PROPERTY developers should seek professional advice before signing on the dotted line to avoid ongoing problems with the GST margin scheme.
PROPERTY developers should seek professional advice before signing on the dotted line to avoid ongoing problems with the GST margin scheme.
This stern warning from tax professionals is a clear signal that confusion about the GST margin scheme continues to pose problems in the property sector.
PKF consulting partner Mark Pollock said the GST margin scheme seemed to be widely misunderstood.
“It’s going to lead to litigation,” he said.
It appears the Australian Tax Office (ATO) has adopted an aggressive stance in relation to errors in the calculation of the GST.
“The tax office is seeing a lot of high-value transactions and it has the ability to charge penalties,” Mr Pollock said.
“In the UK the government gets a lot of revenue from penalties and interest in relation to the Value Added Tax (VAT).
“It’s [GST margin scheme] not well understood and the biggest problem is people don’t take advice prior to signing a contract.”
Mr Pollock said the calculation confusion had arisen because the margin scheme was not calculated like most GST transactions.
“For most business you just add 10 per cent on to the sale price,” he told WA Business News.
“So it’s either zero or 10 per cent.
“With the margin scheme it’s the sale price less the value of the land as valued at June 30 2000, and multiply this by 10 per cent”
Problems also were occurring in contracts where the purchaser has assumed he or she will be able to claim input tax credits.
“On the flip side we’ve got a case where the purchaser signed a con-tract to buy a piece of land and the contract said it included GST,” Mr Pollock said.
“The purchaser has assumed he or she will get input tax credits.
“But the thing with the margin scheme is it’s not at the purchaser’s discretion … it’s at the vendor’s discretion.”
If these disagreements can’t be resolved the matters are likely to end up in court, he said.
In such situations the cases are complicated by a lack of any legal precedent in Australia or case law.
“I’ve got a case where the purchaser expected an input tax credit but the vendor is using the margin scheme and he’s saying [to the purchaser]: ‘You owe us the full amount’.
“The purchaser is now trying to renege.
“So there will soon be a legal precedent [in Australia].”
In New Zealand 25 per cent of the tax cases in front of the courts were related to GST, Pricewaterhouse-Coopers partner indirect taxes Ross Thorpe said.
“We [in Australia] haven’t had any court cases here, not [one] looking specifically from a tax perspective. There have been a few compensation deals,” he said.
“There are a number of cases that I believe are in train but it takes a long time for them to hit the courts and it takes a long time for them to be of any benefit.
“The other problem is whether we look at Australian cases that concern income tax or do we look at European court case law which concerns VAT?”
Issues relating to the GST differ markedly from those relating to income tax because questions often arise ahead of finalising negotiations.
“If the transaction is happening tomorrow you need to know what the consequences are,” PricewaterhouseCoopers senior manager indirect taxes Guy Noakes said.
Mr Thorpe said that, although clauses could be inserted into contracts to try and protect purchasers and vendors, addressing these issues after a contract had been signed could be problematic.
“It can cause hassles for both sides and you’ve always got the situation where you can’t do much about it,” he said.
“At that point you have to try and reduce the consequences of what’s occurred for both parties involved.”
“It is something that comes up quite a lot … and if it’s then discovered at an audit two or three years down the track; the indemnity clause may not protect the other party.
“Technically you can get penalties [from the ATO] and in most cases it would be a per annum penalty.
“The interest rate is 11.8 per cent, which is a general interest charge that goes back to the States, so the tax office doesn’t normally waive that particular penalty.”
In a situation where a parcel of land has two differing valuations, Mr Noakes said there remained some uncertainty as to which one should be applied.
“It’s not overly common but it can occur for whatever reason. There might have been two different valuations taken for different reasons,” he said.
“There’s nothing in the legislation saying which of the two valuations, the higher or the lower, ought to be utilised.
“It’s really up to the developer as long as the valuation complied with all the requirements of the legislation in the tax office.”
For many businesses operating in the property sector the focus on GST has shifted from compliance issues to more complicated issues in relation to transactions.
“People are now thinking they know how the GST applies but unfortunately I think they need to go back through the details of the particular transaction and work through it,” Mr Noakes said.
“There are issues such as valuation or the terms of contract as to unlocking when the GST is paid.”
A spokeswoman from the ATO said that, although there was no case law relating to GST, there certainly was GST law.
“There are a number of things the ATO has done, including quite comprehensive notes developed through industry forums,” she said.
“If people have particular issues they should come to us to provide a ruling.”
The spokeswoman said the ATO was still formulating it’s position on any penalties in relation to the GST margin scheme.
“The commissioner has said that we are moving from a transitional stage to looking broadly at penalties,” she said.
This stern warning from tax professionals is a clear signal that confusion about the GST margin scheme continues to pose problems in the property sector.
PKF consulting partner Mark Pollock said the GST margin scheme seemed to be widely misunderstood.
“It’s going to lead to litigation,” he said.
It appears the Australian Tax Office (ATO) has adopted an aggressive stance in relation to errors in the calculation of the GST.
“The tax office is seeing a lot of high-value transactions and it has the ability to charge penalties,” Mr Pollock said.
“In the UK the government gets a lot of revenue from penalties and interest in relation to the Value Added Tax (VAT).
“It’s [GST margin scheme] not well understood and the biggest problem is people don’t take advice prior to signing a contract.”
Mr Pollock said the calculation confusion had arisen because the margin scheme was not calculated like most GST transactions.
“For most business you just add 10 per cent on to the sale price,” he told WA Business News.
“So it’s either zero or 10 per cent.
“With the margin scheme it’s the sale price less the value of the land as valued at June 30 2000, and multiply this by 10 per cent”
Problems also were occurring in contracts where the purchaser has assumed he or she will be able to claim input tax credits.
“On the flip side we’ve got a case where the purchaser signed a con-tract to buy a piece of land and the contract said it included GST,” Mr Pollock said.
“The purchaser has assumed he or she will get input tax credits.
“But the thing with the margin scheme is it’s not at the purchaser’s discretion … it’s at the vendor’s discretion.”
If these disagreements can’t be resolved the matters are likely to end up in court, he said.
In such situations the cases are complicated by a lack of any legal precedent in Australia or case law.
“I’ve got a case where the purchaser expected an input tax credit but the vendor is using the margin scheme and he’s saying [to the purchaser]: ‘You owe us the full amount’.
“The purchaser is now trying to renege.
“So there will soon be a legal precedent [in Australia].”
In New Zealand 25 per cent of the tax cases in front of the courts were related to GST, Pricewaterhouse-Coopers partner indirect taxes Ross Thorpe said.
“We [in Australia] haven’t had any court cases here, not [one] looking specifically from a tax perspective. There have been a few compensation deals,” he said.
“There are a number of cases that I believe are in train but it takes a long time for them to hit the courts and it takes a long time for them to be of any benefit.
“The other problem is whether we look at Australian cases that concern income tax or do we look at European court case law which concerns VAT?”
Issues relating to the GST differ markedly from those relating to income tax because questions often arise ahead of finalising negotiations.
“If the transaction is happening tomorrow you need to know what the consequences are,” PricewaterhouseCoopers senior manager indirect taxes Guy Noakes said.
Mr Thorpe said that, although clauses could be inserted into contracts to try and protect purchasers and vendors, addressing these issues after a contract had been signed could be problematic.
“It can cause hassles for both sides and you’ve always got the situation where you can’t do much about it,” he said.
“At that point you have to try and reduce the consequences of what’s occurred for both parties involved.”
“It is something that comes up quite a lot … and if it’s then discovered at an audit two or three years down the track; the indemnity clause may not protect the other party.
“Technically you can get penalties [from the ATO] and in most cases it would be a per annum penalty.
“The interest rate is 11.8 per cent, which is a general interest charge that goes back to the States, so the tax office doesn’t normally waive that particular penalty.”
In a situation where a parcel of land has two differing valuations, Mr Noakes said there remained some uncertainty as to which one should be applied.
“It’s not overly common but it can occur for whatever reason. There might have been two different valuations taken for different reasons,” he said.
“There’s nothing in the legislation saying which of the two valuations, the higher or the lower, ought to be utilised.
“It’s really up to the developer as long as the valuation complied with all the requirements of the legislation in the tax office.”
For many businesses operating in the property sector the focus on GST has shifted from compliance issues to more complicated issues in relation to transactions.
“People are now thinking they know how the GST applies but unfortunately I think they need to go back through the details of the particular transaction and work through it,” Mr Noakes said.
“There are issues such as valuation or the terms of contract as to unlocking when the GST is paid.”
A spokeswoman from the ATO said that, although there was no case law relating to GST, there certainly was GST law.
“There are a number of things the ATO has done, including quite comprehensive notes developed through industry forums,” she said.
“If people have particular issues they should come to us to provide a ruling.”
The spokeswoman said the ATO was still formulating it’s position on any penalties in relation to the GST margin scheme.
“The commissioner has said that we are moving from a transitional stage to looking broadly at penalties,” she said.
