Transcript: IndirecTV™ video update – September 2011
GST and Property Transactions
[Jonathan Paul] Welcome back to IndirecTV. In this episode, we’re going to look at the often complex world of GST and property transactions. And joining me today to talk through this is Matt Missaghi. Matt, why is it that property transactions can often cause taxpayers problems from a GST perspective?
[Matt Missaghi] There are several reasons. The main reason is that property transactions are not always the core business transactions and hence taxpayers are not quite familiar with the relevant GST legislation. And this doesn’t really help when the language used in the GST Act can be quite ambiguous. On top of this, there have been several amendments made to the GST legislation over the last decade which kind of adds to this complexity. So this complexity is really reflected by the plethora of ATO interpretive guidance on property related matters, the ongoing industry consultation and the disproportionate level of GST litigation which concerns property related matters.
[JP] So I guess it’s not surprising then that the Tax Office sees the area of GST and property as quite a high risk area from a GST compliance perspective.
[MM] That’s correct. The current Compliance Program indicates that the ATO will conduct about 1,200 audits and reviews this financial year in relation to property related transactions.
[JP] 1,200? Now that’s a considerable number. The Compliance Program also comments that the Tax Office is going to carefully monitor transactions from taxpayers that are traditionally not in the property sector. These tend to be, I guess, one off type transactions, how is the ATO actually going to do this?
[MM] We know that the ATO has improved its data-matching technology and its analysis of property transactions and business activity statements to identify taxpayers who have not correctly reported GST on property related transactions. And of course they have continued their cooperation and exchange of information with State and Territory revenue offices. So given this focus on property related transactions, it’s important for taxpayers to take extra care when it comes to property related transactions.
[JP] There have also been a number of recent developments in relation to GST and property - for example, the recently released draft legislation around new residential premises. Why were these changes to the GST legislation required?
[MM] The proposed amendments are intended to ensure that the GST legislation achieves its intended policy outcome for the treatment of new residential premises. The decision handed down in the Gloxinia Investments case, held that the sale of newly constructed premises, by a developer under a lease arrangement with the land owner, was an input taxed supply of residential premises. Now this outcome was quite contrary to the intended policy outcome of the GST legislation to tax newly constructed residential premises, so therefore these amendments have been made.
[JP] Now there’s also been the long awaited ATO draft ruling concerning ‘residential premises’ and ‘commercial residential premises’. Now, what are the one or two key points that come out of that draft ruling?
[MM] In relation to deciding whether premises are ‘residential premises’, the Draft Ruling says that we should focus on the physical characteristics of the property, and that it is necessary to look at the objective intention with which the premises have been designed, built or modified, rather than the subjective intention or use by a particular person. A simple example of this could be a suburban home that’s been slightly modified to be a medical practitioner’s day surgery. If those premises were to be sold, based on the physical characteristics of the premises and the objective intention with which they were built, that would be a supply of ‘residential premises’, which would be input taxed - even if the recipient of the sale was say a GP that was planning to use it as a day surgery. So this view reflects the decisions handed down by the Full Federal Court in Marana Holdings and also the Sunchen case.
In relation to ‘commercial residential premises’, the ATO has previously held the view that the supply of employee accommodation is input taxed. Generally speaking this has meant that significant amounts of input tax credits have been denied in relation to maintenance and construction costs. The Draft Ruling reflects a softening of this view, where certain types of accommodation, for example camp style accommodation in remote locations, are considered to be ‘commercial residential premises’. This means that full input tax credits should be available on related costs. There could be an opportunity for taxpayers who haven’t previously claimed credits on maintenance or construction costs on qualifying accommodation, to now obtain refunds or even claim credits on a go forward basis.
[JP] Now circling back to the Compliance Program, that indicates that the Tax Office is going to continue its focus around making sure that taxpayers have compliant margin scheme valuations and they’ve also recently changed their three rulings concerning the margin scheme. Now how is that actually going to impact on taxpayers?
[MM] The margin scheme amendments were more of a technical update to reflect the Full Federal Court’s decision in the Brady King case, so that won’t really affect transactions on a go forward basis. However from a margin scheme valuation perspective, the key thing is to make sure that the valuation is an approved valuation and compliant with the ATO guidelines, otherwise the margin scheme calculation could be invalid which could result in an increased GST liability.
[JP] Well thanks for those insights Matt. Unfortunately we’re out of time for this episode, but there are obviously a few issues and things that people need to be aware of in terms of GST and property. So for any further information, please contact your usual Indirect Tax adviser. Thanks for watching.