The Building and Construction Industry and The New Tax System

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1 Tax f The Building and Construction Industry and The New Tax System - Australian Taxation Office On behalf ofthe New Tax System Advisory Board I am pleased to endorse this booklet about the New Tax System. The booklet has been produced by the ATO specifically for businesses and organisations operating in the building and construction industry. The ATO has undertaken consultation with organisations to help ensure that this booklet meets the particular needs ofthe building and construction industry. This booklet is just one part of the educational material available to help you prepare for The New Tax System. You can also find out more about The New Tax System through theato's telephone information service, a program ofseminars scheduledbetween September 1999 and May 2000, and advisory visits by ATO field officers from November A definitive GST guide will be mailed to businesses when they have registered for The New Tax System. A large range ofhelpful material is also available from the tax reform website at Please take the time to read this booklet and make use ofthe other materials available to assist your business make the transition to The New Tax System. The transition is not difficult, but will require some planning. I urge you to start that planning now. - Chris Jordan, Chairman, The New Tax System Advisory Board. 1. THE NEW TAX SYSTEM The New Tax System starts on 1 July The New Tax System will benefit you by: abolishing wholesale sales tax and some State and Territory taxes; substantially reducing industry costs; providing a single reporting form which replaces several current business tax forms; reducing the number of times you report to theato; making sure all taxpayers pay their fair share of tax - but no more; providing quick and easy ways ofdealing with the ATO, including through the internet; helping you to be internationally competitive and lifting the tax burden on exports; giving State and Territory governments a secure revenue base to pay for community needs; substantially increasing government support to families and low income earners; and dramatically reducing personal income tax, as shown in the table below, and increasing incentives to work and save. TODAY'S TAX RATES NEW TAX RATES Current scale* taxable income Tax rate % New scale* taxable income Tax rate 0/0 $0-$5,400 0 $0-$6,000 0 $5,401-$20, $6,001-$20, $20,701-$38, $20,001-$50, $38,001-$50, $50,001-$60, $50, $60, *In addition, a low income rebate of up to $150 continues to apply.

2 Start-up Assistance To help you, The New Tax System Advisory Board is leading a major education campaign about The New Tax System for business and consumers. The Government is also providing $500 million to help small and medium enterprises, charities and the education sector make the transition to GST. The GST Start-up Assistance Office will administer this assistance. Major elements of The New Tax System The major elements of The New Tax System are: $12 billion of income tax cuts every year; a goods and services tax ("GST") of 1aper cent on the supply ofmost goods and services consumed in Australia; a Pay As You Go system which will replace a number of systems, including Pay As You Earn, the Prescribed Payments System, the Reportable Payments System, provisional tax and company instalments; extensions to the Diesel Fuel Rebate Scheme; a luxury car tax and wine equalisation tax (to offet the abolition of wholesale sales tax); changes to excise on alcohol; requirements for endorsement of charities as being deductible gift recipients or income tax exempt; and reportingfringe benefitsonemployees' group certificates. In addition, the Government has indicated it will introduce a range of business tax reforms in its response to the Review of Business Taxation (the Ralph Report). How to register for The New Tax System Registering for The New Tax System, including GST, is as simple as filling in a single application. From the beginning of November 1999 current business taxpayers will receive a registration package. This will include an application, a set of instructions explaining how to fill in the application, and an information guide. When you register you will receive an Australian Business Number. This is a new identifier which you will use for your dealings with the ATO and for future dealings with other government departments and agencies at all levels. To register for an Australian Business Number, you must be either a company or an entity carrying on an enterprise. Employees, hobbyists and individuals who are conducting activities without a reasonable expectation of profit cannot register for an Australian Business Number. Note: Your Australian Business Number will not replace your tax file number but it will eventually replace your Australian Company Number or your Australian Registered Body Number. Businesses with an annual turnover of $50,000 or more and non-profit organisations with an annual turnover of $100,000 or more must register for GST. Those with a lower turnover may choose to register. You must have an AustralianBusiness Numberto bepartofthe GST system. You must register by 31 May 2000 to be part ofthe New Tax System on 1 July You can register electronically through the Business Entry Point at or send your completed application to the ATO. Your tax agent can also lodge your application through the Electronic Lodgment System. Streamlined reporting The New Tax System will simplify the way you report to the ATO. You will report most of your tax entitlements and obligations on a new single form called a Business Activity Statement. Ifyour annual turnover is less than $20 million, you can lodge your activity statement quarterly or monthly. However, ifyour annual turnover is $20 million or more, you must lodge your activity statement and make payments electronically every month. You must lodge your activity statement on or before the 21st day of the month following the end of each tax period. You must lodge an activity statement foreach tax period, even if it is a nil report. Note: You can save time and money by lodging your business activity statement and making any payment electronically. You can also lodge by mail or through your tax agent. At a later date, the ATO will send you information about the Business Activity Statement and instructions on how to fill it in. From February 2000 you will be able to practise lodging your business activity statement on the internet. Note: Most supplies of goods and services to government departments and agencies from a GST registered business will have GST included in the price of the supply. Preparing early Although most elements of The New Tax System start on 1 July 2000, you need to start preparing now. Things you could do include: decide whether you should register for GST; think about contracts you have, or enter into, that go beyond 1 July 2000; ask your suppliers about cost reductions; think about the implications of pricing changes and fluctuations in sales; alert your customers to any changes; plan your cash flow; evaluate your record keeping; prepare a business plan and timetable; train and prepare your staff; prepare your business systems; and review your stationery requirements, including tax invoices and adjustment notes. 33

3 2. UNDERSTANDING YOUR GST ENTITLEMENTS AND OBLIGATIONS GST is a broad-based tax of 10 per cent on most supplies of goods and services consumed in Australia. GST replaces wholesale sales tax which applied at varying rates to a range of products. The consumer will bear the cost of GST, not the business providing the goods and services. However, the liability to pay GST to the ATO rests on the supplier ofthe goods and services, notontheircustomer. In otherwords, even if you do not include GST in your price, you will still be liable to pay it to the ATO. Consumers will receive large personal income tax cuts and other compensation to offset any rise in prices. Who will monitor prices? When making pricing decisions to take into account The New Tax System changes, including GST, businesses need to be aware that a new law has been passed that prohibits price exploitation in relation to these changes. Price exploitation occurs where a business does not pass on to consumers cost savings arising from tax reforms or where it increases prices unreasonably. The Australian Competitionand ConsumerCommission ("ACCC") wants to help you comply with The New Tax System. The ACCC will extensively monitor prices to make sure they are adjusted properly and make sure price changes are consistent with the changes in tax rates. New legislative provisions and ACCC guidelines mean you should: fully offset any GST-related price increases against other indirect tax savings and related reductions in supplier costs; not apply any mark-up to the GST component of any price; make sure prices only reflect GST liabilities that can be reasonably forecast; not increase the difference between costs and prices in dollar terms; and reduce prices immediately after tax changes occur. You need to maintain appropriate records (such as invoices showing cost changes or records of pricing decisions) to demonstrate you have complied with these guidelines. Penaltiesmaybeupto $10millionperoffence for corporations and $500,000 per offence for individuals. Further information is available from the website at or you can contact the ACCC on and services you sell or supply to others in the course of your business. These supplies are called taxable supplies. There are other types of supplies where GST does not have to be included in the price. These are called input taxed supplies and GST-free supplies, and are explained later in this booklet. GST will also be included in the price ofthings you acquire or import for your business. However, if you are registered for GST, you can claim a credit from the ATO for any GST included in the price you pay for things for your business. This is called an input tax credit. The difference between the GST payable on your supplies and the GST included in the purchase price of your acquisitions is the amount you owe or are owed by the ATO. If your credits are greater than the amount of GST payable, you will be entitled to a refund. The following example and flow chart explain how GST will work for you. Supply of goods North Building Supplies sells materials to Bob, a subcontractor, for $11,000 (including $1,000 GST). Bob then charges his head contractor $10,000 for the materials and $4,000 for labour, an invoice total of $15,400 (including $1,400 GST) on a house being built. The head contractor sells the finished house to a buyer for $165,000 (including $15,000 GST). North Building Supplies pays the $1,000 GST to the ATO. Bob is entitled to an input tax credit for $1,000 GST included in the price paid to North Building Supplies. He offsets this credit against the $1,400 GST payable on the supply to the head contractor and pays $400 to the ATO. The head contractor is entitled to an input tax credit for the $1,400 GST included in the price paid to Bob. The head contractor offsets this credit against the $15,000 GST payable on the supply to the house buyer and pays $13,600 to the ATO. Only the consumer bears GST on the final product, as consumers cannot claim input tax credits for GST included in the price paid. 34 How does GST work? If you are a registered business, or required to be registered, GST will be payable by you on most goods

4 35 How do you work out GST on taxable supplies? The GST is always included in the price of goods and services you supply or buy but may not be shown separately. To work out how much GST to include in the price ofa taxable supply you are selling, divide the value ofthe supply by 10. To work out how much GST is included in the price ofsomething you have bought (an acquisition), divide the price by 11. Working out the amount of GST Arthur's Building Supplies sells 100 packs of nails to your business. The total value of the nails is $200. Arthur calculates how much GST is payable by dividing the value by 10 ($200/10 =$20). He charges you $220, that is, $200 for the nails plus $20 GST. If you want to work out how much GST is included in the price of the nails, you divide $220 by 11. The amount of the GST is $20. Input tax credits Input tax credits are only available for the GST included in the price paid for a creditable acquisition. A creditable acquisition is something you acquire for a creditable purpose for use in your business. You cannot claim a credit ifan acquisition is not for a creditable purpose, that is, ifit is for making input taxed supplies (for example, financial supplies) or for a private purpose. The amount of input tax credit is reduced if the acquisition is only partly for a creditable purpose. You will need to apportion the input tax credit accordingly. Claiming input tax credits Katherine runs a plumbing supplies business and is registered for GST. She buys 10 taps for $550 from a manufacturer to sell to a plumber. She is entitled to an input tax credit of 1/11 th of $550, that is, $50. On the same day Katherine buys a TV for her home for $770 (including $70 GST). As this is a private purchase, Katherine cannot claim an input tax credit for the $70 GST included in the price of the TV. Note: The principle of mutuality may be of relevance in determining what constitutes income for the purposes of the income tax laws, however, it has no relevance in determining whether or not an entity has made a taxable supply. If you payor are liable to pay only part of the consideration for an acquisition, you need to apportion the input tax credit. You are only entitled to the part ofthe input tax credit that relates to the consideration you pay or are liable to pay.

5 You are entitled to input tax credits for more than just the materials you use directly in making a supply. For example, you may buy a large piece ofequipment for your business and have it serviced. Any GST included in the price of the equipment and service can be claimed as an input tax credit. You are also entitled to input tax credits for the GST included in the price of business expenses such as power, telephone and advertising costs. You don't have to wait until you sell your goods to claim the input tax credit. Note: You can only claim input tax credits for GST included in the price you pay for supplies acquired for your business if you are registered for GST. This is why you may choose to register even if your annual turnover is less than $50,000. Wholesale sales tax credit Wholesale sales tax is being abolished and will be replaced by GST from 1 July If you have been charged sales tax on goods you hold for sale or exchange at the start of 1 July 2000, you can claim a credit for this stock if you are registered for GST. The credit does not apply to: stocks held for manufacturing; stocks of most second-hand goods; goods held for hire or lease; business consumables such as stationery; or alcoholic beverages. What is subject to GST? Most goods and services consumed in Australia will be taxable supplies, that is, they will be subject to GST. However, no GST will be charged on GST-free supplies and input taxed supplies. GST-free supplies If supplies are GST-free you will not charge GST for them but you will be entitled to input tax credits for GST included in the price you paid for the things you acquired for use in your business. GST-free supplies include basic food, exports, sewerage, water and drainage, eligible childcare, the sale ofa business as a going concern, non-commercial activities of charities and most education and health services. Note: Wages and salaries paid to employees and superannuation contributions paid on behalf of employees are not subject to GST. Input taxed supplies If supplies are input taxed you do not charge GST on the supply but neither are you entitled to input tax credits for anything acquired or imported to make the supply. Input taxed supplies include most financial supplies, supplies of residential rent and residential premises, and some supplies of precious metals. Importations Everyone has to pay GST on taxable importations. This includes businesses that are registered for GST as well as those that are not registered. Customs collects GST on taxable importations. The taxable value for importations is equal to the customs value plus the cost of insurance and freight of the goods plus any customs duty payable on the import. For more information on how GST relates to importations, see the ATO publication, Importing & The New Tax System. 3. ACCOUNTING FOR GST You will claim input tax credits and account for GST payable on your Business Activity Statement at the end of each tax period. Tax periods Tax periods are the reporting periods for GST and can be quarterly or monthly. Quarterly tax periods are periods of three months ending on 30 September, 31 December, 31 March and 30 June. Monthly tax periods end on the last day of each calendar month. Ifyour annual turnover is less than $20 million, you generally have quarterly tax periods. However, you may choose to have monthly tax periods. You can make this choice when you register for GST or, if you decide later to change your tax periods to monthly, notify the ATO. You can change back to quarterly tax periods (after at least 12 months) if your annual turnover is still under $20 million. Monthly tax periods are compulsory if: your annual turnover is $20 million or more; you will be carrying on an enterprise for less than three months; you have a history of failing to comply with your tax obligations; or your income tax year does not end on 30 June. You can end your tax periods up to seven days earlier or seven days later than the standard tax periods if you want to line up your tax periods with your commercial accounting periods. If you do this it will not change the date for lodging your Business Activity Statement or making payments. Changing your tax period Nicholas runs a building business. His normal accounting practice is to balance the accounts every Friday. Nicholas has quarterly tax periods. As 31 March falls on Tuesday, Nicholas ends his tax period on Friday 3 April so that he does not have to make a special balance on the Tuesday. Nicholas' next tax period starts on Saturday 4 April rather than on 1 April. His Business Activity Statement for the tax period ending on 3 April, and any payment, is still due on 21 April. 36

6 Ifyou have monthly tax periods because your annual turnover is $20 million or more, you can apply to the Commissioner of Taxation to change your tax periods to line up with your commercial accounting periods. Note: You may find that the introduction of GST presents cash flow benefits, as GST included in the price of goods and services you supply during a tax period is not payable to the ATO for up to 21 days after the end of that period. Attributing GST and input tax credits to tax periods There are some rules about how to work out which tax period your GST amounts belong to, that is, which tax period they are attributed to. The rules for attributing GST payable and input tax credits to tax periods are different, depending on whether you account for GST on a cash basis or not on a cash basis. There are two methods of accounting for GST - on a cash basis or not on a cash basis (also referred to as accruals). To determine what method of accounting you currently use, look at your invoicing procedures and when you record payments and sales. Ifyou issue or receive an invoice but do not account for the sale or purchase until the cash is received or paid, you are using a cash basis. If you account for the sale or purchase at the time you issue or receive an invoice, you are not using a cash basis. Many businesses use a combination of the two methods. However, from 1 July 2000 businesses will have to choose only one method of accounting for GST. Cash basis If you use a cash basis of accounting you account for the GST payable when you receive payment for a taxable supply, and claim input tax credits when you actually pay for acquisitions. In other words, you cannot claim an input tax credit until you have paid for the goods and services, and you do not have to pay the ATO the GST included in the price ofa supply until you receive payment for that supply. You can use a cash basis of accounting for your business if: your annual turnover is $1 million or less; or you are properly accounting on a cash basis for income tax purposes (as outlined in Income Tax Ruling TR 98/1). If you have an annual turnover of more than $1 million and you do not account on a cash basis for income tax but wish to account for GST purposes on a cash basis, contact the ATO for more information. Non-cash basis Ifyour annual turnover is $1 million or less you can use a non-cash basis of accounting for your business. If your annual turnover is more than $1 million you must account for GST on a non-cash basis unless the ATO gives you approval to use a cash basis. If you do not use a cash basis you will account for all GST payable and all input tax credits in the earlier of: the tax period in which a tax invoice is issued relating to that supply; or the tax period in which any of the consideration is received or made. Accounting on a non-cash basis Santo's Electrical Services provides electrical services to fit out a house for a builder for $33,000 (including $3,000 GST) on 30 September. Santo gives the builder an invoice on the day of the service, but payment is not due for 30 days. Santo's tax period ends on 30 September. As he does not accountfor GSTon a cash basis, the $3,000 GST payable is attributable to the tax period ending on 30 September even though the builder has not paid him. The builder's input tax credit is attributable to the tax period ending 30 September (provided the builder does not account for GST on a cash basis) because an invoice has been issued. Note: To maximise your cash flow and minimise your administration costs, think about: how you acquire and supply goods and services; your terms and conditions of trade; your debt collection strategy and terms of settlement; your accounting system; and future contracts. Regardless of which accounting method you use, you cannot claim an input tax credit until you receive a tax invoice (unless the GST-exclusive value of the supply is $50 or less). Tax invoices You must have a tax invoice to claim an input tax credit for a creditable acquisition. In most cases tax invoices are issued by suppliers. In some special cases they may be issued by recipients of supplies. If you make taxable supplies, your registered customers will need tax invoices to claim input tax credits for acquisitions with a GST-exclusive value of more than $50. If you are asked to provide a tax invoice, you have to do so within 28 days ofthe request from the purchaser. For this reason you might choose to issue all your invoices in a form which satisfies the requirements for a GST tax invoice. You should have a tax invoice before you lodge a Business Activity Statement claiming the input tax credit. If you don't have the tax invoice, you cannot claim the 37

7 38 input tax credit until you receive it. If you obtain a tax invoice in a later tax period, you can claim an input tax credit in that period. Tax invoices are not required if the GST-exclusive value of the supply is $50 or less. However, you should have some documentary evidence to support all input tax credit claims. Certain information must be shown on tax invoices. Supplies ofless than $1,000 Tax invoices for taxable supplies ofless than $1,000 must include: 1. the Australian Business Number of the supplier; 2. the GST-inclusive price ofthe taxable supply; 3. the words "tax invoice" stated prominently; 4. the date of issue of the tax invoice; 5. the name of the supplier; 6. a briefdescription ofeach thing supplied; and 7. when GST payable is exactly 1111th of the total price, either a statement along the lines of "the total price includes GST", or the GST amount. Note: Registered contractors must issue a tax invoice to you to enable you to claim an input tax credit. As unregistered contractors are not able to issue tax invoices, you will not be entitled to an input tax credit for an unregistered contractor's services. Supplies of$1,000 or more Tax invoices for taxable supplies of $1,000 or more must include: 1. the Australian Business Number of the supplier; 2. the GST-inclusive price ofthe taxable supply; 3. the words "tax invoice" stated prominently; 4. the date of issue of the tax invoice; 5. the name of the supplier; 6. the name of the recipient; 7. the address or the Australian Business Number of the recipient; 8. a brief description of each thing supplied; 9. the quantity of the goods or the extent of services supplied; or 10. when GST payable is exactly 1/11th of the total price, either a statement along the lines of"the total price includes GST", or the GST amount. Taxable and non-taxable supplies Ifthe tax invoice is for a taxable supply and either a GST-free or input taxed supply, the tax invoice must also show: each taxable supply; the amount ofgst payable (in relation to the taxable supplies); and the total amount payable for the supply. Note: Invoices in electronic form are tax invoices if they provide all the information required. Importations Tax invoices are not required for taxable importations. However, you must have the relevant documentation issued by Customs (rather than the supplier) to support input tax credit claims. Payments and refunds of GST The amount you have to pay to the ATO is the difference between: the GST you include in the price of sales you make; and the input tax credits you are entitled to for GST included in the price paid on things used in your business. This amount has to be paid on or before the 21st day of the month following the end of your tax period. Amount to pay Martin's Brickworks makes sales totalling $220,000 (including $20,000 GST). The GST payable is attributable to the quarterly tax period ending on 30 September. In the same period Martin is entitled to input tax credits of $15,000 for GST included in the price paid for goods and services used in his business. Martin has to pay $5,000 (that is, $20,000 $15,000) to the ATO by 21 October. If the amount of input tax credit owed to you is greater than the GST on your sales, you will receive a refund. The ATO must pay this amount within 14 days of you lodging your Business Activity Statement. Ifpayment is made after this time, interest is payable by the ATO under the Taxation (Interest on Overpayments and Early Payments) Act Amount of refund If Martin has input tax credits of $25,000 (because he purchased a large amount of supplies), he would be owed $5,000 by the ATO. If Martin lodges his Business Activity Statement by 21 October, he should receive the $5,000 refund from the ATO by 4 November. This is assuming that Martin does not have any other tax debts that would be offset against this amount. Adjustments From time to time you may need to make an adjustment to the amount ofgst owed or refunded. This may occur if:

8 all orpartofa supply orpurchase is cancelled; the price for a purchase or supply is altered (such as when you provide or become entitled to a volume discount or early payment discount); a supply becomes taxable or a purchase becomes creditable; a supply stops being taxable or a purchase stops being creditable; the purpose of your purchase changes; or you have bad debts or you fail to pay a debt. Ifyou have accounted for GST payable or input tax credits on an earlier Business Activity Statement and one ofthe above events occurs, you may have paid either too much or too little GST, or claimed too much or too little input tax credit. In these instances you need to make an adjustment on your Business Activity Statement for the tax period in which the change happens. Depending on the circumstances, this will either decrease or increase the amount of GST payable by you or the amount the ATO has to refund. You make an adjustment on the Business Activity Statement that covers the tax period when the change happens or when you find out about the change. Adjustments because ofa change in price Supplies If, after you have accounted for GST on a supply you made, there is an increase in the consideration you receive or are entitled to receive for the supply, you will have paid too little GST. To makeup for this, you shouldmake an adjustment. This will increase GST payable in the tax period when you find out about the change. Ifyou make an adjustment for a supply, you are required to issue an adjustment note to the recipient of the supply, who can then make an adjustment if necessary. Acquisitions If you have to pay more for an acquisition than you thought when you claimed your input tax credit, you will have claimed too little input tax credit. You make this adjustment in the tax period in which you find out about the change to the payment amount or, if you account for GST on a cash basis, in the period in which you actually pay the additional consideration. You should make an adjustment ifyou have claimed too much input tax credit, for example, if what you paid for your acquisition is actually less than you thought it would be. To correct this, you need to make an adjustment to reduce your input tax credit. Adjustment where consideration is reduced Graeme operates a small construction business. For the September 2000 quarter tax period, Graeme claimed input tax credits of $80 for stationery purchases of $880 (including $80 GST). In October the wholesaler gives Graeme a volume discount of $110 for purchases made in the September quarter tax period. Graeme has claimed too much input tax credit. The correct amount of input tax credit for the stationery purchases is $70 (the GST included in the reduced consideration of $770). To correct this, Graeme should make an adjustment that reduces his input tax credits by $10 in the December quarter tax period. (Note: The wholesaler will have an equivalent, but opposite, adjustment.) If the supply to you has a value greater than $50, you must have an adjustment note before you can claim the additional input tax credit. Adjustments because ofa change in use The amount of input tax credit you are entitled to depends on how much you plan to use the acquisition or importation in your business. You work out this amount at the time you make the acquisition or importation. Over time your actual use may vary from your intended use, so you may have to make adjustments to make sure that you have not claimed too little or too much input tax credit. You only have to make these adjustments where the GST-exclusive amount you paid for the acquisition or importation was more than $1,000 and it does not relate to making financial supplies. Planned use changes Sarah buys a computer in May to use in her business. She intends to use the computer 75 per cent for business purposes and 25 per cent for private purposes. Sarah is entitled to an input tax credit of 75 per cent of the full input tax credit at the time of purchase. After using the computer for 14 months, Sarah calculates that she actually uses it only 50 per cent for the purpose of her business. The input tax credit that Sarah should have received is 50 per cent of the full input tax credit, not 75 per cent. Sarah will need to make an adjustmenton herbusiness Activity Statement. The requirement to make adjustments for a change in use continues over a number ofyears depending on the price of the acquisition. These adjustments are made in 39

9 40 adjustmentperiods. The adjustment period ends on, or as close as possible to, 30 June. To provide an adequate period oftime for you to assess use, your first adjustment period is the tax period that starts at least 12 months after the end of the tax period in which you claimed the input tax credit for the acquisition or importation. The number of these adjustments periods you have for an acquisition or importation that does not relate to making financial supplies depends on the GST-exclusive amount paid for the acquisition. This is explained in the table below. GST-exclusive amount of consideration for the acquisition $1,000 or less $1,001 to $5,000 $5,501 to $499,999 $500,000 or more Number of adjustment periods None Two Five Ten Note: An acquisition or importation that relates to business finance, such as financial supplies, will have different adjustment periods. Adjustment notes When an adjustment is in relation to a taxable supply, you will need to issue an adjustment note to your business customer so the customer can claim an additional input tax credit. An adjustment note is like an amended tax invoice and may contain similar information to a tax invoice. You must issue the adjustment note within 28 days ofa request by your customer or, ifearlier, within 28 days of becoming aware of the adjustment. Adjustment notes are not necessary if the GSTexclusive value of the supply is $50 or less. Moreinformationonthe contentofadjustmentnotes will be provided in an ATO ruling. Adjustments because ofbad debts If you are not accounting for GST on a cash basis, you may need to make adjustments if: you make a taxable supply and the whole or part of the consideration has been due for 12 months or more (or you write off the amount as a bad debt); you recover all or part ofthe amount that has been due for 12 months or more (or the amount is written off); in a previous tax period, you claimed an input tax credit for an acquisition and an amount you still owe for the acquisition has been due for 12 months or more (or is written off by the supplier); or you pay an amount which you owe for an acquisition and the amount has been due for 12 months or more (or was previously written off as a bad debt by the supplier). Note: You will not need an adjustment note for adjustments for a change in use or for bad debts. 4. OTHER GST ISSUES Exports Goods and services exported will be GST-free. This means that businesses can claim input tax credits for the GST included in the price of goods and services they use to produce exports, even though they do not include GST in the price of the exports. Exports will be GST-free ifthey are exported within 60 days of either receiving payment or issuing an invoice for the goods, whichever is the earlier. You must keep records showing the goods were exported within the 60 days for them to be GST-free. These records could include: airway bills; bills of lading; evidence from the Australian Customs Service that the goods were exported; or evidence that the goods arrived in the country of destination, provided by the customs authorities of that country. Ifyou receive payment for an export in instalments (in accordance with the terms of a contract), the export will still be GST-free if you export the goods within 60 days after either receiving any of the final instalment or the date of the invoice for the final instalment. Exports Elphick's construction company has a contract with an overseas customer to build a support frame that will take six months to build. It will be exported 30 days after completion. Payment for the contract is made in six monthly instalments, with the final payment due on completion. Elphick's construction company will not issue invoices for the monthly instalments. The supply is GST-free if Elphick's construction company exports the frame within 60 days of receipt of the final instalment. Note: If a person exports the stock or equipment on your behalf, then this person acts as your agent. Any transaction performed by your agent is considered to be performed by you, therefore your exports will still be GST-free (if they meet the export requirements). Contracts Supplies made from 1 July 2000 under contracts entered into on or after 8 July 1999 (when the GST became law) will be subject to GST.

10 To protect tax revenue and to ensure a level playing field for all businesses and consumers, the Government has introduced some transitional rules. These rules are for contracts and agreements entered into before the implementation of GST, where these involve the supply of anything on or after 1 July If you are entering into any contract (as a supplier), you may need to consider the effects of GST when negotiating the contract price. This is particularly important for contracts spanning the transitional period, as you may end up being liable to pay GST and not being able to recover it from your customer. The impact ofgst on contracts entered into before 8 July 1999 which span the transitional period will vary depending on: the date on which the contract is entered into; the date on which full payment is made; whether the contract is reviewable or nonreviewable; and whether your customer is entitled to full input tax credits. Leasing, rental and hire purchase Leases, rental and hire purchase arrangements are contractual arrangements. They are a taxable supply and therefore any payments are subject to GST. Registered businesses will be entitled to input tax credits for the GST included in the price of a lease, rental or hire purchase arrangement used for their business operations. However, during the transition to GST some special rules apply. These rules are for contracts and agreements entered into before 1 July 2000 which involve supplying anything on or after 1 July These contracts may give rise to GST obligations relating to the period after 1 July Certain credit transactions similar to loans are financial supplies and are input taxed. The ATO will provide more information on financial supplies. Transitional arrangements Transitional rules apply to property transactions where the contract is made before 1 July 2000, and the property is made available, that is, settlement takes place on or after 1 July 2000 (for example, off-the-plan sales where deposits are taken before GST implementation but settlement takes place afterwards). For more information on contract arrangements please refer to the ATO's transitional fact sheet, GST transitional arrangements - contracts which span the implementation ofgst, whichis available from the website at or by phoning the Business Tax Reform Infoline on Valuation rules for construction contracts Special valuation rules apply to construction agreements made before 1 July 2000 for the supply of goods or real property made available after that date. The valuation rules apply to the supply ofgoods or real property where the supply is the construction, major reconstruction, manufacture or extension ofa building or civil engineering work. Broadly, GST is payable on the difference between the value ofthe supply ofthe building or civil engineering work and the value ofmaterials permanently incorporated in, or affixed to, the site at the start of GST. Generally, these rules require you to value all the work and materials permanently incorporated on the work site on 1 July This date may vary according to the terms of your contract. GST is only payable on the supply to the extent that the value of the supply exceeds the valuation of work completed on 1 July Valuations The ATO issued a bulletin, GSTB 1999/2, on 14 September which discusses the transitional rules for construction contracts that span 1 July The bulletin explores the different valuation methods commonly used in the construction industry and the method acceptable to theato. The acceptable method is the value of work completed on a trade by trade basis against the total value of each trade usually using a measured Bill of Quantities. The value of all work and materials that are permanently affixed to the site will be the total of all certified progress claims made up to and including 30 June Alternatively, the ATO will generally accept valuations where the work is assessed by a recognised person, or by an in-house employee with the same qualifications or experience as a recognised person. Recognised persons include architects, valuers, civil engineers or quantity surveyors. An independent valuation will generally be required where the supplier is a self-employed builder, or a building company that does not normally employ a person with the recognised qualifications or experience. In these cases adequate records may not exist to determine a value from the builder's own records. Valuations mustbeundertakenbeforetheendofthe first tax period (in other words, monthly or quarterly period) after the operative date. You can apply to the Commissioner of Taxation for an extension of time if necessary. The operative date will generally be 1 July 2000, however, it may change dependent on the terms of the contract. You should refer to the ATO bulletin GSTB 1999/2 for a full explanation of how to value construction contracts. For further information on contract arrangements please refer to the ATO's transitional fact sheet, GST transitional arrangements - contracts which span the implementation ofgst, which is available from the website at or by phoning the business Tax Reform Infoline on Barter dealings If you provide goods or services under a barter arrangement you will have to pay GST on the market value (including GST) of a thing or things provided as 41

11 considerationfor the goods and services you have supplied. However you will be entitled to claim an input tax credit for the GST included in the price ofthe materials you use to make the supplies. Barter dealings include agreements you may have with another contractor where you do some work for the contractor and the contractor does something in return. Selling residential property GST will apply to the sale of all newly constructed residential property from 1 July 2000, whether bought by an owner occupier or as an investment. However, GST will not apply to the sale of residential properties that are not new. They will be input taxed. Note: Charges for water supplies, sewerage and drainage services will be GST-free. A standard contract for the sale ofland, such as those approved by the law societies or real estate institutes in each state, provides for the payment of a deposit with the balance payable on completion in exchange for a duly executed transfer. The liability for paying GST under such a contract generally arises when settlement takes place. Ifa contract is not a standard contract the vendor (or seller) needs to examine the terms of the contract to determine when the liability arises. When a deposit paid by the buyer on exchange ofthe contract is held by a stakeholder, as trustee for the vendor and buyer, it only becomes subject to GST if it is either forfeited or applied as part consideration for the purchase (this usually happens when settlement takes place). For land transactions GST will generally be payable on the full selling price. However, a seller may choose to calculate the GST under the margin scheme. Information on how the margin scheme works is outlined later in this booklet. Incidental selling costs GST will apply to incidental costs associated with selling all types of property. Incidental property selling costs include: fees charged by solicitors, surveyors, pest and building inspectors, accountants and financial advisers. Incidental selling costs Natasha sells her house for $150,000. The agent charges a 2 per cent selling commission of $3,000 plus $300 GST, that is $3,300. Advertising costs amount to $330, including $30 GST. Legal and other associated costs add up to $825, including $75 GST. Included in the price Natasha has paid for the incidental costs on the sale of her house is $405 GST. However, the sale price of the house itself will not include GST. First home buyers From 1 July 2000 first home buyers may be eligible for non-means tested assistance of $7,000 under the First Home Owner's Scheme. The scheme will be administered by the individual States and Territories. Bodies Corporate A body corporate (sometimes known as an owner's corporation) with an annual turnover of $50,000 or more, must register for GST. A body corporate with an annual turnover of less than $50,000 may choose to register. Note: Turnover includes amounts contributed as levies by proprietors. A registered body corporate will be required to include GST in the amounts levied on proprietors. The body corporate will be entitled to input tax credits for the GST included in costs such as electricity, management, cleaning, repair and maintenance services. It will also be required to lodge a Business Activity Statement for each tax period. A registered proprietor will be entitled to claim input tax credits for GST included in levies relating to commercial properties. Selling commercial property GST will apply to the sale of all new or existing commercial property from 1 July Most sellers of commercial property will be registered for GST and therefore GST will be payable on the selling price. However, if a seller is not registered for GST then GST is not payable on the sale. If the property is made available to the buyer after 30 June 2000, GST will apply to a sale of any newly constructed commercial property. Made available will usually mean the date of settlement, as the buyer obtains access to the property at that time. The seller must pay GST on the full amount ofthe sale price ofthe property. If the buyer is registered for GST they will be able to obtain an input tax credit for the GST included in the selling price of the commercial property unless it is used to make input taxed supplies. In this circumstance the seller may choose to calculate the GST payable using the margin scheme. However, there are restrictions on the circumstances in which the margin scheme can be used. Information on how the margin scheme works is contained below. Unregistered buyers will not be able to claim input credits. Sale of farmland The supply of farmland will be GST-free if the supplier has carried on a farming business on the land for at leastfive years before the sale. In addition, the purchaser ofthe farm land must intend to operate a farming business on the land. A large farm may be subdivided into a number of smaller farms and sold off. These supplies are GST-free provided each of the farms can operate separately. 42

12 Margin scheme The margin scheme, in relation to property transactions, allows for a reduced amount of GST to be paid. It applies to the supply offreehold interests in land, strata units and long-term leases, including those held on 1 July If you are registered or required to be registered for GST and you make a supply of a freehold interest strata unit or a long-term lease, the supply is subject to GST. GST may be calculated on the full value of the supply or on the margin. Margin Scheme On 12 May 2000 Bill, a property developer, has a block of land to sell. He aims to sell the block in November 2000 for $100,000 plus the GST on the sale. Without using the margin scheme, Bill would need to sell the block for $110,000 to cover the GST payable on the sale. The GST would be 1/11 th of the sale price $10,000. However, under the margin scheme Bill could sell the block for less than $110,000 and still clear $100,000. The block is valued at $80,000 as at 1 July Under the scheme GST is only calculated on the difference in value between 1 July 2000 valuation and the final sale price. If he sells the block for $102,000, the margin is $22,000. The GST payable on the margin is 1/11 th of $22,000 being $2,000 that Bill has to pay to the ATO. Bill would therefore be able to market the block at a lower price of $102,000 and make the price more attractive to prospective private buyers who cannot claim an input tax credit, for example, a financial institution. The margin scheme cannot be used if a purchase of property is acquired through a taxable supply where GST was calculated without using the margin scheme. Sale of property If Bill buys a block of land in September 2000, where GST was not calculated using the margin scheme, and claims an input tax credit for the GST included in the purchase price, then he would not be able to use the margin scheme when he sells the property. If Bill buys the block from a private owner, no GST would have been included in the price and no input tax credit would be available. Bill would have the option of using the margin scheme when calculating the GST payable on his subsequent sale of the property. How to calculate GST on the margin ofa supply You calculate GST on the supply as l/llth of the margin. The margin is your sale price (including GST) less your original purchase price or if you held the interest on 1 July 2000, the valuation of that interest at that date. You should notinclude the costofany improvements to the land made on or after 1 July 2000 when you work out the original purchase price. If your original purchase price is more than your sale price then under the margin scheme, no GST is payable on the sale because there is no positive margin. The margin scheme ensures thatgst is payableonly on the value added by your enterprise, for example, the value added by a property developer who supplies new houses. Ifyou purchase land and subdivide it, you apportion the purchase price over the total number of subdivided blocks of land. Note: Where the margin scheme is utilised, the purchaser cannot claim an input tax credit. This is irrespective of whether the property may be commercial premises, as the transaction is specifically excluded from being a creditable acquisition under the scheme. Margins on subdivided land Hilary Enterprises Pty Ltd, a mid-sized developer, acquires a block of land on the outskirts of Adelaide for $300,000 in July The block is subdivided into 6 blocks of equal size and amenity. The company chooses to use the margin scheme to calculate the GST payable on the subsequent sale of the blocks. In these circumstances it is appropriate to apportion the consideration for the acquisition equally to the 6 blocks, that is, $50,000 each. The company sells four blocks for $75,000 each, this means the margin on each block is $25,000. The GST payable for each block sold by the company is 1/11 th of the margin, that is $2,273. The company later sells the remaining two block for $90,000 each (including GST). The margin on these two block is $40,000. The GST the company is required to pay on the sale of the last two blocks is 1/ 11 th of the $40,000 margin, that is $3,636 per block. 43

13 Had the company opted for the full taxation rather than the margin scheme, the GST liability on the sale of the initial four blocks would have been $6,818 per block (that is, 1/11th of the sales price of $75,000). The later sale of the remaining two blocks would have resulted in GST of $8,182 (that is, 1/11 th of the sale price of $90,000) per block. However, a registered buyer of the block would be able to claim input tax credits for the GST under this treatment, to reduce the net cost. The seller of a property may choose to only apply the margin scheme on sales to buyers who cannot claim input tax credits, such as private individuals. If the purchaser is in a position to claim input tax credits, they may prefer not to purchase under the margin scheme. This is because while GST would be payable on the whole value, the purchaser can claim the GST as an input tax credit. Margin methodfor freehold interests, strata units or long-term leases held on 1 July 2000 If you were registered or required to be registered for GST on 1 July 2000 and you held a freehold interest, strata unit or a long-term lease at that date and you want to use the margin scheme to calculate the GST payable on the sale, you must use the value of the interest, unit or lease as at 1July 2000 to work out the margin on the supply. You do not use the original purchase price. Off-the-plan sales Strong Building Services Pty Ltd is building 12 town houses and selling them off-the-plan for $200,000 each. The town houses will be completed in early August 2000 and settlement will be due then. Strong Building Services will have to pay GST on the sale of the town houses as they are made available to buyers on or after 1 July The company chooses to use the margin scheme, so GST will only be payable on the value added after 1 July Strong Building Services Pty Ltd obtain a valuation for each town house at $150,000 on 1 July The margin for calculating GST on each town house is $50,000, that is, the selling price of$200,000 less the valuation amount of $150,000. If the value of the freehold interest, strata unit or long-term lease held on 1 July 2000 is more than your sale price, then under the margin scheme no GST is payable on the sale because there is no positive margin. If you were registered or required to be registered for GST after 1 July 2000, you must get a valuation on the day ofeffect ofyour registration or the day on which you apply for registration (if it is earlier). The ATO will issue the requirements for valuations under the margin scheme. New residential property GST will be payable on the sale of new residential property where the property is made available on or after 1 July 2000, including situations where the construction commenced before 1 July However, the vendor may choose to apply the margin scheme. Withholding tax obligations Under the new PAYG legislation currently in Parliament, the withholding obligations of labour hire firms and their clients will be simpler. A business (a labour hire firm) will have a withholding obligation ifit makes a payment to a worker, who is an individual performing work under a labour hire arrangement. A labour hire arrangement exists where an intermediary (the labour hire firm) arranges for an individual to carry out work directly for clients of the labour hire firm. Under such an arrangement, there is no contract between the client and the individual worker. Labour hire arrangement Staffprovider Ltd keeps a database of skilled persons who are willing for their services to be provided to third parties. Corporate Pty Ltd requires the services of a computer programmer and contacts Staffprovider Ltd. Staffprovider arranges with Corporate to provide the services of a computer programmer in return for payment. Staffprovider then contracts with Jane for her to do the computer programming for Corporate. Staffprovider must withhold amounts from payments it makes to Jane under the arrangement with her. There are various types ofagency arrangements that are not labour hire arrangements for PAYG purposes. For example, recruitment or placement agency arrangements give rise to a contractual relationship between the client business and the worker. The client business will usually have the withholding obligation, depending on the nature of the relationship. Note: If you use a contractor who does not have an ABN, then under the proposed PAYG system you will be required to withhold tax from each payment you make to them at the top personal tax rate including the Medicare levy (48.5 per cent). You will have to account for these withholdings and send any tax withheld to the ATO. Voluntary agreement for withholding tax A business and a contract worker who is an individual, and who has an Australian Business Number ("ABN") can make a voluntary agreement to bring the work payments into the PAYG withholding system, ifthe work payments are not subject to any other PAYG withholding. 44