VAT and Immovable Property: Full Taxation Models and the Treatment of Capital Gains on Owner-Occupied Residences

VAT EXEMPTIONS: CONSEQUENCES AND ALTERNATIVES, Rita de la Feria, ed., Kluwer Law: The Hague, 2013

Sydney Law School Research Paper No. 13/50

55 Pages Posted: 11 Jul 2013 Last revised: 25 Oct 2016

See all articles by Rebecca Millar

Rebecca Millar

The University of Sydney Law School

Date Written: July 1, 2013

Abstract

How should immovable property (in particular residential property) be treated under a value added tax? This paper considers whether proposals to tax all sales of immovable property (including consumer to consumer sales) are preferable to existing models (in which the first sale of new residential property is taxed – the price representing the net present value of the future consumption of the asset purchased – and subsequent sales are exempt).

After setting out the essential features of a modern VAT, the paper outlines the consequences of taxing immovable property in full under a VAT, using an example that is gradually changed to illustrate the effects of different approaches. The examples illustrate how full taxation of sales of immovable property equates to non-taxation, while taxing re-sales of residential property with deferred input tax credits (whether without indexation, as proposed by Poddar, or with, as proposed by Conrad) amounts to a capital gains tax on homeowners. The paper concludes that existing models are not merely acceptable alternatives to a full taxation ideal but are in fact the only approach that is consistent with the underlying design of transaction-method VATs. The final section of the paper focuses on how exactly how such models can be given legal effect, using the New Zealand and Australian GSTs as examples. The discussion highlights one critical design feature of both countries’ laws, which is ignored in most comparative tax discussions. Both countries target their GST only at value added to land by persons carrying on economic activities. They exclude from the tax base any capital appreciation (or depreciation) on immovable property held by owner-occupiers, residential landlords, and mere investors – an effect that is diametrically opposed to the proposals of Poddar and Cnossen. For reasons explained in the paper, the New Zealand approach has the advantage of being simpler and conceptually clearer, from a legal perspective, and is probably to be preferred.

Keywords: VAT, GST, value added tax, goods and services tax, VAT treatment of land, VAT on immoveable property, VAT on real property, VAT treatment of residences, VAT on owner-occupiers, New Zealand GST, Australian GST, VAT and grants, VAT and subsidies, comparative tax law, comparative law

JEL Classification: K10, K30, K34

Suggested Citation

Millar, Rebecca Mescal, VAT and Immovable Property: Full Taxation Models and the Treatment of Capital Gains on Owner-Occupied Residences (July 1, 2013). VAT EXEMPTIONS: CONSEQUENCES AND ALTERNATIVES, Rita de la Feria, ed., Kluwer Law: The Hague, 2013; Sydney Law School Research Paper No. 13/50. Available at SSRN: https://ssrn.com/abstract=2291790

Rebecca Mescal Millar (Contact Author)

The University of Sydney Law School ( email )

New Law Building, F10
The University of Sydney
Sydney, NSW 2006
Australia

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