| |
| Caravans and GST: we're all being taken for a ride |
| |
|
Contact: Peter Hill
|
| |
The caravan park debacle was not an isolated issue. Its genesis was the preservation of the great Australian dream. We don't normally publish material in GST Today that is not focused on business issues, but sometimes the games being played in Canberra to the media circus audience deserve some reality checks.
What would have happened if the Howard Government had tried to win the 1998 Federal election on the platform of a GST on the sale of private homes? The answer is moot - the scenario was simply inconceivable.
The fact that is often overlooked, however, is that the absence of any GST on the sale of the family castle is not due to any special rule in the GST law. It is because those of us fortunate enough to own our home do so in our private capacity. So when it comes time to sell, we will also be supplying (that is selling) our home in that same private capacity. In this way, we don't come within the standard meaning of a "taxable supply", and nobody pays GST unless it is in respect of the making of a taxable supply.
The designers of our GST law (and we are referring here to the pre-Democrat phase of the design process), recognised the economic distortions that would flow from the escape of the family home from the GST net. They took note of the potential situation whereby a brick two-bedroom Federation, free-standing, original condition home could be bought for $400,000 (no GST), whereas the brick two-bedroom Federation, free-standing, original condition home right next door could be bought for $400,000 (including GST).
To a private purchaser, the cost is the same. But the outcomes for the vendors are different. The owner of the house with the GST-inclusive price tag is registered for GST because they are a landlord, and selling an investment property does form part of carrying on an enterprise, an essential ingredient of a taxable supply. The result is that the private vendor pockets $400,000 (before other taxes of course!) but the landlord loses $36,364 as GST.
So there was a need for a special rule. The law as was drafted, and as we now currently have it, makes the sale of non-new residential homes input taxed. This is the effect of section 40-65 of the GST Act. Comparable treatment ensured, distortions dealt with. Everyone happy.
But hang on, what about the non-participants in the great Australian dream? Why should tenants be hit with GST on their rent payments when mortgage payers escape GST on their loans? Good question, and the answer was to create another special rule. But this is where the Federal Government may have made its first mistake in this touchy area. The special rule was simply to make residential rent input taxed too. This is the effect of section 40-35 of the GST Act.
Logic would have it, however, that if you hit a residential landlord with increased costs due to GST but deny them the right to claim it back, they are going to want to maintain their yield somehow. That somehow has to be increased rent doesn't it? The answer is clearly yes, and this was finally admitted by the Federal Government in a media release issued by the Treasurer in June 2000.
Remember, though, the designers of the GST law were focused on smoothing the economic path of the supplier, not the recipient. On that basis, there was no distortion in making residential rent input taxed, so there was no problem. But was there?
Indeed there was, and now we get close to yet another special rule. (Anyone discerning a theme happening here will begin to realise why our cut and paste GST system is anything but simple.) The pre-Democrat phase designers thought there was a consequent need to help out a special category of suppliers, the owners and operators of caravan parks and boarding houses, which are euphemistically labelled "commercial residential accommodation that is predominantly for long-term accommodation".
The problem identified, and the official reason for this extra special rule, was that the supplier of accommodation by way of a caravan, for example, "would have to apportion input tax credits between that part that relates to the residential accommodation and that part that relates to services". This is what the Explanatory Memorandum to the GST Bill said about the need for Division 87 of the GST Act. And the solution? "To avoid this and make the calculations easier, a concessionary treatment . . . is given."
This is the special rule that the Democrats, having agreed to it 12 months previously, wanted to amend. This is the special rule the Labor Party wants to repeal. The "concession" is to allow the supplier of the caravan to claim input tax credits and be only liable to 10% GST on half the rent. This is where the Federal Government definitely made several mistakes.
The first mistake was to focus the special rule yet again on the supplier and not the recipient. The tabloid TV said that 75% of the residents caught by this special rule are low income earners. Effectively adding 5% to their accommodation costs is not fair and hardly a concession.
The second mistake was to even legislate the solution. The Commissioner of Taxation is perfectly capable of exercising the responsibility of formulating a straightforward and reasonable means of apportionment of costs by way of ruling or determination. He has already done so. Why didn't the Federal Government simply leave the supply side alone?
The third mistake was to believe there was ever a problem needing a special fix-it rule. Having to apportion input tax credits is hardly an isolated or unusual feature of the GST environment. Many other types of big and small businesses have to do it. What makes caravan park or boarding house owners unique?
The Federal Government has the power to increase or decrease the concessionary treatment by regulation, but has chosen, for now, to opt for the "throw money at it" solution. The Democrats agreed in return not to force an amendment to Division 87 to effectively bring the GST rate down to 2.5%. The result was that more legislation was passed.
This time the Compensation Measures Legislation Amendment (Rent Assistance Increase) Act 2000 was quickly passed to amend the legislation which in turn amends the Social Security Act 1991 and the Veterans Entitlements Act 1986 to now provide a 10% increase (up from 7%) in the maximum rent assistance rates available to social security and veterans pensioners and other social security recipients. The increase applies from 1 July 2000.
The change will provide extra assistance for people with low incomes in rental accommodation, including caravan park, mobile home and boarding house residents.
The maximum rent assistance rates for family tax benefit are also to be similarly increased by disallowable instrument (made under section 8(1) of Schedule 4 to the ANTS (Family Assistance) Act 1999). The estimated cost of "fixing" this problem is $33 million per annum.
And if Labor had had their way? Repealing the special rule for caravan parks and the like would have brought us back to the first special rule. The one that input taxes residential rent. The one that would therefore see the cost of living in a caravan rise by 4.7% on the Federal Government's belatedly-released estimates.
Here's the rub though: the special rule for caravan parks and boarding houses stays, including the little bit that says that any supplier otherwise subject to GST on half the value of the rent can choose to stay input taxed!
This in turn will create further distortions - all persons eligible for rent assistance will benefit from the 10% maximum increase, but some recipients will see their rent increase by 2.5% (or a lesser amount) and some will see their rent increase by 4.7%. If anything, and because the Democrats forced the increase in rent assistance, Division 87 should be repealed forthwith.
Subsequent legislative and regulatory changes may have impacted upon the subject matter of this article.
Peter Hill
BBus MTax FTIA
Managing Writer - ATP
ATP - GST
July, 2000
March, 2001
|
| |
|
