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| GST questions we've been asked |
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Contact: Paul Stacey
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Our by-line at ATP for GST Today is "relevant and practical". We endeavour to write content that will assist a business or its advisers in dealing with the everyday realities of GST. It is for this reason that we asked readers in recent issues to let us know what "GST answers you need from GST Today". In this article we provide answers to some of those questions that have been raised.
My business is in the electronics industry. I, like many of my rivals, invoice in US dollars. How am I supposed to format my invoices?
The GST Act and regulations only prescribe the content of tax invoices. It is assumed that the above business will format its invoices so that they also serve as tax invoices.
Section 29-70 requires that a tax invoice must disclose "the price" of a taxable supply. Under section 9-85 "the value" of a taxable supply is to be expressed in Australian dollars. The value of a taxable supply is its price multiplied by 10/11 (section 9-75). There is no equivalent provision requiring that the value of a taxable importation be expressed in Australian dollars.
So where does this quick "snakes and ladders" trip through the GST Act get us? To the conclusion that this part of the GST Act is poorly drafted and likely to be amended. That aside, a business must quote the GST-exclusive amount of a taxable supply in Australian dollars.
A business is not as a matter of law required to quote the amount of GST in Australian dollars. However, as a matter of common sense a business should also quote the amount of GST in Australian dollars. It would be both illogical and messy to quote the GST-exclusive amount in Australian dollars and the amount of GST in US dollars. The ATO is unlikely to quibble with this approach.
The next question is the rate at which the business should convert the US dollar amounts to Australian dollars. The GST Act does not provide an answer. It does, however, provide that the value of a taxable supply should be calculated "in a manner determined by the ATO". The ATO has yet to determine such a manner. However, anecdotal evidence suggests the ATO is contemplating that amounts should be converted into Australian dollars via a daily rate to be published by the Reserve Bank of Australia.
Do GST-registered businesses have to notify their insurance companies of those premiums to which they cannot claim input tax credits? Do unregistered enterprises have to notify their insurance companies that they are not claiming, or rather not entitled to claim, input tax credits?
The key to understanding how GST applies to ordinary businesses is to recognise that prima facie it is the GST-registered business, not the insurance company, which will have a GST liability every time it makes a claim under a general insurance policy. This is because under the normal supply rules it is the business and not the insurance company that makes a taxable supply when a claim is settled. This is the basic position.
Therefore, if a factory burns down and a business receives a $500,000 insurance payout it will have to account for GST of $45,454.55 on the claim. If the business had intended to apply the entire $500,000 payout to rebuilding the factory, it will theoretically be $45,454.55 short after paying its GST liability to the ATO.
The GST insurance provisions then come along and deem a business not to have made a taxable supply when it settles a claim. However, it only does so as long as a business had notified its insurance company of the extent to which it will claim input tax credits for the premiums. If a business does not notify the insurance company, or fails to do so within the required period, then the GST treatment reverts to the basic position.
Notification must be given at the time or before the insurance policy is written. However, it is intended that this will change to being any time up to the time a business advises the insurance company that an insurable event has occurred. In the above example, this is the time when the business advises the insurance company that the factory has burnt down and that it intends to make a claim. Therefore GST-registered businesses unable to claim input tax credits on insurance premiums should notify their insurance companies that the extent to which they are entitled to claim input tax credits is nil.
There is a technical argument that as the deeming and notification provisions of sections 78-45 and 78-50 only apply where a business can claim input tax credits on insurance premiums, a GST-registered business unable to do so does not need to notify its insurance company. That argument may be technically correct. However, it is also pointless. All it achieves is to leave a business exposed to a GST liability on settled claims. The normal supply rules do not require that input tax credits can be claimed on insurance premiums before the supply of settling a claim can be a taxable supply.
The technical debate could be continued but ATP believes that the notification provisions should be given a robust interpretation. The purpose of the notification rules is to shift liability from a business to its insurance company. As there is no loss of GST from the GST net ATP does not believe that the ATO would treat such a notification as ineffective.
A business that is not registered for GST cannot make taxable supplies. It therefore cannot have any GST liability when settling an insurance claim. This position is recognised by section 78-80 of the GST Act. Such a business therefore need not notify its insurers of its non-entitlement to input tax credits.
Do I have to value all the assets in my fixed asset register as at 30 June 2000?
No. Assets only have to be valued as at 30 June 2000 in two circumstances:
- where you intend to apply the margin scheme to any subsequent sale of an asset; or
- your business is one of property development and you have work in progress as at 1 July 2000 on contracts which fall within section 19 of the GST Transition Act.
The margin scheme basically only applies to the sale of real property, such as the sale of a freehold interest in land or the grant of a long term lease. A business might use the margin scheme to reduce the total sale price where the purchaser of the real property cannot claim input tax credits on its purchase. This is because any increase in sale price to take account of the vendor's GST liability will be lower where the margin scheme is applied. However, where the purchaser can claim full input tax credits the GST component of the sale price is only a cash flow issue. The purchaser will therefore not have the same sensitivity to the headline price.
Therefore, it will never be necessary for an ordinary business to value its non-real property fixed assets as at 30 June 2000. Further if the likely purchasers of its real property assets are other GST-registered businesses then it may decide not to value these assets at 30 June and thereby save paying valuer's fees.
Where a property developer has work in progress (WIP) on a contract, which falls within the terms of section 19 of the GST Transition Act, it will have to determine the value of all work incorporated into the project as at the start of 1 July. GST is only payable on the extent to which the final contract price exceeds the value of this WIP.
If I sell a residential house to a doctor (for use as a doctor's surgery) will I have a GST liability on the sale?
Ordinarily the answer is no. A private individual selling their private home will usually not be registered for GST. Accordingly he or she cannot make taxable supplies. No taxable supply equals no GST liability. Where it is a landlord selling the residential premises then the answer will again usually be no. This is because most landlords, if letting residential premises is all they do, will not be registered for GST.
However, if the landlord voluntarily registers for GST, or is required to be registered because of other business activities, then the answer will be yes. The difficulty in answering the question in this circumstance lies in the intended change of use of the premises. Presently the house is used as "residential premises", but once sold it will be used as "commercial premises".
The sale of residential premises and commercial premises have quite different GST consequences. The sale of residential premises is an input taxed supply. The vendor has no GST liability on the sale, but cannot claim input tax credits on costs associated with the sale. The sale of commercial premises is a taxable supply. The vendor will have a GST liability on that sale and be able to claim input tax credits on associated costs.
So just what is being sold in this situation, residential premises or commercial premises? And is the treatment of the sale determined by its present use or its intended use?
Well, it would seem that the answer depends upon both the present and prospective use of the premises. The rule that "sales" of residential premises are input taxed is contained in section 40-65 of the GST Act. If section 40-65 does not apply then the sale of premises will be a taxable supply. For section 40-65 to apply there must be:
- a sale of residential premises; and
- a sale of residential premises "to be used" predominantly for residential accommodation.
Therefore in the present instance the sale of the residential house will not be an input taxed supply. Rather, it will be a taxable supply and the vendor will have a GST liability on the sale.
The practical difficulty facing the vendor of the house is how it will know the purchaser's intended use of the premises. What if the doctor's intention to use the house as a surgery is only half-formed? That intention may never eventuate or, alternatively, the house might only be converted into a surgery several years after the sale.
There are two practical steps such a vendor can take when selling residential premises:
- it can enquire of the purchaser what its intended use of the premises will be and document the response; and more importantly
- ensure that the sale contract has a GST recovery clause so that if it transpires that the sale is not an input taxed supply the vendor can recover its GST liability from the purchaser.
A property developer owns vacant land as at 30 June 2000 and after that date commences building residential accommodation which is subsequently sold. Will this qualify as "new residential premises"? Will the result be any different if a "private individual" develops and sells the property?
As noted in the preceding question the sale of residential premises is an input taxed supply. However, the sale of "new residential premises" will not be an input taxed supply, and hence will normally be a taxable supply.
The term "new residential premises" is defined in the definition section of the GST Act. The term will include "residential premises" that:
- have previously not been sold as residential premises;
- were created through the substantial renovation of an existing building; or
- were built on land after the previous premises were demolished.
The building in the above scenario will qualify as "new residential premises" under either the first or third bullet points. It does not matter that the land was acquired before 1 July 2000. What matters is when the supply of new residential premises takes place. In this scenario they were supplied after 30 June 2000. The GST-registered vendor, whether it be a property development company or a private individual, must therefore account for GST on that sale.
If this is the only business activity undertaken by the private individual he or she will still have to register for GST. This is because the activity of developing the property with a view to making a profit on its sale will amount to carrying on an enterprise. It will have to register when the sale of the property becomes likely within the next 12 months.
The issue of when the land was purchased is more pertinent to whether input tax credits can be claimed on its cost, so as to offset partially the GST liability on the sale of the property.
If the land had been purchased after 30 June 2000 then input tax credits can be claimed provided the sale to it was a taxable supply and not subject to the margin scheme. However, as the land was acquired before 1 July 2000 input tax credits can only in effect be claimed if the developer chooses to use the margin scheme when it sells the property.
The sale of the building will be the supply of new residential premises, but it will also be the supply of real property by the sale of a freehold interest in land. The developer can therefore choose to apply the margin scheme to the sale. To do so the developer should get the land valued as at 1 July 2000. GST will then only be accounted for on the difference between the sale price and the land value. The developer will claim input tax credits on the development costs in its monthly or quarterly GST returns as and when they become attributable.
If a business has a turnover of less than $1 million and uses the cash basis for GST can it adopt the "cash" basis for income tax purposes? If not, does this mean that a business will have to maintain two sets of books and all the frustration that entails?
If a business satisfies the criteria set out in section 29-40 of the GST Act it can use the cash basis. Only one of those criteria relates to the use of the cash basis for income tax purposes. The criteria are of the "or" type. Therefore it is not necessary that a business satisfy all of the criteria before it can use the cash basis for GST. Hence, as is implicit in the question, a business can use the cash basis for GST purposes without using the cash basis for income tax purposes.
Eligibility to use the cash basis for income tax purposes is determined by a completely different set of principles. These are judicially based, rather than statute based as is the case with GST. The cash basis can only be used for income tax purposes where it provides a "correct reflex" of a business's income. In order to adopt the cash basis for income tax purposes a business will need to satisfy the ATO that this basis provides a correct reflex of its income. Ordinarily the ATO will not allow a company to use the cash basis for income tax purposes.
However, a business should recognise that even if it does use the cash basis both for GST and income tax purposes, this will not wholly do away with the need for adjustments. This is because the income tax law contains specific provisions that alter the timing of certain deductions and income. A good example of this is the prepayment of trading stock rule. Under income tax law the deduction is deferred until the stock comes on hand. However, under the cash method of accounting for GST there is no deferral of the entitlement to claim input tax credits.
If a charity is not required to register for GST, but voluntarily registers in order to claim input taxed credits, does this mean that it must collect GST from its "members"? If so, does this put it at a competitive advantage? Or is it not required to collect GST if it voluntarily registers for GST?
The question contains a "GST myth" which should be debunked immediately. A business, or in this case a charity, does not collect GST from its members. GST is a supplier liability tax. It is the entity making the supply which has the obligation to pay its GST liability on the supply. The most it can do, depending on market conditions, is increase the price it charges for supplies it makes to cover its GST liability.
However, that will not always be possible. For example, if a landlord has difficulty finding tenants for a particular commercial property it may choose not to increase the existing rent in order to cover its GST liability. It may be commercially more important to ensure that the premises are tenanted, rather than run the risk of the property being untenanted due to an increase in rent. Any decision to increase prices is a commercial decision. The introduction of GST does not mean automatic price increases.
It is assumed that the reference to "members" refers to individuals or organisations that regularly contribute to the charity. Whether a GST liability arises on their contributions will depend upon what is being supplied. If all that is happening is that these individuals and organisations are making regular donations then there is no GST liability. However, if these entities are paying for a service, for example, to be affiliated to the charity, then the charity will be making a taxable supply to them. The charity will have a GST liability in respect of that supply.
It is not clear that if a charity increases the price of, say, its affiliation fees it will be at a competitive disadvantage. People primarily contribute to charities for reasons of charity, rather than commercial benefit. Yes, the price of the affiliation fees may increase, but so too will individuals after-tax income (due to income tax cuts) and the charitable motive will presumably remain undiminished.
The above position remains the same regardless of whether a charity voluntarily registers for GST or is required to register for GST.
What is the GST treatment of work in progress as at 30 June 2000? What about contracted work (no written agreement) which is not completed and delivered until July 2000? Also, what about ongoing workers compensation and other litigation matters?
GST only applies to supplies made on or after 1 July 2000. If a supply is made before that date then no GST liability will arise on that supply, regardless of whether payment is made after 30 June 2000. Also an entitlement to input tax credits only arises on creditable acquisitions or importations made on or after 1 July 2000.
Work in progress (WIP) will generally comprise a mixture of incurred internal and external costs and provisions. The mix will depend upon the type of WIP being considered. For example, in the case of contracted work the WIP will comprise the cost of own labour, purchased parts or raw materials and provisions in respect of the same. Input tax credits can never be claimed on salaried labour costs. Also, input tax credits cannot be claimed on parts or raw materials supplied to a business before 1 July 2000. It does not matter whether or not the parts or raw materials are invoiced and paid for after 30 June 2000.
As regards provisions these are normally backed out for accounts purposes at the commencement of the new financial year on 1 July 2000. They are then either written back or applied against expenses. Input tax credits can never be claimed on provisions written back since the writeback, by definition, indicates that no creditable acquisitions occurred.
As for provisions applied against expenses provided for, but not invoiced until after the financial year end, it will be necessary to determine when the underlying supply was made. If the expense relates to parts or raw materials supplied before 1 July 2000 then input tax credits cannot be claimed. However, many such invoices will relate to parts or materials supplied both before and after 1 July. Where this is the case it will be necessary to apportion the invoice cost and claim input tax credits only on those supplies acquired after 30 June. It will be necessary to obtain a tax invoice in respect of these acquisitions.
Where the contracted work is completed and delivered after 30 June 2000 the business will be making two supplies - the supply of the product and the supply of the delivery of the product. Both of those supplies will be made after 30 June. Both supplies will generally be taxable supplies and hence the manufacturer will have a GST liability on both.
WIP in respect of litigation matters will generally be wholly comprised of invoiced and provided for external legal fees. No input tax credits can be claimed on the invoiced costs. The same analysis of the provision will have to be performed. Legal fees are generally calculated by reference to hours labour cost within a period. Businesses can simplify the task of analysing their provisions by asking their legal advisers to bill all "time on the clock" as at 30 June 2000.
What is the GST treatment of the sale of a motor vehicle by a sole trader where the motor vehicle was used for a mixture of business and private purposes?
The thrust of this question is whether, because there was a limitation on input tax credits claimed on the motor vehicle's purchase due to the private use element, there is a similar limitation on the GST liability on its subsequent sale.
The short answer is no. There is no symmetry in the GST treatment in this instance.
The sole trader is liable to GST on "any taxable supply" that it makes (section 9-70). The sale of the motor vehicle will be a taxable supply by the sole trader where:
- the sole trader is registered for GST;
- it is connected with Australia, for example it is sold here in Australia to an Australian resident;
- it is for consideration, that is it is a sale and not a gift; and
- the supply is done in the course of carrying on the sole trader's business.
Asset sales are an incident of carrying on a business. The provision defining taxable supply does not look to the extent that input tax credits were previously claimed on an item being sold. It only looks "to the extent" that the supply is a GST-free or input taxed supply. The sale of a motor vehicle by the sole trader will never be a GST-free or input taxed supply.
In particular, the section does not look at the extent to which the sale was in the course of carrying on an enterprise. This is quite unlike the rules as to whether an acquisition is made for a creditable purpose. These explicitly exclude acquisitions to the extent of their private or domestic nature from being for a creditable purpose and hence from input tax credits.
The sale of the motor vehicle is made in the course of carrying on the sole trader's business. The sole trader will therefore be liable to GST of one-eleventh of the sale price.
We rent and sell music equipment. The rental program is used to promote sales. Eighty per cent of rental equipment is ultimately purchased by the hirers. The balance is returned to stock and then sold through our retail network as "ex-rental". Can we claim back sales tax on our population of rental units as at 30 June 2000? If not does this mean that the equipment will be double taxed when it is sold?
The special GST credit for sales tax only applies to goods "on hand" at 1 July 2000 "that are held for the purposes of sale or exchange". That is a long hand way of saying you only get the special credit for trading stock held at 1 July 2000. Equipment rented out is not trading stock on hand as at 1 July 2000. Therefore, you will not be able to claim input tax credits on your population of rental units as at 1 July.
The special credit can be claimed on the ex-rental units held either at the business's warehouse or in the retail shops at 1 July. The latter is subject to the proviso that the ex-rental units are placed in the retail shops on a consignment basis, under a Romalpa clause or subject to some other form of retention of title clause. This is because goods are on hand until dispositive power is relinquished. The power to dispose of goods is generally relinquished when legal title is passed. The unfortunate consequence of the rental units not being eligible for the special credit is that they will be subject to double tax. That is sales tax will have been borne on the equipment and a GST liability will also arise on their sale after 30 June 2000.
The sole exception is if the music equipment was hired out under a hire purchase agreement. This is because section 11(1A) of the GST Transition Act excludes the exercise of a right to acquire goods hired under a hire purchase agreement from being a supply made after 30 June 2000. Ergo the sale of the rental goods to their hirers will not be subject to GST.
From the tenor of the question it sounds as if this will not be the case, however the possibility should be investigated. It may be that the rental agreements, although not commonly thought of as hire purchase agreements, meet the GST definition of hire purchase agreements.
What is the GST treatment of rebates earned by members of a co-operative which are held for a period, say three months, before being passed on to the co-operative members in full?
The co-operative is the entity registered for GST purposes, rather than its members, in respect of the activities carried on by the co-operative. Rebates are typically earned when an entity's sales of a product within a specified period exceed a pre-determined minimum. Presumably, in the context of the example, the co-operative stocks goods purchased from suppliers, other than the co-operative's own members.
The co-operative will claim input tax credits on the cost of these goods when it first purchases them. The rebate will be an adjustment event. Therefore, the co-operative will have to make an increasing adjustment event to reflect its reduced input tax credit entitlement in respect of the purchased goods.
This should be made in the GST return in which the co-operative "becomes aware of the adjustment". This will usually be the GST period in which it receives the rebate.
The remittance of the rebates to the co-operative members is akin to the remittance of profits by other business entities. It is not the payment of "consideration" in respect of a supply made by the co-operative. It therefore has no GST consequences.
Subsequent legislative and regulatory changes may have impacted upon the subject matter of this article.
Paul Stacey
BA LLB ACA
Technical Editor - GSToday
ATP - GST
May, 2000
March, 2001
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