Including Resales of Residential Premises in the GST Base

In the broad-based consumption tax system known as a value-added tax or goods and services tax (GST), the treatment of residential premises in practice is usually inconsistent with the economic objective of the tax. This objective is that the flow of consumption is subject to taxation. For housing, this means that the value of the total consumption of housing may not fully be captured within the GST base.

Generally, the effect of the GST (as it is called in Australia) in practice is that the first sale of residential premises from a property developer to a homeowner is included in the GST base but later sales of residential premises from one homeowner to another are not.

Under what is known as the prepaid method, the value of residential premises when a property developer first sells is assumed to be equal to the value of all future consumption of the residential premises. However, this assumption is not always valid. The value of residential buildings depreciates over time but, in most metropolitan areas at least, increases in the value of residential land, which is part of the value of an owner’s consumption of residential premises, are not captured within the GST base. The value of the total consumption of residential premises may therefore increase, over and above the market value of residential premises when first sold from a property developer or builder to a homeowner.

Various proposals have recommended that the resale of residential premises from one homeowner to another should be subject to GST. Currently, homeowners are generally unable to register for GST. This tax is not imposed on supplies that are personal, and homeowners are generally regarded as not selling residential premises in the course of a business (or taxable activity). Therefore, they are unable to charge GST on the sale of residential premises or to claim an input credit on purchase. It may not be practically and politically feasible to require homeowners to register for GST purposes and collect GST on the sale of residential premises.

Administrative solutions to collect GST on residential premises

My recent journal article considers three possible ways in which GST collection could occur in relation to sales of residential premises between otherwise unregistered homeowners without them having to register for GST purposes.

First, an intermediary involved in the property transfer, such as a lawyer or conveyancer, could be required to collect GST owing on the purchase of residential premises and remit it to the tax authority. Such an approach would appear suitable in Australia where these professionals are already commonly engaged to perform tasks related to the transfer of immovable property.

Second, the GST could be collected through an agency responsible for the transfer of title, such as a government property registry. This is similar to how some taxes on transfer of property (such as stamp duty in Australia) is collected.

Third, a purchaser of residential premises could be required to account for the GST payable directly to the tax authority. This is similar to how Australian purchasers pay GST on some taxable supplies of real property directly to the Australian Taxation Office.

How can input credits on home purchase be managed?

If sales of residential premises between homeowners are subject to GST, then homeowners should also be entitled to deferred input tax credits for the GST paid in connection with the purchase of residential premises, or other costs such as renovations or improvements. There is a challenge in identifying the quantum of possible input tax credits that could be claimed.

For example, if input tax credits were available to homeowners, then it would be appropriate for homeowners to claim input tax credits in relation to GST incurred in increasing the consumption value of residential premises, such as in relation to the cost of improvements. However, input credits should not be allowed on repair and maintenance costs because these do not result in any additional value of consumption that should be subject to GST or any corresponding input tax credits to provide to a homeowner.

It would be important that any potential burden and associated complexity for homeowners of having to maintain records to claim input tax credits is not greater than the requirements imposed in Australia for capital gains tax purposes. This burden could potentially be eased through the use of a presumptive input tax credit system. Under such a system, if homeowners did not wish to keep records of costs they could instead claim input tax credits according to a schedule of items, which might include fixed amounts for certain items such as the addition of a balcony or bedroom.

The Torrens title registration system used in several states and territories in Australia could be adapted to assist in retaining a record of the GST paid on the purchase of residential premises. GST paid when residential premises are purchased could be recorded on the title documents.

Residential housing is both consumption and investment

These recommendations do not take into account the fact that residential premises have both a consumption and an investment component. Allowing a homeowner to claim full input tax credits in relation to the GST paid on the purchase of residential premises, and in relation to costs relating to owning residential premises, would mean that the residential premises would be treated as a pure investment. This is due to there being no GST net effect of purchasing and owning residential premises. This result would not reflect the fact that a homeowner has effectively consumed some of the value of the residential premises that they have owned.

From a consumption tax perspective, a more appropriate result would be achieved if GST was not charged on the upfront purchase of residential premises. Rather the consumption value that residential premises theoretically provide to homeowners should be included in the GST base on a yearly basis, and no input tax credits should be allowed to homeowners.

In the Australian context, this could be done by charging GST on an estimate of the value of accommodation services that residential premises theoretically provide to homeowners (in Victoria, this estimate could be the net annual value, already used for rating purposes).

If this could be achieved, it would result in a valuable new revenue stream for governments.

 

This article is based on Peacock, Christine, (2019), How could sales of residential premises between otherwise unregistered homeowners be brought into the VAT base? Journal of the Australasian Tax Teachers Association 14(1), pp. 151-169.