GST & Property Update End of GST Transitional Relief

Transcription

1 Tax Brief 13 October 2005 GST & Property Update Given the volume of cases, legislative change and new or revised rulings relating to GST & property that have issued or been enacted since our last GST & property-related Tax Brief in March 2005, we are issuing this Update as a summary of all the major developments regarding GST & property End of GST Transitional Relief The GST-free treatment of transitionally grandfathered leases and other long term, non-reviewable contracts ended on 30 June 2005 so all supplies under such contracts are now subject to GST. The price change process to deal with GST after 1 July 2000, legislated earlier this year, went relatively smoothly with all known price increases being 10% and very, very few taxpayers seeking arbitration. This did not stop technical issues arising in the arbitration process (refer ATOIDs 2005/227 and 2005/228 and fact sheet GST and long-term non-reviewable contracts ). In our experience, only a small percentage of recipients elected to reverse charge the GST. Despite the end of the transitional period, whether a market review before 1 July 2005 caused supplies under otherwise grandfathered leases to become taxable remains an issue before the Courts: In DB Rreef Management Pty Ltd v Deputy Commissioner of Taxation [2005] FCA 509 (now under appeal) the taxpayer won the argument that a market review was not a review opportunity on very narrow grounds - that a review of the market rent for the premises which could not take into account a substantial fit-out that made up almost 50% of the actual rent was not a general review ; In Coles Supermarkets v Westley Nominees [2005] FCA 839 (also under appeal) the taxpayer lost a similar argument where outgoings and turnover rent payments, making up 26% and 22% of the tenants total payments, were not subject to the market review so the review was not a general review. The Judge held, contrary to ATO views (refer GSTD 2000/10), that the payment of the outgoings was not part of the consideration for the supply for GST purposes. As a result the consideration (being the base rent under the lease) was the subject of a general review.

2 If these appeal cases change what has been accepted as a review opportunity, landlords may be able to seek refunds for GST paid (but not passed on) before 30 June 2005 on leases that were treated as subject to GST. In such circumstances, the landlord will then also want to begin the price change process so the rent can be increased to recover amounts for GST in future. Action Points: 1 Ensure no GST-free supplies of commercial premises are still being reported for supplies after 1 July 2005; 2 Consider whether the DB Rreef and Coles cases may give rise to refund opportunities for the period to 30 June 2005 and the need to commence the initial offer process; 3 Be aware for due diligences and assignment consents that a small percentage of tenants may be reverse charging GST or paying 10% under a side letter will that bind the next tenant or landlord? GST Margin Scheme Legislative Amendments Significant amendments to the margin scheme legislation became effective from 29 June Whilst most changes were aimed at eliminating tax avoidance structuring (highlighted in the recent final rulings GSTR 2005/4 and 2005/5), some amendments have wider effects or benefits: the vendor and purchaser must now agree in writing before the sale that the margin scheme applies it is no longer just the unilateral election of the vendor; amalgamated land including lots that were and lots that were not eligible for the margin scheme by themselves can now be sold under the margin scheme subject to an increasing adjustment to reverse out any credits claimed on such lots. Proposals to change the margin scheme calculation for land purchased as a GST-free going concern or farmland were excluded from the current amendments but are still being considered by Treasury in consultation with various industry bodies. An advantageous interpretation of how the margin scheme applied to sales of new stratum units was rejected in Sterling Guardian v Commissioner of Taxation [2005] FCA 1166, due to it not being within the purpose and context of the provisions. We understand the case is being appealed. A new determination on margin scheme valuations was released on 7 September 2005, MSV 2005/3, which essentially continues three of the four methodologies 2 GST & Property Update

3 for valuing land as at 1 July 2000 (or later in certain circumstances) for the purposes of applying the margin scheme. The fourth methodology, cost of completion for partially complete premises, can no longer be used for sales contracts entered into after 1 July 2005 (refer MSV 2005/2). Given the disputes between taxpayers and the Commissioner on margin scheme valuations including some heading to the Courts it is surprising that the most used method, a professional valuation, is now less prescriptive. The touchstone now is that it must be made in a manner that is not contrary to professional standards in Australia. Action Points: 1 Ensure the written agreement to use the margin scheme is a feature of your contracts; 2 Be aware that the interaction of going concern, farmland and margin scheme provisions is still subject to possible amendment. 3 Cease using the cost of completion method for valuing partly completed premises for the purposes of the margin scheme. Commissioner s Publications On 4 October 2005 the Commissioner issued 3 draft rulings and 3 Practice Statements: GSTR 2005/D3 discusses the new valuation determination referred to above MSV 2005/3 - which will apply to sales on or after 1 December As well as discussing the three acceptable methodologies, the draft ruling also looks at the GST treatment of: settlement adjustments; amalgamating titles; and sales or vesting of property by government bodies. GSTR 2005/D4 is a general discussion of the margin scheme as it applies to land acquired on or after 1 July Apart from replicating the discussions in D3 and D5, the draft ruling discusses the legislative changes (see above) and also confirms that: a conditional written agreement to adopt the margin scheme (eg. if the parties incorrectly consider that going concern treatment applies) is sufficient; any fair and reasonable method of apportioning valuations over sub-divided lots is acceptable (examples include using number of lots, percentage of saleable area or proportion of total anticipated sales price); partial interests can be sold under the margin scheme. GSTR 2005/D5 discusses the concept of improvements on the land for the purposes of the margin scheme and subdivision 38-N. Broadly, in the ATO s view the concept of improvements connotes something that enhances the value of the land and includes buildings/structures, driveways, fencing, land 3 GST & Property Update

4 clearing, landfill and drainage but only so long as such enhancements exist at the relevant time (1 July 2000 or sale). PSLA 2005/2 (GA) discusses the time for choosing to use the margin scheme for supplies before 29 June 2005 (ie. where the written agreement of the parties is not needed). While the choice must generally be made before settlement, the Commissioner will exercise a discretion to allow further time in limited circumstances. Importantly, the recipient must not otherwise be entitled to an input tax credit (eg a private purchaser). The Practice Statement will therefore be of limited application in business to business transactions. PSLA 2005/15 provides that for sales after 29 June 2005 requiring the written agreement before settlement to apply the margin scheme, an extension of time to make that agreement will be allowed where it is fair to the parties and there is no arrangement contrary to the policy of the GST Act. Useful examples given include where the parties incorrectly thought that going concern (or other non-taxable) treatment applied or where the recipient determines that it wishes to use the margin scheme for subsequent sales. PSLA 2005/16 discusses the circumstances in which the Commissioner will allow a further period beyond the date on the supplier s GST return is due to be lodged for it to obtain an approved valuation. Generally, this will be granted if it is fair and reasonable to the parties and not part of an arrangement contrary to the policy of the GST Act. Useful examples given include that the valuation obtained was not an approved valuation, the parties incorrectly adopted going concern (or other non-taxable) treatment, genuine mistake or inadvertent oversight. Input Tax Credit Recovery The first major case on input tax credits recovery, HP Mercantile Pty Ltd v Commissioner of Taxation [2005] FCAFC 126, was a win for the Commissioner in establishing a very wide nexus test to deny input tax credits. A trust that acquired interests in debts and then collected them was denied credits on its due diligence costs (reversing the decision at first instance in The Recoveries Trust case) and only entitled to reduced input tax credits on its debt collection costs. In both cases there was the required nexus real and substantial, not trivial between the acquisitions and making input taxed supplies. The previously widely accepted principle of pre-decision acquisitions having an insufficient nexus to the eventual input taxed supply was rejected. The clear implication is that an entity that only makes input taxed supplies will not be entitled to (full) input tax credits. The judgment also includes principles of wider import but, apart from requiring apportionment, it remains to be seen what will determine input tax credit recovery for a business making both taxable and input taxed supplies. 4 GST & Property Update

5 Action Point: Care needs to be taken on GST recovery on capital raisings and other financial supplies made by otherwise fully taxable businesses (such as property leasing or development). Draft Ruling on Deposits The first draft GST public ruling for the year, GSTR 2005/D1 regarding Division 99 deposits, poses some surprise concepts: deposits must be only 10% unless the taxpayer can justify more on reasonable grounds; and forfeited deposits are always consideration for a taxable supply, even if the underlying supply would have been GST-free. The strange logic might change given the number of submissions being made on the draft. Action Point: Consider whether GST attribution and tax coding systems would need to change if draft ruling is finalised without change. Other GST & Property Issues De-registration of Tax Law Partnerships The transitional period for complying with GSTR 2004/6 ended on 30 June 2005, which means that all tax law partnerships where the co-owners, and not the TLP, carry on the leasing enterprise should now be de-registered. Commercial Residential Premises Still no sign of the long-awaited re-write of GSTR 2000/20 to take into account the decision in Marana Holdings v Commissioner of Taxation (2004) 57 ATR 521. However, we understand it is due to be released as a draft in late October after brief, confidential discussions with industry on how the change in approach may be implemented. Going Concern & Farmland There has also been a court decision confirming that the required agreement in writing between supply and purchaser before the supply of a going concern will be GST-free needs to be an express written agreement and not merely implied from the contract: Midford v FCT [2005] AATA 623. Recent ATO materials on the going concern and farmland provisions include: 5 GST & Property Update

6 ATOID 2005/92 on the interaction of the GST-free supply of farmland and going concern provisions; and ATOID 2005/103 the back to back sale of farmland can be GST-free if the end purchaser intends to carry on a farming business Call Options Over Land The ATO has issued four interesting interpretative decisions in August in relation to options over land: ATOID 2005/182 confirms that call options over commercial property are taxable supplies ATOID 2005/183 while call options over residential premises are input taxed financial supplies of derivatives they are also input taxed under section 9-30(2)(b) meaning that, according to the ATO, concessions such as the financial acquisition threshold and reduced input tax credits do not apply. ATOID 2005/184 while call options over GST-free land (eg farm land) are input taxed financial supplies of derivatives they are also GST-free under section 9-30(1)(b) meaning that GST-free treatment prevails under section 9-30(3). ATOID 2005/194 a vendor makes an input taxed financial supply of credit arrangement in allowing the purchaser to pay for a property under an instalment contract. 6 GST & Property Update

7 For further information, please contact Sydney Melbourne Andrew Howe Rhys Penning Rhys.Penning@gf.com.au G&F document ID _15.docx These notes are in summary form designed to alert clients to tax developments of general interest. They are not comprehensive, they are not offered as advice and should not be used to formulate business or other fiscal decisions. Liability limited by a scheme approved under Professional Standards Legislation Greenwoods & Freehills Pty Limited (ABN ) Sydney ANZ Tower, 161 Castlereagh Street, Sydney NSW 2000 Australia Ph , Fax Melbourne 101 Collins Street, Melbourne VIC 3000, Australia Ph Fax Perth QV.1 Building, 250 St Georges Terrace, Perth WA 6000, Australia Ph Fax GST & Property Update