changing the contract from "Inclusive of GST" to "Plus GST if any".

The bank now expects the purchaser to pay the drop of hammer price "Plus GST".

Some questions and thoughts:

The purchaser is buying the property off the bank and so their vendor is (say) Westpac not the person living in the house, and so is this a liability shield?

The bank are pointing out that the contract say's that the bank takes no liability and that all cost's and expenses in the transaction are the liability of the purchaser, but the contract also clearly states that the purchase price is "Inclusive of GST" and the purchaser should be able to rely on the fact that their purchase price is the hammer drop price.

Possible solutions and outcomes welcome.

[motivated]

Classic case of misrepresentation if the bank is trying to amend the contact after the event. Whilst the buyer will have been expecting to meet "all costs" (incidentals, legal etc), the purchaser is entitled to rely on fundamental conditions of auction such as whether the auction is incl gst or plus gst.
They cant change the rules of the game after the auction and get away with it.
Was the agent in some way involved in this as well or was this entirely driven by the bank ?

[Rosco]

As a GST registered person you need to be extremely careful when buying "inclusive of GST". Say it was $230,000 inclusive of GST

In this case, from a tax perspective, both the buyer and seller are GST registered, so it is zero rated. As the $230,000 is written on the sale and purchase agreement, it is zero rated at $230,000.

So now the GST registered buyer has really purchased for $230,000 + GST or $264,500, an extra cost of $34,500.

I'm sure from a legal perspective you could try to argue misrepresentation, but it depends on what questions were asked and confirmed when. I have seen cases where the purchaser just didn't ask and presumed the vendor wasn't GST registered. Therefore there own fault for not double checking.

Ross

[Rosco]

Solutions?

1) Sometimes you can play around with a non GST registered entity, then sell to the GST entity, who claims the GST. You might be too late, but could get advise on nominating another purchaser to settle.

2) Is there any evidence in the auction documents that the vendor was not GST registered. Or did any of the real estate agents confirm the vendor was not GST registered?

Unfortunately as I put above, the fact the sale was inclusive of GST doesn't help you.

Ross

[Davo36]

At the end of sales and purchase agreements, they have a section where each party fills in their GST status. What was filled in for the vendor?

[Rosco]

This would be an auction, so isn't always so clear!

[speights boy]

Not sure if this thread is of any help or relevance ?

Property trader duped out of $30k by vendor and GST zero rating rules

[Davo36]

This would be an auction, so isn't always so clear!

What? The auction agreement is usually done before the auction, so buyers can peruse it. If it said the vendor was not GST registered in the back part of the agreement, I don't see how they can change that.

[spaceman]

errrrmmmmm????.....am I missing something here???......doesn't seem tricky to me.

The original contract stated INCL GST ....... end of story no????

If the contract said nothing in relation to GST then perhaps the bank could argue.......but it's kinda hard to argue sensibly over what INCL GST means

Cheers
Spaceman

[Stevegoodey]

The auctioneer stated that the vendor (being the bank) was not a GST registered party for the purposes of this transaction.
But what the bank is trying to do is say that the contract signed on fall of hammer transfers all liability and risk to the purchaser and that the GST liability has now become a liability that the purchase must accept.

The bank has just found out they are going to get left with this GST margin and their trying to contract out the risk, I don't think they can but it makes for an interesting precedent.

[Stevegoodey]

Often this section is either left out of bank/lawyer produced mortgagee documentation or the agents won't fill this in until the agreement is signed.

Which leaves the purchaser in limbo.
Often agents who don't deal with traders, don't recognize how important it is that we know who we are purchasing off and who they are selling to.

[Davo36]

Yep right, but I guess there is a S&P signed now. Was that section filled in when it was signed?

If so, it's just another little thing in your favour I reckon.

I once had Crockers chase me for $11k in overdue body corp fees on an office mortgagee sale. The solicitors acting for the bank (Westpac) had given an undertaking of what was owed. They had stuffed up and not considered the BC fees. So my solicitor sorted it out, but it cost me $1000 or so for his time to do do.

So many things can happen with mortgagee sales.

[Rosco]

The question is really whether it was a zero rated sale or not.

If both parties were GST registered, then it must be zero rated for GST purposes.

If it was zero rated, then it is zero rated at the purchase price on the contract. So zero rated at $230,000 using my earlier figures.

If zero rated, the purchaser will not be able to claim GST back on the purchase.

Maybe the purchaser can chase the vendor, but I doubt it will be able to get anything of the bank.

Ross

[Rosco]

Whether the part at the back was filled out or not, doesn't change the zero rating status as this is set in law if both parties are GST registered.

If the contract was filled in wrongly you might have some come back on the agent or vendor?

Ross

[motivated]

Had a big argument pre-auction about this issue and tried to get the agent to do a pre-auction agreement that would allow the bidding to be gst incl so it was on the same basis as others, but in the proposed side agreement our final bid was to have gst deducted to allow for zero rating.
The agent got really snotty and threw their toys--and i dont think they understood the gst issues of this situation and their management wern't overly helpful. Someone else paid far too much so we didnt get to see it to the end.
This issue does need to be sorted by the real estate industry as it will arise time and time again.
Zero rated transactions are fine if ALL parties are gst reg---- but with property, the rules as set up with zero rated transactions create a mess at auctions as not all transactions are on a level playing field