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November, 2002 Volume 1, Issue 5 Inside this Issue Tony Evans - Editor is 12 months old so is GUSTAX! GST Myths Alert on the Margin Method The Prize ruling Questions and Answers Common GST issues Legislation
November, 2002 Volume 1, Issue 5 Inside this Issue Tony Evans - Editor is 12 months old so is GUSTAX! GST Myths Alert on the Margin Method The Prize ruling Questions and Answers Common GST issues Legislation / Rulings Update The contents of this paper are for general information only. They are not intended as professional advice and you should consult a qualified accountant or other suitably qualified professional. Whilst all care and diligence has been exercised in the preparation of this newsletter, GuSTAX Consulting Pty Ltd expressly disclaims all liability for any loss or damage arising from reliance upon any information in this paper. GuSTAX Consulting Pty Ltd ABN (Just Tax Consulting) 5 Piccadilly Avenue Wantirna South Vic Angst Update is a registered business name in the State of Vic. is 12 months old This is the fourth edition of the ANGST UPDATE and we are pleased to advise that this publication is celebrating its 12 month aniversary and Gustax Consulting has recently completed its first 12 months of trade. We wish to thank all our clients that have sought our advice over that time and look forward to being of service to them in the future. We trust that you have found this publication extremely useful during the past and we look forward to reporting on all the major GST issues in the future. We value your feedback. If there are any issues you want addressed, please us and we will try to include comment on it in the next edition. Speaking of s, please note that we have adopted a new address. Please update your records to alter our address to:- Finally, this will be our last edition for the year. We hope to talk to you between now and Christmas, but if we don t, than please accept our best wishes for the festive season. GST MYTHS Accountants and business owners should not apply income tax concepts to GST automatically, because there are some major areas where these income tax concepts have no application. Some of these myths are explained below. The bum RAP Under income tax law, you can adopt a reasonably arguable position or RAP as we know in the trade where there is an issue in dispute and you are just as likely to be right in your interpretation as be wrong. Where you adopt this approach, the ATO will not apply penalties if you are found to be wrong. This concept does not apply to GST. Basically you are required to resolve dispute issues before you lodge the BAS. Where you adopt a position, you will need to justify that the GST status of that position is correct. You will need to take reasonable care otherwise penalties can be applied if you get it wrong. Please note that reasonable care may include requesting a ruling. By adopting a reasonably arguable position, you may not have taken enough care to avoid penalties. The Ruling is always right! Quite often when arguing a taxpayer s position with the ATO, they will turn around and say that because the client did not comply with the ruling, there is GST payable. This is irrespective of your interpretation of the relevant sections of the GST legislation. So what status do the rulings actually have? Rulings are only the views of the Commissioner of Taxation on the interpretation of the law. They are not law and cannot be treated as law. In some cases, the rulings are incorrect and mis-interpret the law, usually to the benefit of the tax office. Where a taxpayer complies with and relies on a ruling, they will have the protection of the ruling provided the facts and circumstances of the taxpayer match those in the ruling. This is because they have relied on the ATO view and the basis of our ruling system is that complying with rulings give you the protection of the ruling while it is valid. Where a ruling is withdrawn, then you no longer have the protection of the TAX TRAINING FOR YOUR PRACTICE Before you renew your tax training with your current training provider check out what else is available. Gustax Consulting offers significant advantages compared to many other trainers. These include:- Highly reputable trainer in Tony Evans, our in-house tax specialist. You get a trainer that provides tax advice to tax practitoners and is not just a training presenter. Best value for money in town starting from $ (GST inclusive) per two hour session in Suburban Melbourne. This includes a tax update and a special topic each month. Practical based sessions that tell you what is relevant for your practice. We ask you what you want and tailor accordingly! Guaranteed to get the same highly skilled trainer each session resulting in continuity in your training. Comprehensive Tax Update notes each month Extensive list of special topics to choose from with detailed papers and you get to choose when you want the topic! Training is provided at your premises to all of your staff at a mutual time of convenience No need for you to travel. Over twelve months track record of high quality service. Groups of up to 20 people allowed in sessions and you can share costs with others by putting groups of firms together. If monthly sessions don t suite talk to us. We can provide flexible solutions to meet your practice s needs. Don t pay anymore than you need for high quality tax training - Contact ruling for subsequent transactions but are fully protected for transactions entered into during the currency of the ruling. As stated earlier, not all rulings are correct. Where a taxpayer adopts a position that is in conflict with a ruling, then as long is the position is in compliance with the law, they are okay. They may find themselves in a dispute with the ATO who do not agree with their interpretation. They may have to fight this matter in the courts. In these cases, the view of the taxpayer will need to be well documented and justified. Practitioners should be wary of the ATO zealots. There are not many Tony Evans to find out more on: - Telephone Facsimile Mobile thankfully but we all run across them occasionally. These ATO staff will read something in a tax ruling or draft ruling and will take it as gospel. Quite often they will misinterpret what is in the ruling. They will not entertain an alternative position from the client and they will not escalate the issue to a supervisor or a specialist cell in the ATO. In most cases, their view will result in more GST payable by the taxpayer. On most occasions, the ATO will provide even handed advice and will pursue the position of the taxpayer and seeks clarification where there is any doubt. However you will experience problems when dealing with these ATO Zealots. Seek an alternative position if you are not sure that what the ATO is telling you is correct. Be prepared to escalate the issue to the person s supervisor if you firmly believe that the ATO is wrong. This is not being difficult or unco-operative this protecting your client s or your business s position. Unfortunately the ATO can take the heavy handed approach as the dollars involved in some transactions are too small to dispute. However this does not give them the right to walk all over you just because the ATO official believes that the GST ruling is gospel. Rulings are exactly that. Guidelines for your benefit but still only the ATO view of the law and not actually the law! Self Assessment & Objections GST is also subject to the self assessment rules and therefore it is up to the taxpayer to get it right when they lodge their BAS. This is an unacceptable state of affairs for such a complex tax, but administratively convenient for the ATO. It also puts a significant compliance burden on accountants and tax agents. Remember that you can lodge the BAS based on your interpetation of the law and rely on self assessment. Alternatively you can lodge on the ATO view of the law (if it is different) and lodge an objection at the same time where you are disadvantaged. As GST is a transaction based tax, you will need to lodge an objection for every BAS that includes a dispute trannsaction. This is onerous but extremely important to do. Failure to do this may jeopardise your right to refunds and GIC if your objections are subsequently successful. You will probably only get refunds in relation to the BAS returns you objected to! ALERT ON THE MARGIN METHOD Recently the Commissioner of Taxation issued an addendum to the Margin Method ruling, indicating that you needed to have a valuation in place by the time of the supply of the property if you wanted to use a valuation. Otherwise the cost of the property must be used. Unfortunately we concur with this view. The following example demonstrates. Taller Poppies Pty Ltd acquired its premises for $100,000 in It registered for GST on 1 July On 30 June 2002 it sold the property for $980,000 in order to move into bigger premises. It obtained a valuation (in accordance with GSTR 2000/21) of the property as at 1 July 2000 of $870,000. The valuation was dated 31 July Had the margin method applied based on the valuation, GST of $10,000 would be payable on the supply of the property. This is 1/11 th of ($980,000 - $870,000). However because the valuation was not obtained before the date of supply, Taller Poppies Pty Ltd cannot use the valuation and must use the cost of the property. This means the GST payable is $80,000 (1/11 th of the margin which is now $880,000 - $980,000 - $100,000). The law requires the valuation to be in place at the time of the supply which is settlement of the property and in this case is 30 June The message here is that where a valuation is required under the margin scheme, you should obtain it at the first available opportunity and certainly before the time of supply. Failure to do so may mean that the valuation cannot be used and the orginal cost of the property must be used instead. THE PRIZE RULING On 2 nd October 2002, the ATO issued a final ruling on GST and prizes. This ruling is quite controversial and will cause potential problems for any client who is involved in the giving or receiving of prizes where there is an element of effort or skill used to win the prize. At risk are horse owners, professional sportspersons and the like. Basically the ATO take the view that there are a multitude of supplies in relation to many competitions. Let us take the example of a horse owner entering a horse in a horse race. When a horse owner enters his horse into a race and pays a fee, there is a taxable supply. Basically the race organiser has made a supply to the horse owner of the right to participate in the race and must charge GST. Provided About the Editor Tony Evans is a Chartered Accountant who has extensive tax consulting experience over 20 years working in the profession including overseas experience working with VAT in the UK. A director of GuSTAX Consulting Pty Ltd, he was previously a partner with a boutique tax division in one of the midtier accounting firms in Melbourne. Tony s diverse tax specialisation's include: - GST Employment taxes Corporate Taxes CGT PAYG Expatriate Taxation He is also recognised as an excellent communicator and trainer and has conducted numerous technical sessions for the ICAA and members of the profession. they issue a tax invoice and the horse owner is registered for GST, the horse owner will be able to claim an input credit. So on the basis that the fee was $1,100, the horse owner will have an input tax credit of $100 and the race organiser will need to remit output tax of $100. Let us now assume that there are twenty horses in the race and the prize money is $55,000 plus a trophy worth $2,200 for first prize. Every horse in the race makes its best efforts to win the race. They are all making a supply of effort. If they don t win a prize their supply is not a taxable supply as they receive nothing in return. If they win a prize, then their supply is a taxable supply if they are registered for GST. They will receive prizes worth $57,200 in return for winning and will need to remit GST of $5,200. Yes, they will need to remit GST of $200 on the trophy even though they do not receive the cash. If they were not registered for GST, then they have just exceeded the registration threshold. It is almost certain that their hobby of racing horses has just become an enterprise and they will need to register for GST and remit the $5,200 GST on the cash and trophy prize. The race organiser has also made a supply of the trophy here. They have effectively sold or supplied the trophy in return for the successful services of the horse in the race. Part of the value of this supply is the value of the trophy and the race organiser will now need to remit $200 on the supply of the trophy. All is not lost. The race organiser will have purchased the trophy for presumably $2,200 and would have got an input tax credit on the trophy. So their input tax credit will equal their output tax and they will not be out of pocket. They will also need to issue a tax invoice in relation for the trophy. If we look at the horse owner again, he has effectively used part of his horse race winnings to acquire the trophy. Once he gets the tax invoice and provided he uses the trophy in his enterprise, he will be entitled to an input tax credit for the trophy. Some prizes are exlcluded from these convoluted rules. If the prize is considered to have no intrinsic value and is a non-functional recognition of the achievement of winning, then it will be deemed to be of no value and GST will not apply to the supply of the trophy. Such trophies will include ribbons, perpetual trophies, trophies that are not made of precious metals or jewels or the like. However trophies made out of precious metals or jewels, trophies that are works of art like paintings or are functional like a decanter, of even goods given as a trophy will fall into these ridiculous rules and will attract GST. The ATO has indicated that Olympic and Commonwealth games medals will be deemed to have no value. The burning question is how much precious metal or jewels or artistry will be required before the trophy is considered to have some value and caught by this ridiculous interpretation. Let us assume that the horse owner claimed an input tax credit of $200 on the trophy as it was used 100% for creditable purpose to promote his horse racing enterprise. However he subsequently retires and keeps the trophy himself personally. He either ceases his GST registration or withdraws the trophy for personal use. Then he will have an adjustment event on the trophy at this time and will need to give back the GST of $200. Q & A Commonly asked GST questions The first question is an update on a question from last publication. The implications of all of the above on the racing industry is horrendous. This will turn into a GST nightmare because the ATO is concerned it will miss out on some GST on trophies. If this is what our new simplified tax system achieves then clearly our legislators and the tax office have lost the plot! And, of course, you then need to consider the income consequenses of all of the above! Q: I am a sole trader that purchased a car for $55,000 on 2 July Applying my current logbook, I estimate my business use to be 80% so I recover $4,000 of the $5,000 GST paid leaving me with a cost of the car of $51,000. What is the base for depreciation claims, $51,000 or $50,000? A: Despite the fact that the GST not recovered represents the private portion of the GST, it is included in the cost base for depreciation purposes. So the value of the depreciable asset will be $51,000. This will then be subject to a depreciation claim based on a useful life of eight years and only 80% of the eligible depreciation will be deductible. Q: I want to buy a business and a property used in the business. The vendor owns both in the same entity. I want the business to end up in my company and the property in my name personally. Can I do this and still meet the going concern provisions. A: For a supply of a going concern to be GST-free, everything necessary for the continuation of the enterprise must be supplied. This will normally mean that the premises must be supplied as well as the business. However this is not always the case. Let us assume it is the case here. If the company buys the business only on one day, and as part of that deal the vendor is required to sign a lease with the purchaser in relation to the property, then the sale of the business will meet the going concern requirements with regard to the property. If the vendor subsequently (at least a day later) sell the property and assigns the lease at the same time to the individual then the going concern requirements will also be met in relation to the property. Legislation & Rulings Update The ruling issues don t end here. Lets look at another scenario. Jill decides to be in the audience of a television program called Blind Date. She gets picked out of the audience and ends up appearing on television and winning a blind date trip to the Kakadu Resort worth $4,400. As a condition of participation, the television show Detailed below is a summary of recent rulings, determinations, ACCC matters and other items of interest affecting GST. Legislation Update A New Tax System (GST) (Exempt Fees, Taxes & Charges) Determination 2002 Taxation Law Amendment Bill (No.3) 2002 as Amended GST & loss transfers GST Cases Royal & Sun Alliance Insurance Australia Ltd v Com. of State Revenue Ambiance Arncliffe Pty Ltd V Com. Of State Revenue required that she agree to appear on the following week s show to talk about the blind date if successful. The television show has provided the prize worth $4,400 in return for her appearances on the television show. Therefore it has made a taxable supply of the trophy and must remit $400 GST in relation to the prize. The television show did not buy the prize. Instead, it received the prize in return for agreeing to promote the resort on the show. There are two taxable supplies here as well. There is a supply of advertising worth $4,400 by the television show and a supply of the holiday to the TV show by the resort. Both parties will need to issue tax invoices and remit GST. Thankfully both will be entitled to input credits as well. It should be remembered that where a prize is given purely at random or through luck and there is no effort or skill involved, then GST will not apply. This is because there is no consideration for the supply. As the supply of the prize fails one of the four basic requirements for a taxable supply, there is no taxable supply. But the moment there is some effort or skill involved, GST can apply. This is hard to reconcile in a horse race where it may be pure luck that a horse wins! Is the tax office right with its interpretation we will need to see a court case to find out.. Legislation & Rulings Update (Cont.) GST Rulings GSTR 2000/21 Addendum to Margin Scheme ruling GSTR 2000/17 Addendum Offer documents treated as tax invoices GSTR 2002/03 GST & Prizes GSTR 2002/04 Foreign Currency Conversions and RCTI s GSTR 2002/05 Supplies of Going Concerns (New Version of ruling) GSTR 2001/05 Supplies of Going Concerns (withdrawn at same time) GST Draft Rulings GSTR 2002/D03 Barter transactions through trade exchanges GSTR 2002/D04 Meaning of New Residential Premises (Re-released) GSTR 2002/D05 GST-free Professional or Trade Courses GSTR 2002/D06 Operation of the Financial Acquisitions Threshold GSTR 2002/D07 GST & Lease Incentives GSTR 2002/D08 Presence in Australia Supplies to Non-residents GST Determinations GSTD 2002/03 Supply of Goods and Delivery Charges GSTD 2002/04 Documentation for Third Party Cash Rebates GSTD 3003/05 Token appreciation given to Speakers GST Draft Determinations GSTD 2002/D03 Supply of goods and delivery charges Practice Statements PS 2002/12 Refunds of GST incorrectly remitted. Tax Office Publications / Announcements The following publications and information was released on the ATO Websites:- Property & Construction Industry Update GST & Horses acquired at auction Big Business GST
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