Tax Related Issues. Presented by: Louisa Andreucci, Hood Sweeney

Transcription

1 Tax Related Issues Presented by: Louisa Andreucci, Hood Sweeney

2 Today s session GST the basics Applying the margin scheme Capital gains tax Other taxes

3 GST the basics Introduction A broad based tax on the supply of most goods and services consumed in Australia Introduced with effect from 1 st July 2000 Set rate of 10% Purpose ensure that the financial consumer of a good or service is the ultimate bearer of the costs of the GST

4 GST the basics Generally, businesses and other organisations registered for GST will: Include GST in the price they charge for their goods and services Claim credits for the GST included in the price of goods and services they buy for their business

5 GST the basics Registration Required for entities with turnover of $75,000 or more in a financial year, or if its turnover is likely to be greater than $75,000 in the next 12 months Required for non-profit organisations with turnover of $150,000 or more

6 GST the basics What you need to do for GST Work out whether your sales are taxable (subject to GST and not GST-free or input-taxed) Issue tax invoices for your taxable sales Claim GST credits for GST included in the price of your business purchases Account for GST (cash vs accrual) Lodge activity statements

7 GST the basics Taxable sales To be a taxable sale (GST in the price) a sale must be: For payment of some kind Made in the course of operating your business Connected with Australia GST on taxable sales paid when activity statement lodged

8 GST the basics GST-free sales You don t include GST in the price if your product or service is GST-free. Examples of GST-free products and services include: Most basic food Some education courses Some medical, health and care services Water, sewerage and drainage Farmland Sales of businesses as going concerns

9 GST the basics GST-free sales: Farmland/Broad Acre Farmland sold is GST-free if: The land was used for a farming business for at least five years immediately before the sale The buyer intends to use it for a farming business Sale of subdivided land used for a farming business for at least five years is GST-free is: Its permissible to use the land for residential use The supply is made to an associate of the supplier for less than market value

10 GST the basics GST-free sales: Import/Export of Goods or Services GST is payable on import of goods or services regardless of the entity being registered or not GST free if the recipient of the goods and services is outside Australia Exported goods are GST-free if they are exported from Australia within 60 days of: The supplier receiving any payment for the goods The supplier issuing an invoice for the goods

11 GST the basics GST-free sales: Sale of a business as a going concern The sale of a business as a going concern is GST-free if all apply: Everything necessary for the business to continue operation is supplied to the buyer The seller carries on the business until day sold/settlement date Buyer is registered for GST Payment is made for the sale Agree in writing that sale is a going concern

12 GST the basics Input-taxed sales Goods and services that don t include GST in the price Can t claim GST credits Common examples: Financial supplies Residential premises Sale/rental of residential premises

13 GST the basics Input-taxed sales: Financial supplies Generally make a financial supply when: Lend or borrow money Grant credit to a customer Buy or sell shares or other securities

14 GST the basics Input-taxed sales: Residential Selling or renting existing residential premises are input-taxed no GST If you buy any property with the intention of selling for a profit/developing to sell, may be considered carrying on a business Not considered to be carrying on a business if property transactions are for private purposes

15 GST the basics Renting residential premises If residential rented, rent is input-taxed and no need to include GST in the rental income Cannot claim GST credits for any costs relating to the rental

16 GST the basics Buying commercial property If you buy commercial property may be entitled to claim GST credits included on purchase Can also claim GST credits on eligible purchase costs You can t claim GST credits if: The seller used the margin scheme You purchase property from someone who is not registered for GST You purchase property as a GST-free supply You re not registered for GST

17 GST the basics Selling commercial property If you sell commercial property liable for GST on the price: Pay GST on 1/11 th of the sale price Can claim GST credits on the purchases relating to sale of property If commercial property is leased when sold may be able to treat as GST-free supply of a going concern

18 GST the basics Renting commercial premises If commercial premises rented, rent is taxable sale and GST included on rental income Can claim GST credits for any costs relating to the rental

19 GST the basics Business Activity Statements Registered entities must lodge a Business Activity Statement on a monthly, quarterly or annual basis Includes sales for the relevant period, GST payable and input tax credits applied May also include if applicable: PAYGW from employees wages PAYGI for paying an entities income tax in advance Fuel tax credits Fringe benefit tax

20 GST the basics Cancellation of GST Registration If an entity ceases business If an entity s turnover drops below the thresholds and no longer wishes to be registered for GST ATO must be informed

21 Applying the margin scheme When a property is sold, and that property is a taxable property, you must normally pay one eleventh of that sales value as GST The Margin scheme allows a seller to only pay GST on the margin for the sale which is usually the difference between the sale price and the original purchase price This will result in less GST overall being paid to the Australian Taxation Office and a higher profit for the seller

22 Applying the margin scheme Two conditions to be satisfied: 1. The property was purchased before 1 July 2000 It was purchased after 1 July 2000 from someone that: was not registered or required to be registered for GST who sold you existing residential premises who sold the property as part of a GST free going concern who sold you the property using the margin scheme 2. The seller and purchaser must agree in writing to apply the margin scheme.

23 Applying the margin scheme Calculation of the margin scheme Two methods exist in order to calculate the margin on a property disposal and they are: The consideration method The valuation method

24 Applying the margin scheme Consideration method Use this method regardless of when property purchased Margin is difference between the property s selling price and the original purchase price Sale price must include any settlement adjustments contained within the sales contract Purchase price is only cost do not include development costs, legal fees, stamp duty

25 Applying the margin scheme Example of calculating margin on property disposal consideration method Bob is a GST registered builder 1 December 2002 purchased block of land for $150,000 from a vendor who was not registered for GST Bob paid $550 conveyancing fees and $7,000 stamp duty on purchase Constructed a house on the land and sold for $315,000 Bob chose to use margin scheme to work out GST on sale (specified in contract)

26 Applying the margin scheme Example of calculating margin on property disposal consideration method Margin for the sale of house is $315,000 - $150,000 = $165,000 Bob must pay GST of 1/11 th = $165,000/11 = $15,000 Bob can also claim GST credit on conveyancing fees and construction costs in the period for which the purchases applied (excluding stamp duty)

27 Applying the margin scheme Valuation method Generally only use valuation method to work out margin if property purchased before 1 July 2000 Only use if you hold an approved valuation Margin is difference between selling price and value of the property (usually as at 1 July 2000)

28 Applying the margin scheme Valuation methods Three valuation methods available Market value in writing by a professional valuer Purchase price in a contract entered into before 1 July 2000 by parties dealing at arm s length Most recent value set by a state of territory government department for rating or land tax purposes

29 Applying the margin scheme Example using the valuation method Bayview Limited is a GST registered property developer and reports GST on a monthly basis Bought land in 1970 for $30,000 and entered into sales contract to sell land in September 2008 for $1.44m Contract states margin scheme will be used Settlement occurred on 2 December 2008 Obtained a professional valuation of land at 1 July 2000 for $1m

30 Applying the margin scheme Example using the valuation method Bayview calculates margin as selling price minus value of land ($1.44M - $1M = $440,000) When lodging December 2008 activity statement, Bayview reports and pays $40,000 GST on sale of land (settlement month) Because Bayview chose to apply the margin scheme, purchaser cannot claim a GST credit for the GST included in the price they paid for the property

31 Applying the margin scheme Example sale of property purchased before 1 July 2000: consideration method vs valuation method Tom registered for GST and carrying on a business of leasing commercial property Tom bought a commercial property in 1989 for $50,000 Property sold in 2003 for $105,000 using margin scheme

32 Applying the margin scheme Example sale of property purchased before 1 July 2000: consideration method vs valuation method If Tom applies consideration method margin is $55,000 ($105,000 - $50,000) Tom s GST liability is 1/11 th of this amount - $5,000

33 Applying the margin scheme Example sale of property purchased before 1 July 2000: consideration method vs valuation method If Tom applies valuation method margin he must get an approved market valuation At 1 July 2000 the property is valued at $61,000 Margin is $44,000 ($105,000 - $61,000) Tom s GST liability is 1/11 th of this amount - $4,000

34 Applying the margin scheme Calculation of the margin scheme Requirements vary depending on whether property purchased: Before 1 July 2000 On or after 1 July 2000 On or after 9 December 2008 In terms of sale, requirement vary depending on date of sale: On or after 17 March 2005 On or after 29 June 2005

35 Applying the margin scheme Selling property on or after 17 March 2005 Eligibility to use margin scheme changed for sales of property made from 17 March 2005 onwards Cannot use margin scheme if: Purchased property as fully taxable and margin scheme was not used Inherited the property from a person who could not use the margin scheme Obtained the property from a member of the same GST group who could not use margin scheme Obtained the property as a participant in a GST joint venture, from the joint venture operator who could not use the margin scheme

36 Applying the margin scheme Selling property on or after 29 June 2005 Requires a written agreement between the seller and purchaser to use the margin scheme Seller must agree with the purchase in writing to sell property under margin scheme prior to settlement date Change in eligibility rules that apply from 17 March 2005 onwards also apply to sales from 29 June

37 Applying the margin scheme Selling property purchased on or after 9 December 2008 May be changes to eligibility to use margin scheme Cannot use margin scheme if entity you purchased property from was not eligible to use margin scheme and property purchases was: Part of GST-free going concern GST-free farm land From an associate for no consideration

38 Applying the margin scheme Property purchased as a mixed supply If property you are selling is a mixed supply (partly input-taxed or GST-free and partly taxable) margin scheme can be applied to the taxable part of the sale Example of mixed supply: Sale of two storey apartment building that is commercial property downstairs (taxable supply) and residential upstairs (input-taxed supply)

39 Applying the margin scheme Record keeping It is highly recommended that in order to minimise any Australian Taxation Office enquiries that you keep the following in order to prove how the Margin Scheme was applied: Purchase and sale contracts and settlement statements Details and calculations of how the margin was calculated Copy of the agreement in writing to use the margin scheme If the valuation method is chosen, a copy of the valuation

40 Capital Gains Tax The basics Must be a disposal of an asset acquired after the 19 th September 1985 Disposal after 19 th September 1985 Assets subject to the tax include: Businesses Investment property Holiday houses Units in unit trusts Shares in companies

41 Capital Gains Tax Who does it apply to Resident: a resident of Australia is subject to capital gains tax on the sale of an asset irrespective of where that asset is situated in the world Non-resident: a non-resident of Australia only liable for capital gains tax on the sale of certain assets with a connection to Australia

42 Capital Gains Tax Exemptions Trading stock Betting and other gambling wins Art Unions, Lotteries etc Valour or Brave Conduct Awards Taxpayer s principal place of residence Most motor vehicles, motorcycles or similar vehicles and any road vehicle designed to carry loads of less than 1 tonne or fewer than nine passengers

43 Capital Gains Tax Cost base for calculation of capital gains tax Original purchase price plus any costs incurred Legal fees Stamp duty Valuation fees 5 elements of cost base

44 Capital Gains Tax Tax Date Date of the sales contract is applicable date for capital gains tax purpose not date of settlement Example: contract signed 21 May 2007 Settlement 30 September 2007 Applicable sale date for calculation is 21 May 2007 Exemptions, rollovers & concessions available

45 Capital Gains Tax Inheriting Property When someone dies, capital gain/loss usually disregarded when a property passes: To deceased person s executor/legal person representative To deceased person s beneficiary such as next of kin From the deceased person s legal representative to a beneficiary

46 Capital Gains Tax Inheriting Property If property passes to a tax-advantaged entity or foreign resident capital gains tax will apply If property inherited after 20 September 1985 and sell later, capital gains tax may then apply If legal representative sells property as part of winding up estate, capital gains tax may apply

47 Capital Gains Tax Residential Premises If residential premises rented any capital gain made when selling or disposing of the property will be subject to capital gains tax Exemptions apply home you live in (6 year rule) If investment property is not rented/available for rent (holiday home, hobby farm): Property is subject to CGT in same way as rental property Can t claim income tax deductions because it doesn t generate rental income

48 Capital Gains Tax Vacant Land If vacant land acquired (private purposes or investment) usually considered a capital asset subject to capital gains tax If land purchased for use in a business activity, may be considered trading stock

49 Capital Gains Tax Subdivided Land Profit from selling subdivided land may be capital gain or ordinary income If land subdivided such as land you live on and newly created block sold, capital gains tax applies Treated as ordinary income (not a capital gain) if both of the following apply: Intention or purpose in entering into the transaction was to make a profit Entered into transaction, profit was made, in course of carrying on a business

50 Capital Gains Tax Subdivided Land Subdividing land doesn t in itself result in a capital gains tax event Capital gain or loss only made when subdivided land sold Date acquired the subdivided blocks is the cost base of the original land

51 Capital Gains Tax Renovating Properties If you re renovating one or more properties you need to work out if you are: A personal property investor Engaged in a profit-making activity of property renovations Carrying on a business of renovating properties Intention is key

52 Capital Gains Tax Renovating Properties Personal Property Investor If considered personal property investor net gain or loss from renovation less purchase and other costs is treated as a capital gain/loss CGT concessions may reduce the capital gain

53 Capital Gains Tax Renovating Properties Profit-making Activity of Property Renovations If you re carrying out a profit-making activity, any income or loss is reported in tax return not capital gain Intention to make a profit on the renovation

54 Capital Gains Tax Renovating Properties Renovation Business Intention carrying on a business of renovation Calculation for profits same way as any business Capital gains tax doesn t apply

55 Capital Gains Tax Selling Commercial Property When commercial property sold, likely to make a capital gain/loss Discount applies for individuals and trust Concessions may apply for small business Capital gain/loss is difference between what it cost to obtain and improve the property and what is received when disposed If property acquired pre 20 September 1985 any gain/loss is disregarded any capital improvements made post 20 September are subject to CGT

56 Capital Gains Tax Working Farms Likely to make a capital gain/loss when sell or cease to own a working farm Subject to capital gains tax with discount for individuals/trusts and concessions for small business If home is part of the working farm may be eligible for a partial main residence exemption

57 Capital Gains Tax Foreign Residents Special capital gains tax rules that apply if you are a foreign resident/cease to be as Australian resident Special capital gains tax rules for temporary residents Rules to not affect assets acquired before 20 September 1985 When you are a foreign/temporary resident only certain assets are subject to CGT

58 Capital Gains Tax Foreign Residents CGT discount (50% discount) was previously available to foreign resident individuals on taxable Australian property Prior to 8 May 2012 no affect From 8 May 2012 foreign/temporary residents must meet certain eligibility conditions to apply the discount: Whether the CGT asset was held before or after 8 May 2012 The residency status of the individual who has the capital gain

59 Capital Gains Tax Record keeping For as long as the taxpayer owns the property, plus a further five (5) years after tax assessment issued Separate file should be created Asset Register to record Capital Gains Tax transactions

60 Other Taxes Stamp Duty Transfer of Business Stamp duty on transfer of a business abolished for any business transfers dated on or after 18 June 2015 Contract of sale or other agreement must have been entered into post 18 June 2015 Stamp duty will still apply on transfer of land or motor vehicles included in the sale of the business

61 Other Taxes Stamp Duty Transfer of Commercial Property First reduction of one-third of stamp duty on transfers of nonresidential, non-primary production real property from 7 December 2015 Second reduction of one-third to apply from 1 July 2017 Complete abolition of stamp duty from 1 July 2018

62 Other Taxes Stamp Duty Transfer of Commercial Property

63 Thank you for attending Questions?