The
GST was intended to be a simple broad-based tax like the New Zealand
one. But we gave the bureaucrats a free hand to design a uniquely
Australian version and further complicate it with special exemptions
to persuade the Democrats to allow it through the Senate.
Consequently we now have a complex system that nobody fully
understands, and many of the official rulings are still drafts
'for industry and professional comment.' So these notes are correct
at the time of writing to the best of our knowledge, but details
may still be subject to change.
Basic Definitions
It is essential at the outset to understand that it is the vendor
(or landlord) who pays the tax direct to the government, not the
buyer.
Although the amount the buyer pays to the vendor includes the
tax component.
It is also important to understand the three ways the tax can
be applied:
1. Taxable Supply - GST is payable and the
vendor can deduct credits for previous GST payments (Inputs).
2. Input taxed - GST is not payable, but the
vendor cannot deduct previous GST payments.
3. GST Free - GST is not payable, and the vendor
can deduct credits for previous GST payments.
Most items are Taxable Supplies but many supplies like residential
rents and financial services are Input Taxed, whilst only special
exceptions will be GST Free like:
- State taxes, e.g. Land Tax and Stamp Duty.
- Council rates, including water and sewage charges.
- Planning and Building application fees.
- Fresh food
- Education and health costs.
- Overseas air fares.
- All exports
- Sale of the family home.
- Farming land, for continued use as a farm.
- Real Property as part of an ongoing concern.
Another point that is sometimes hard to grasp is that trading businesses
do not in effect 'pay' GST; e.g. it is not an extra cost to them
as they get a tax credit for any GST they do pay on their own purchases
or 'Inputs.' This credit is deducted from the taxes they collect
on their sales (which are paid by their purchasers), when calculating
the net amount to pay the ATO.
But in the case of Input Taxed Items businesses do incur an
extra cost as they are unable to claim tax credits on those inputs.
This particularly applies in the case of residential investments.
This means that not all businesses are going to be able to just
add all their tax payments together and claim them as one large
tax credit. They must be aware of any products they deal in that
are input taxed and keep those payments separate. No doubt a few
errors will arise in practice!
To Register or
Not To Register
Non-Registered investment property owners do not charge GST when
they make a sale or rent a property, whereas registered owners
must charge it (where required) and pass the GST on to the government.
This may sound like a powerful argument for not registering, but
there is a catch as non-registered investors (or businesses) cannot
claim back the GST payments they have made on their purchases
or expenses (inputs).
And they may also be breaking the law as any investor or business
with a gross income exceeding $50,000 p.a. must register and receive
an official Australian Business Number (ABN). There is an anomaly
here in that income from residential property is not included
when calculating the $50,000 as it is 'only' input taxed.
Investors and companies that earn less than $50,000 from other
sources still have the option to register, and if they do they
will be able to claim their tax credits.
Buying from
Non-Registered Vendors
Anyone buying investment property from a non-registered vendor
will not have to pay GST and may pay a lower price if most of
the vendors in that market are registered. But the non-registered
vendor may want to share some of this benefit and raise his price.
This will dissuade registered investors as they are able to claim
tax credits for any GST they pay. Only non-registered buyers will
gain an advantage from not paying GST, and eventually the marketplace
will set the price.
Buying Vacant Land
If you by it from a farmer it may be GST free. If you buy it
from an unregistered owner it is GST free. If you buy it from
a registered owner, the price you pay will include a GST component
which eventually will be 10%, but in the transition period could
well be less. You will receive a Tax Invoice and if you are registered
will be able to claim a tax credit for the GST paid in your first
tax statement after the ownership of the land is transferred.
Commercial Property Investments
Commercial properties are fully Taxable Supplies. GST is charged
on all sales and rents, and all GST payments can be claimed as
tax credits. Except that any non-registered owners do not charge
GST on sales or rent.
This is a 'no net loss' to both registered owners and tenants,
as GST is automatically returned to the tenants (as long as they
are registered) in the form of input tax credits.
Similarly, although the purchaser of a commercial property pays
GST to the vendor, he is able to recover the tax paid by claiming
it as an input tax credit.
So the net cost to him is zero - plus the paperwork of course.
Therefore GST will not raise the price of commercial property
at all! Although the landlord passes on to the ATO one eleventh
of the rent he collects from the tenant, he is able to claim input
tax credits for any GST he has paid on his expenses such as Body
Corporate levies, property management fees or repairs and maintenance.
There is therefore no case for higher commercial rents as a result
of GST, other than for the GST itself, which the tenant can then
recover.
The Family Home
Existing family homes can be sold without GST regardless of
whether they are sold to another family or to an investor. But
if you buy a new home the builder must charge 10% GST. When the
dust settles (by late 2000) his net costs will be some 4% lower
due to the abolition of Wholesale Sales Tax, so the overall cost
increase is only about 6%. Nor will subsequent resales of family
homes be taxed.
However, the full effect of this 6% increase will not be felt
for up to two years after GST is introduced as the builder does
not have to charge GST on any land he owns or on the value of
building work done before 1 July 2000. It is only when the builder
has to buy new land after 1 July 2000 that the full 6% increase
will come into effect.
Residential Investment Property Sales
When secondhand residential investment property is sold it will
not be subject to GST as long as the property is used 'predominantly
for residential accommodation.'
However, newly built residential investment property will attract
GST in the same way as the family home described above. The cost
of new residential property will therefore rise by around 6% over
the next two years.
Eventually the marketplace will operate to enable this to flow-on
to selling prices of existing residential property. How long this
takes will depend upon demand and the amount of new stock coming
onto the market. When it does, it will provide a windfall profit
to residential investors.
Residential Rents
GST is not charged on residential rents, regardless of whether
the owner is registered or not. And regardless or whether the
landlord owns one or twenty-one residences.
Residential rents come under the Input Taxed category, which
means the landlord's costs will rise by possibly 2-5% under GST
and if he is to receive the same return on his investment, he
will want to recover this from the tenant by raising the rent.
Whether or not he can do this without losing a tenant depends
upon the local rental market, and in any case he can only do it
when the current lease expires. No ruling has yet been made on
whether Holiday-let Units are to be treated like other longer
term residential property or as short term residential property
like hotels, motels etc. These come under a special classification
of 'commercial residential' with its own set of rules.
Protecting Existing Commercial Assets From GST
Property owners and builders will not charge GST when they sell
assets they owned before 1 July 2000. But they will have to pay
GST on any enhanced value or any building work that is carried
out on the properties after that date.
It will be necessary for all registered owners of existing commercial
investment property, and all builders and developers to obtain
valuations of their properties at 1 July 2000 in order to minimise
GST when they sell those properties.
Owners of existing residential investment properties are not
affected as GST is not applied when they are sold as long as their
use does not change.
There is no rush in the case of property valuations as Valuers
are able to prepare them retrospectively when the sale eventually
takes place.
But in the case of a building partly constructed at 1 July 2000
a Quantity Surveyor needs to assess the value of work done pre-GST
within a few days of that date.
The total costs the builder has spent at 1 July 2000 are compared
with his total project costs to arrive at a percentage completed
GST free, including land. That percentage is then applied to the
actual selling price to ensure the builder does not have to pay
GST on the whole of his profit.
GST and the Body Corporate
Large Bodies Corporate with annual levies exceeding $50,000
are required to be registered and to charge 10% GST on the levies
they send out to Unit owners. But they do get credits for all
GST payments they have already made to suppliers, tradesmen, etc.
Nevertheless their total outgoings are expected to rise by about
8% and Unit owners will need to pass that cost on to their tenants
if they are to achieve the same net yield on their investments.
Residential rents will only need to rise by about 2-3% to cover
the cost of unrecoverable input taxes. But commercial rents will
rise 10% to cover the GST.
Sinking Fund levies will also need to be increased by the 10%
GST, but in this case it may be some years before the Input Tax
Credits become available when the work is finally carried out.
Registration is optional for small Bodies Corporate of less
than 20 or so Units (i.e. $50,000 income). If they do not register
they do not have to add the 10% GST to their levies, but they
also cannot obtain a credit for any tax they have to pay on their
inputs. Nevertheless this is likely to be the preferred option
for most small Bodies Corporate as they avoid the extra bookwork
of sending in quarterly statements to the Tax Office.
Resident Unit Managers must pay GST on their Body Corporate
fees (often called a 'salary'), commissions, etc. In most cases
there will be no clause in their agreements to allow them to recover
this from the Body Corporate or from individual Unit owners. However
if the agreement was entered into before 2 December 1998 the tax
does not become due until the first remuneration review or 1 July
2005, whichever comes first.
This may involve some delicate negotiations in cases where the
Unit owners have been stuck with an old agreement that has escalated
the manager's salary at an unreasonably high rate. Owners may
see this as an opportunity to redress the balance. But where the
manager is doing a good job for a reasonable return it is to be
hoped that an amicable outcome can be achieved.
Warning:
There are many more complexities than covered in this introduction.
Investors must seek professional advice on the GST. We wish to
acknowledge the assistance in the preparation of this article
of accountants Steven Lutz, Brian Hunter and Peter Meyers and
Body Corporate manager Craig Hardy.
Copyright - Reprinted courtesy of Australian Property Investor
magazine.
