Seller beware

July 2016

by Nicolaos Giannopoulos

The un-intended implications on supplies of buildings under the GST legislation

Item 2 of the First Schedule to the Goods and Services Tax (Exempt Supply) Order 2014 (Exemption Order)

“Any building or premises to the extent of it being used for residential purposes, designed or adapted for use or intended to be used as dwelling excluding hotel, inn, boarding house or similar establishment of sleeping accommodation.” (Emphasis added)

On the surface, ‘item 2 of the First Schedule to the Exemption Order’ (item 2) appears innocuous. However delve a little deeper and you will find the language employed by the statute has the potential for varying interpretations and applications and hence a likelihood of disputes with the Royal Malaysian Customs Department (RMCD).

What can be gleaned from item 2?

“used for residential purposes”

In the context of item 2, the phrase "used for residential purposes" appears to merely signify use of the building for lodging, sleeping or accommodation, without indicating whether the use be for any fixed or minimum period. Had the draftsmen of the GST law wished for such they could have considered using the phrase “used as a residence” instead, which clearly would have implied a degree of permanency to the use.

The word “used” is critical because it appears to require an assessment of the current usage of the building; current being at the time of the supply. From a GST perspective this is ideal; as the liability for GST falls on the supplier, he must (at the time of supply) have legal certainty as to the GST treatment of his supply and subsequent liability. 

Thus in our view, "building used for residential purposes" merely signifies a building used for lodging or sleeping accommodation, regardless of the duration of the use.

“designed or adapted for use as a dwelling”

In assessing whether the design and adaptation is “for use as a dwelling” the draftmen appear to require an assessment of the capability for the building to be used as a “dwelling”. This will likely require an assessment of the physical attributes and characteristics of the building.

These physical attributes and characteristics must be reflective of a “dwelling”. The use of the word “dwelling” is one which is not surprising as it has formed the cornerstone of the United Kingdom (UK) VAT rules pertaining to property. 

As a consequence there exists an abundance of case law which can be used as reference in matters requiring an assessment of whether a building is in fact a “dwelling”.

In a precedential UK case deciding upon the meaning of the word “dwelling” [Uratemp Ventures Limited v Collins (2001) UKHL 43], it was decided that a “dwelling” is “a place where somebody lived, to which he returned and which formed the centre of his existence”. 

It should be a place with facilities for day-to-day living, consisting of areas for sleeping, eating and bathing. Thus, these are the physical attributes and characteristics requiring an assessment of whether a building is in fact a “dwelling”.

Although not a case decided on a VAT issue, it has nevertheless been referenced by numerous UK VAT tribunals and courts since the relevant courts judgement.

“intended to be used as a dwelling”

When undertaking a statutory interpretation of a provision of an Act, a construction that promotes the purpose or object underlying the Act should be preferred, to a construction that would not promote that purpose or object as prescribed under Section 17A of the Interpretations Acts 1948 and 1967.

Thus it is imperative when interpreting the application of item 2 to ascertain the purpose of the GST Act.

That purpose can be found in the preamble to the GST Act, being "to provide for the imposition and collection of goods and services tax and for matters connected therewith." (emphasis added)

The 'imposition" of the GST is prescribed by Section 9 of the GST Act (the charging provision of the tax). 

This provision imposes GST on a supply and the liability for GST upon the supplier. Thus from this we surmise that the purpose of the GST Act is to impose GST on a supply and impose the liability for GST upon the supplier. 

In order for this purpose to be fulfilled, the draftsmen of the GST laws must provide the supplier with legal certainty as to the GST treatment of his supplies, and hence his liabilities. 

With respect to item 2, the draftsmen have utilised the word "intended". 

The word is defined, under the Oxford Advanced Learners Dictionary, as follows:

• planned; meant; the intended meaning/ result/ purpose/ effect.

The word must be read and interpreted (bearing in mind the purpose of the GST Act) to enable the supplier to have certainty as to the imposition of the tax.

For this to occur, the words "intended to be used" must be read and interpreted as assessing the objective suitability of the building being supplied (not the subjective intention of the purchaser). 

This is supported by the grammatical construct of item 2. Item 2 uses as its grammatical subject "building or premise". Hence it is only the building or premise which is the object of the relevant intention (and not anyone or anything else); "building or premise…intended to be used for residential purposes" implicitly describes the intention with which the building is capable or suitable for that purpose (residential use).

It should be read as meaning a building "suitable for use", “capable for use", "permissible" or "having the necessary qualities" to be used for residential purposes.

Based upon the above reasoning, the "intended for use" requires an assessment of the physical attributes and characteristics of the building at the time of supply by the supplier. 

Contrary view

If Parliament had intended that the subjective intention of the purchaser (or even that of the supplier) be relevant in ascertaining the GST treatment, then it would be prescribed so in item 2. However there is nothing in the wording to suggest that the subjective intention of the purchaser is relevant to the operation of item 2. 

To take into consideration the purchasers intended (future) use of the land would be to apply the GST in an entirely inconsistent approach with the purpose of the GST i.e. that GST is imposed on the supply and the liability on the supplier at the time of supply and not on a prediction as to the future use of the building by the purchaser (which in some instances may never be known to the vendor or may change with time).

And it would be far removed from the basic tenants of GST i.e. that the supplier has legal certainty as to the GST treatment of his supplies and his liabilities.

Concluding remarks

The GST treatment of the supply of a building appears to be complicated by the use of language which could be interpreted by some as requiring the vendor to ascertain the purchasers intended use of the building. Views are divided as to whether the purchaser's subjective purpose must be established. 

Our view is that at the time of supply the vendor needs to assess whether the building being supplied is "suitable for use", "capable for use", "permissible" or "has the necessary qualities" to be used for residential purposes. It is our view that such building is an exempt supply, to the extent that the intended use is for residential purposes.

An examination of the subjective intention of, or use by, any particular person, purchaser or otherwise is not relevant; instead the intention refers to the objective intention with which the particular premises are designed, built or modified.

This would avoid the situation where for example the vendor supplies a building which has the physical attributes of a residential property, but assigns the GST treatment based on the purchaser’s intention to demolish the building and use the land as a car lot (commercial).

Taking into account the objective intention with which the particular premises are designed, built or modified will make the task of determining whether a supply of a building is exempt or not somewhat simpler. However it is still a question of law and fact which can result in difficulties where the factors are finely balanced.

Nicolaos Giannopoulos is an Executive Director, Indirect Tax Advisory Group at PwC Malaysia.