gst on property transactions - 99 page research report

8/17/2019 GST on Property Transactions - 99 Page Research Report

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(A.C.N. 005 428 268)(A.B.N. 63 005 428 268)

101 Bowen StCamberwell South

Victoria 3124Phone: 613 9819 5244

Fax: 613 9819 6270

A R E S E A R C H R E P O RT :

R E P O RT I N G O N G S T O N

P R O P E RT Y T R A N S A C T I O N S

Project 3368

30 th June, 2010


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Commercial in Confidence Contentsi

CONTENTS

1. EXECUTIVE SUMMARY....................................................................1

1.1 Background ........................................................................................................ 1

1.2 Research Approach ........................................................................................... 1

1.3 Main Findings; Tax Agents................................................................................. 2

1.4 Main Findings; Industry Leaders...................................................................... 13

2. CONCLUSIONS AND RECOMMENDATIONS.................................19

3. INTRODUCTION ..............................................................................26

3.1 Background ...................................................................................................... 26

3.2 The Issue Facing the ATO ............................................................................... 26

4. RESEARCH OBJECTIVES ..............................................................27

4.1 Overall Objectives ............................................................................................ 27

4.2 Operational Research Objectives .................................................................... 27

5. RESEARCH APPROACH.................................................................29

5.1 Stage 1: Workshop........................................................................................... 29

5.2 Stage 2: Qualitative Research ......................................................................... 29

6. MAIN FINDINGS; TAX AGENTS......................................................32

6.1 Overview of Sample ......................................................................................... 32

6.1.1 Perceived Expertise in GST Property Issues................................................... 32

6.2 GST Property Related Issues .......................................................................... 34

6.2.1 Client Types ..................................................................................................... 34

6.2.2 Common Issues and Problems........................................................................ 40

6.2.3 Legislative Issues............................................................................................. 48

6.2.4 The Margin Scheme......................................................................................... 49

6.3 Successful Reporting of GST........................................................................... 50

6.4 Training in Relation to GST and Property ........................................................ 52

6.5 Sources of Information and Advice .................................................................. 54

6.6 ATO as a Source of Information ...................................................................... 55

6.6.1 ATO Website.................................................................................................... 56


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Commercial in Confidence Contentsii

6.6.2 Tax Agent Phone Line...................................................................................... 57

6.6.3 ATO Margin Scheme Publications ................................................................... 58

6.6.4 Other ATO Information Sources ...................................................................... 59 6.7 Desired Assistance from the ATO.................................................................... 60

6.8 Decision Making Tools ..................................................................................... 64

7. MAIN FINDINGS; INDUSTRY LEADERS.........................................69

7.1 Importance of GST and Property..................................................................... 69

7.2 GST Property Issues........................................................................................ 74

7.2.1 The Margin Scheme......................................................................................... 74

7.2.2

Other GST and Property Issues....................................................................... 76

7.3 Future Trends and Challenges ........................................................................ 80

7.4 Delivery of GST Property Information.............................................................. 81

7.5 Type of Information Required .......................................................................... 83

7.6 Assistance by the ATO..................................................................................... 84

7.6.1 Interactive Tool................................................................................................. 85

7.6.2 Consultative Process ....................................................................................... 85

8. APPENDICES; DISCUSSION GUIDES............................................87

8.1 Tax Agents Discussion Guide.......................................................................... 87 8.2 Industry Leaders Discussion Guide ................................................................. 92


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Commercial in Confidence Contentsiii

EXHIBITS

Exhibit 1: Key Situations Giving Rise to GST Property Issues ......................................... 4

Exhibit 2: Summary of Key GST Property Issues ............................................................. 5

Exhibit 3: Overview of Industry Leader Issues................................................................ 13

Exhibit 4: Sample of Tax Agents Interviewed ................................................................. 30

Exhibit 5: Summary of Key Situations; Small Clients...................................................... 36

Exhibit 6: Summary of Key Situations; Mid Sized Clients............................................... 38

Exhibit 7: Summary of Key Situations; Large Clients ..................................................... 39

Exhibit 8: Summary of Industry Leader Issues ............................................................... 70


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Commercial in Confidence Executive Summary1

1. EXECUTIVE SUMMARY

1.1 Background

The Australian Taxation Office (ATO) has identified the area of GST relating to property

transactions as one which can be quite problematic for tax agents. It is important to the

ATO that it assists tax agents in meeting compliance obligations on behalf of their

clients, provides relevant support and information to intermediaries, and addresses key

GST property risks.

Accordingly, the ATO commissioned Chant Link & Associates to undertake research

amongst tax agents and relevant industry leaders. The key objectives of the research

were:

] Tax Agents : To understand the issues currently facing tax agents reporting GSTproperty transactions, and identify ways in which the ATO can assist agents in

meeting compliance obligations of their clients.

] Industry Leaders : To explore GST related property issues from the perspective ofkey industry groups.

1.2 Research Approach

In total, 25 tax agents from 22 different accounting practices were interviewed, using a

mix of face to face and telephone interviews. This included 11 tax agents from 8

metropolitan practices and 14 tax agents from regional practices. The majority of

participants had extensive experience working as tax agents, with 20 or more years’

experience.

In addition, telephone interviews were conducted with representatives from seven key

industry and taxation organisations.

It should be noted that this represents a small sample of tax agents. Further, these

agents tended to well have established relationships with the ATO, and were on the

whole very experienced practitioners, and as such are unlikely to be typical of all tax

agents.


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This means that the sample is not statistically representative of the population of tax

agents, and caution must be exercised when viewing results and the proportion of

participants who responded in certain ways. Accordingly, the findings should be

considered in conjunction with other intelligence held by the ATO.

1.3 Main Findings; Tax Agents

1 . Expertise of Tax Agents : Participants varied widely in their level of expertise in

relation to GST property issues. The extent of expertise tended to be related to size of

practice rather than whether the practice was located in a capital city or regional area.

2. Challenges and dif ficult ies : Participants identified a variety of issues that create

challenges and difficulties in relation to GST reporting on property. These included:

] Complexity of issues : There was a strong view amongst participants that taxationin general had become so complicated that tax professionals in small practices

could not possibly keep up to date with all they needed to know. GST and property

were a key part of this, although this related to a wider concern about taxation

matters in general.

] Type of client : Participants noted that many clients were unaware of theirobligations in relation to GST and property and thus did not inform their accountants

of their activities, and/or did not keep adequate records.

] GST and property issues : There were many issues related specially to GST andhow it was assessed in relation to property that created complexity and difficulties.

This is summarised below and discussed in detail in the report.

] ATO related issues : These were issues related to dealing with the ATO in relationto GST and property. These are summarised below and discussed in detail in the

report.


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3. Suggested support tools for the industry : These were some suggested

improvements in education products and processes that could benefit tax agents:

] Help and assistance tool : There was considerable interest in the idea of aninteractive tool, with all parts of the market potentially seeing such a tool as offering

value. (This is discussed further below.)

] Development of worki ng relationships : Many participants felt that if they had theopportunity to develop a working relationship with one or two individuals, they could

then short circuit a lot of the questions and queries that arose about individual

cases. For many participants, this would be the single most useful improvement the

ATO could make to its services.

] ATO website : While participants acknowledged that most or all of the informationthey wanted was available on the ATO website, some felt that it was too hard to find

it unless they knew exactly what they looking for. They therefore wanted tools that

could help them find required information, and suggested that a combination of web

based tools to assist them to get to the appropriate information, with the associated

opportunity to leave a question, would be very useful.

] Tax agent phone line : Many participants felt unable to rely on information providedvia the tax agent phone line because they felt that:

The staff answering calls were not expert in GST, and relied on the information

on the ATO website to answer queries;

The ATO was unwilling to commit to information provided. This perception was

based on a perceived unwillingness of ATO staff to provide their name or

reference number.

These two factors meant that the tax agents placed little credence on the information

provided. The suggestion was made that agents should be provided with a referencenumber and/or name of the person they had spoken to.

4. Key GST property sit uations : Respondents noted that the types of GST property

issues they faced depended on the type of client they were dealing with, as follows:

] Clients who di d not have experience in property development : This groupusually consisted of individuals, partnerships, trusts, SMSFs, small businesses and

some charities, who lacked an understanding of GST and property issues. This

tended to be the most problematic group in terms of GST property issues, as:


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These clients had widely varying levels of financial sophistication;

These clients rarely faced a GST property issue and therefore lacked

experience and knowledge;

These clients were frequently not aware that they might be liable to pay GST.

] Small t o medium entities in the business of property development : This groupusually consisted of partnerships, trusts, and companies who were in the business

of purchasing, developing and selling property. This group tended to have the

fewest GST property issues because:

They were relatively knowledgeable about what they needed to do because

property management and development was a prime business for them, and

Their property issues tended to be relatively simple, as their developments were

generally smaller and fairly straight forward.

] Large to very large entiti es in the business of large scale propertydevelopment: This group included companies, charities and government

organisations which were in the business of purchasing, developing and selling

property.

While organisations in this group often had extremely complex GST property issues,they were generally structured to deal with these issues, and to seek expert advice.

Key situations where GST property issues were likely to arise for each of these client

groups are summarised in the exhibit overleaf.

Exhibit 1: Key Situations Giving Rise to GST Property Issues

Small Client Medium Client Large Client

Property gifted or inherited

Sub division of land heldOne-off propertydevelopment

Purpose of property holdingchanged

B&B operation

Farm sub division

Margin Scheme

Purpose of property holding

changedMultiple use property

Multiple owners / ownershipstructures

Margin Scheme

Purpose of property holding

changedMultiple use property

Multiple legal entities andownership structures

Multiple roles / involvement

Margin Scheme


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5. Common GST Property Issues : Participants raised a number of issues that had at

least the potential to cause problems within GST and property. These issues can be

divided into three broad categories:

I. Client related: Problems were caused by actions of the client. These were said

to be usually unintentional, and caused by a lack of knowledge and

understanding on the part of the client.

II. GST related : These were issues related specifically to the provisions of the GST

as it relates to property.

III. ATO rel ated : These were issues related to dealing with the ATO in relation to

GST and property.

The exhibit below summarises the key causes of problems within each of these three

broad categories, with commentary on the GST related issues following.

Exhibit 2: Summary of Key GST Property Issues

Client Related GST Related ATO Related

Clients acting prior toobtaining advice

Obtaining requiredinformation from clients

Change of use – issue raisedmost frequently

The Margin Scheme

Establishing intention ofpurchaser

Lack of clarity about who is liableto pay GST

Different tax treatments applyingto the same property

Record keeping requirements

“Grey” areas, requiring a judgement call

Joint venture arrangementsLiquidation

Different situations across stateboundaries

Lack of access to GSTProperty experts within

ATO

Inconsistent informationprovided by ATO

Slow assessmentprocess in ATO


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GST Related Issues

] Change of use : This related to issues arising in the way in which a property wasused changed. This happened most frequently when a property development was

only partly sold and the remaining units were rented, with a consequent change to

GST liabilities. This happened most often because the owner was unable to sell all

the properties. A key concern here was that the client may not have kept sufficient

records relating to the change of use.

] The Margin Scheme : The majority of participants thought the Margin Scheme wascomplicated and could cause problems. Key issues raised where:

Changes : The main issue raised in relation to the Margin Scheme was that ithad undergone a number of changes and this meant:

Agents had to keep up to date with the changes;

Specific transactions could be complicated where they occurred over a

period of time spanning those changes.

Valuations : There was frequently room for debate about the valuation of

property. Further, where retrospective valuations had to be applied, there was

potential for mistakes to be made.

Vendor intentions : The need for the sales contract to specify whether the

vendor intended to apply the margin scheme, with clients not always aware that

this was required.

Settlement adjustments : The application of settlement adjustments was said to

be sometimes very complicated.

Timing of purchase : This related specifically to whether the property was

purchased; before or after 1/7/2000.

] Establishing the intention of the purchaser : Although the intention of purchasercould have a significant impact on determining the GST status of the sale of

residential property, it was often not easy for the tax agent to clearly establish

whether the purchaser had intended to be in the business of property development.

] Lack of clarity about w ho was liable for GST : It was said that in many cases thesale contract did not specify whether the vendor or the purchaser was liable for

GST. This was particularly a problem where the way a property was classified was

changed by the vendor prior to selling.


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] Different tax t reatments applying to t he same property . In these situations, itcould be quite difficult for the tax agent to establish what tax to apply to individual

elements of the property, and what expenditure and income related to individual

elements. Specific examples were:

Where individual rooms and apartments in a hotel complex were sold to

individuals, and then rented under different conditions;

Rental of a combination of short term and long term accommodation;

Retirement and nursing home, which may include a combination of residential,

assisted living and high care facilities.

] Record keeping requirements : While in principle this was relatively simple, inpractice there were often a variety of complexities because:

Clients often did not retain good records;

Although each purchase item and method of GST calculation must be recorded,

accounting packages do not provide for this, and this information must therefore

be kept in a separate and traceable database;

Maintaining records was often made complex by an overlay of other factors

such as changes in ownership or ownership structures, and the usage of theland/development. This could make not only establishing a clear picture of what

had occurred, but also determining what tax was payable quite difficult for the

tax agents.

] Grey areas : This occurred where it was not clear what specific definitions were.Examples given were:

Decision as to whether a client is carrying on a business of property

development;

Definitions of what is regarded as a “new” building; eg, how much renovation is

required before a building would be designated as “new”;

The distinction between commercial and domestic use;

The definition of “short term” and “long term” accommodation;

The situation where an individual purchases a property, lives in it and renovates

it, sells it, and then repeats the process. At what point is it determined that this

individual is carrying on a business of property development?


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] Joint venture arrangements , where each party has a different structure andconsequently different GST liabilities.

] Liquidation : When a company is in liquidation or bankrupt it is often difficult to workout in retrospect what the intention was – there may be no paperwork or there may

be no way to get the paperwork.

] Different si tuations across state boundaries in relation to other factors such asstamp duty and land tax.

5. Successful Reporting of GST : Participants made the point that they were notalways sure that they had successfully calculated and reported GST as it related to

property because:

] They did not always get all the necessary information from clients.

] The issues were sometimes extremely complex (as outlined above).

] Changes to legislation and to rulings meant it could be difficult for agents to ensurethey stayed up to date.

] It was often difficult to obtain definitive information on how a particular issue wouldbe interpreted by the ATO.

Nevertheless, participants used the following strategies to ensure as far as possible that

the advice they provided to clients was correct:

] Risk averse : Participants in general said they took a very conservative approach intheir advice.

] Ongoing training and reading : Participants all participated in regular training toensure their knowledge remained up to date.

] Quality cont rol : Most had a system of double checks within their accountingpractice.

] Seeking expert advice : In situations where the participant was not sure how tohandle a particular transaction or issue, they sought information and advice from a

variety of sources to help them determine the appropriate actions.

] Multiple sources : Participants frequently used multiple sources of information toobtain the information they required, and to check that their reasoning was correct.


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] Obtaining detailed information from their clients . Although this was sometimesdifficult to achieve, participants aimed to obtain as much information as possible

from their clients about property transactions.

] Obtaining a Private Binding Ruling : Although this as a rarely used option, thiswas seen to be the only way that a client could be 100% satisfied that advice

provided in a complex situation was correct.

6 . GST Property Training of Tax Agent : All tax agents interviewed underwent regular

training and updates across a wide range of tax related issues. Part of this training

related to GST and property, but for most this was only one small component of manyissues that they had to cover. Training was provided via a variety of sources including:

] Internal training : The amount of training provided by the accounting practice itselfvaried considerably depending on the size of the practice. Thus, for example, the

Big 4 and second tier firms provided extensive in house training. Many smaller firms

had joined larger networks, and one of the benefits of this was the provision of in

house training.

] Professional training organisations : A number of professional external providers

of training were mentioned by participants.

] Professional associations : A range of professional associations, including TheInstitute of Chartered Accountants, CPA Australia, the National Tax and

Accountants Association, and the Taxation Institute of Australia provided various

training opportunities, although only a minority of research participants had attended

training offered by these organisations in relation to GST and property.

7 . Sources of Information Used by Tax Agents : Participants mentioned a number of

key sources of information in relation to tax issues. These sources were used widely by

agents for information about a wide range of tax issues, including GST and property.

The ATO was regarded as a key source of information, and various ATO sources are

discussed separately below. Other key sources used, in approximate order of frequency

of mention were:

] Experts within their own organisations.

] Master Tax Guide and Master GST Guide.


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] Professional sources, including the websites and publications of CCH, Butterworthsand Thomson Reuters.

] Participants would often use the legislation as the starting point for research on aparticular topic or issue.

] Personal contacts in other practices.

] Professional associations , including websites, publications and tax updates,provided by various associations including the Institute of Chartered Accountants,

CPA Australia and the Taxation Institute of Australia.

8 . Use of ATO Information by Tax Agents : The ATO was regarded as an important

source of information because it was the arbiter of whether information had been

collected and reported appropriately, and whether GST had been correctly managed.

Various ATO information sources were used:

] ATO website : All participants agreed that there was an enormous amount of usefulinformation on the ATO website (ato.gov.au). However, opinion about ability to

navigate the site was divided, with approximately half viewing it in a quite positive

fashion, and approximately half being somewhat critical.

] Tax agent phone line : Opinion was divided, although substantially moreparticipants regarded it negatively than positively. Those who were positive said

they had always found the staff helpful in responding to their queries. However, the

majority were quite critical of the phone service for the following reasons:

A belief that the ATO staff did not have sufficient expertise;

A lack of consistency in information provided and actions taken;

A perceived reluctance by the ATO to commit to any information provided;

Slowness of response.

] Margin Scheme Publications : The majority of participants saw these publicationsas potentially useful to give to clients, or for junior staff to refer to, but did not regard

them as publications aimed at tax practitioners.

] ATO commentary on legis lat ion : This was regarded as particularly usefulbecause this gave an insight into what the ATO was thinking and thus how they

arrived at decisions.


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] Private Binding Rulings : Reading Private Binding Rulings issued by the ATO onother cases was often helpful in providing a guide to the ATO approach to specific

issues.

] Tax Agent Portal : Participants all used this in managing activities on behalf of theirclients, and all found it very useful.

] Fact sheets : A few on occasion referred clients to these, saying they gave a goodsnap shot of the key issues to consider. There was a belief by some that the ATO

could make better use of fact sheets and rulings, by providing more complex

examples and situations to consider.

9 . Type of Assistance Desired : In principle, the idea of receiving further assistance

from the ATO was well received by all. There was a general view that agents in small to

medium sized businesses would be most likely to want to use additional services, as

they lacked the resources of the bigger practices.

Suggestions about the type of support desired included:

] Access to GST expertis e : This was a service that many participants wanted, as

they felt that if they had the opportunity to develop a working relationship with one ortwo individuals, they could then short circuit a lot of the questions and queries that

arose about individual cases.

] Tax agent phone line : Many suggestions related to improving the phone serviceprovided, including:

Improved expertise of staff;

ATO staff being willing to take “ownership” of information provided;

Ability to track queries within the ATO.

] ATO website : Suggestions to improve the information on the website included:

A concise summary at the start of documents to explain exactly what was

covered by the document.

Tools to better assist agents in finding required information. This included a

suggestion of a combination of web based tools to assist them to get to the

appropriate information, with the associated opportunity to leave a question;


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A service that would enable agents to customise information they took from the

website to give to clients;

In addition to providing information relating to specific taxes and issues,

providing the ability to identify the full range of issues and taxes that needed to

considered in relation to specific types of transactions.

] Guidance in terms of how the ATO will interpret legislation: Some participantsnoted that it was sometimes very difficult to determine how specific provisions

should be applied, and that the ATO did not supply information to assist in this

process.

10 . Response to Help and Assistance Tool : Responses to the idea of a GST property

tools available on the ATO website can be divided into three broad categories:

] Those who thought there was lit tle value in such an idea : About one third of taxagent participants rejected the idea. These tended to be experienced practitioners

from the larger firms, and they rejected the idea because:

They felt there was no need for such a tool as there was already sufficient

information available;

They felt the issues raised by GST and property were too complex to be

addressed by a decision making tool.

] Those who thought this could be useful as an information source for clients :Some rejected such an idea for their own use, as they felt it would not be able to

handle sufficient complexity, but thought such an idea could be extremely useful as

a planning tool for clients.

] Those who thought this could be useful within their own practice: Around two thirdsexpressed interest in this idea:

Some thought it would be very useful for junior staff, as a means for teaching

them to think about the type of questions they needed to ask clients. These

people also tended to think it could prove to be a useful tool for explaining GST

to clients.


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Some thought they could potentially use such a tool to assist them in working

through relevant issues on a case by case basis, and wanted to be able to use

the tool to provide them with a record of their analysis and how they arrived at

the advice they provided to their client.

While these participants were very positive about the idea, they cautioned that

such a tool would need to be able to manage a great deal of complexity and that

it would need to be carefully structured, and kept up to date. Some, while

interested, expressed misgivings that such a tool would be able to achieve this.

1.4 Main Findings; Industry Leaders

1. Specific issues and concerns : Many of the issues raised by industry leaders were

similar to those raised by tax agents. Nevertheless, there were also issues that were

specific to each organisation. These are summarised in the following exhibit.

Exhibit 3: Overview of Industry Leader Issues

Association Key GST Issues Key Solut ions

Royal Institutefor ConsultingSurveyors

None for this organisation, because theydon’t give GST advice or get involved inapportionment. Members simply providevaluations including full GST to clientsand let tax professionals and lawyersdecide on correct apportionment.

Nevertheless, GST seen as an importantissue, and belief that members do nothave a good understanding of it.

ATO information / interactivetool not required for theirmembers use.

Too simplistic for need of largeclients.


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Real EstateInstitute of

Australia

Do not give advice, but do lobby inrelation to property tax (and other taxes).

However, strong belief that accountantswere the appropriate professional toprovide advice on GST – not real estateagents.

ATO to advertise overview tothe general public (includingreal estate agents). Desiredoutcome is to drive them toseek professional accountingadvice.

Any tools should provide anoverview and highlight problemareas for consideration andencourage seeking of furtheradvice.

Proposed ACCC componentpricing where the GSTcomponent of a land/propertypurchase would be clearlylisted as part of the totalpurchase price would solvemany problems experiencedby purchasers.

HousingIndustry

Association

The Margin Scheme and how tomaximise its use to minimise taxliabilities on small developments /maximise profit.

Few members would take advice or getan ATO private ruling on propertytransactions, and consequently manywould pay full GST when he may beeligible to reduce their GST liabilitythrough the Margin Scheme.

State Governments to changethe wording of Sale of LandContracts to include referenceto GST liability and

applicability of the MarginScheme – with the view todrive them to their advisors(tax professionals) for advicebefore signing a contract.

ATO to provide simpleinformation / models with theobjective of highlightingbenefits and complexities andto drive them to seek furtheradvice.

PropertyCouncil of Australia

] The Margin Scheme;] Apportionment and Recording of

GST transactions in accounts;] Sale of a going concern;] Multi-use developments that

included some residential;] Retirement Villages;] GST rulings not in line with Income

Tax rulings.

ATO tools too simplistic for theneeds of these members.

GST legislation total re-write /combine with income taxlegislation.

ATO, construction industrysectors and key advisors needto work together tounderstand/find individualsolutions to meet complex butdifferent needs of eachindustry sector.


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Institute ofChartered

Accounts of Australia

] Businesses sold as a goingconcern;

] Valuers lack of understanding ofGST and how to apply it;

] Purchase/Sale Contracts agreedand finalised without either partyunderstanding whether GST wasincluded in sale;

] Provision of GST advice was seenas a professional competence issuefor tax professionals, lawyers,valuers and real estate agents;

] Confusion between a home andcommercial premises for thepurposes of determining GST;

] Different treatment for differenttypes of accommodation: retirementvillages, hotels, servicedapartments;

] How to report the GST in the BASfor property transactions on aquarterly basis, when the real usageand therefore tax situation may notbe understood for some period oftime.

GST legislation was said tohave reached the point whereit was too complex for themajority of accountants in

Australia.

One respondent suggestedthere were only about 100accountants in Australia whowere truly qualified to giveGST advice / interpretations.This respondent predicted thata lot of tax professionals(especially smaller ones)would leave the industry due toincreasing complexity andincreasing litigation for thewrong advice.

AustralianPropertyInstitute

The recording of GST apportionment /calculation on past property sales. Verydifficult to accurately access thishistorical information.

State Governments to recordthe GST apportionment /calculation as part of the pricepaid (which they alreadyprovide as a public record).

ATO information could only besummary / generic and notspecific – but could highlightsome of the key problemsareas, and drive those

involved to seek advice fromtheir tax professionals.


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Dept ofTreasury andFinance (SA)

] Mostly large scale sub-divisions thatthe Government undertakes with acomplex web of owners, developers,

joint venture partners, funders etc;] The recording of the GST treatment

of all transactions which (often)need to be changed in the futureonce a property is sold. Noaccounting packages allow thisinformation to be recorded/stored forreference in future years;

] Mostly building public housing.Different treatment of charitiesoffering housing for the needycompared with state governmentdoing the same.

ATO tools inappropriate forcomplex needs.

Small change to legislationwording to provide same GSTexemption to governmentdepartments providing publichousing, as is currentlyavailable to registered charitiesthat provide public housing.

2. The Margin Scheme: This was raised as a complex area by a number of

participants, and some said they were looking to Treasury to provide clearer guidance to

help them decide the best way to apply it. Particular issues raised in relation to the

Margin Scheme were:

] The difficulty of applying the Margin Scheme to large sub divisions, wheredevelopment took place over a considerable period of time, and different parts of a

land holding were used for different purposes.

] The difficulty of recording the valuation of the property, and the basis used forvaluation.

] The difficulty of interpretation.

3. Future trends, challenges and barriers to communication: These were identified as

follows:

] Trends : A few participants raised the issue of increasing complexity in taxation ingeneral, with a concern that it was increasingly difficult for both industry bodies and

for members to stay abreast of changes. However, participants did not identify

trends in relation to their industry which were likely to have a specific impact on GST

and property.


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The only exception to this was the Real Estate Institute of Australia, which noted that

the ACCC was considering applying the philosophy of component pricing to the real

estate industry, which if adopted, would mean that the GST component of a

land/property purchase would be clearly listed as part of the total purchase price.

] Challenges : There was widespread agreement that GST as it related to propertywas very complex, and that this complexity resulted in many problems for all parties

concerned; that is, vendors, purchasers, valuers, real estate agents, builders, tax

professionals and solicitors.

] Barriers to communications : A few associations did try to keep members

informed about GST and its application and implications, and specifically the MarginScheme, the benefits of it and how to apply it. However, there was considerable

concern that any information provided might not be correct, and other associations

were thus reluctant to provide such information. However, all those interviewed

indicated that they would be happy to pass on information from the ATO to their

members about GST and property (or other tax related issues).

It is important to note that most did not see provision of this type of information as an

important part of their role, and thus would not proactively seek such information on

behalf of their members.

4. Assist ance from the ATO : Most participants said they had good links into the ATO

and found the people very helpful whenever they needed anything, although sometimes

even the ATO was unable to answer complex questions.

The ATO was seen by most to be very helpful in providing access to the case law and

rulings, but not in establishing the thinking or objectives of Treasury in relation to

legislation.

5. Access to GST expertise : As was the case with tax agents, there was a belief

amongst participants that access to specific people in the ATO with expertise in GST

would be extremely beneficial for the industry overall. Thus, participants would ideally

like a specialist unit of staff within the ATO who had high levels of expertise in GST and

property and who industry bodies and/or members could contact when they had a

specific issue or problems to discuss.


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6. ATO Fact Sheets : The ATO Facts Sheets were seen to be designed to provide

general information, and as such were regarded as of interest to the general public, but

not to advisors or larger clients with more complex situations.

7. Help and Ass istance tool : While participants could see some benefit in the idea of

an interactive tool to assist in management of GST as it related to property, the general

view was that such a tool would of necessity be quite generic, and could not cover the

complex situations that arose for the large clients and developers.

Consequently, such a tool was seen to be likely to be of most interest and value to

individuals and small property developers.


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Commercial in Confidence Conclusions and Recommendations19

2. CONCLUSIONS AND RECOMMENDATIONS

1. GST and property is complex : All participants acknowledged that GST and

property was a complex area, frequently resulting in difficulties for clients. In terms of

the type of clients most affected by GST property issues:

The clients most likely to experience problems were the smaller clients who

lacked experience in property development. Often, these clients were not even

aware that what they were doing would be classed as property development,

and thus they did not think to seek accounting advice.

Large property developers often experienced problems because of the size and

complexity of their projects.

Small property developers were the client group least likely to experience GST

property issues because they were relatively knowledgeable about the relevant

issues, and they had learnt how to structure their affairs for the types of

development they undertook.

The most difficult group to target in terms of providing information is the small client

who undertakes a one-off property development. This group is particularly difficultbecause they are often not aware that they need to obtain accounting advice prior to

making property related decisions. They often do not consider themselves to be in

the business of property development at all.

Recommendation 1

Main target: Individuals and very small property developers

Message : We suggest that the main message that needs to be disseminated to themarket, particularly smaller property developers, is along the lines of:

The decisions you make about real estate could have a major effect on the tax you need

to pay. You should seek advice from your accountant before buying an investment

property, sub dividing or developing land.

Channels : Multiple channels must be used in order to reach this group because they

are not actively searching for information. We suggest the following channels could be

effective means of reaching many of these people:


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] Real estate agent

] Solicitors

] Local councils must approve many actions relating to property, such as buildingpermits and sub divisions, and therefore are in a good position to disseminate a

message of the type above.

2. Dissemination of information : It was clear from discussions with tax agents and

representatives from industry bodies, that GST as it applies to property transactions

was poorly understood by many stakeholders, including not only propertydevelopers, but also solicitors, valuers, and real estate agents. While it is not

essential that all these parties have a detailed understanding of GST and property, it

is important that they are at least aware that it may apply to property transactions,

and that they have some understanding of situations when it is likely to apply.

While participants from industry associations regarded it as important that members

have an understanding of GST and property, there was real concern that because

this is such a complex area, if they attempted to provide information to members,

they could get the detail of this information wrong. In addition, most of the industry

bodies who participated in this research did not see provision of this type of

information as an important part of their role, and thus would be unlikely to

proactively seek such information on behalf of their members.

However, participants were willing to make available to the ATO various media they

used to communicate with their members. This would provide channels for

presenting messages to members.

Recommendation 2 . The ATO can leverage its existing relationships with industrybodies to disseminate information about GST and property to relevant professional

groups. The ATO would need to would need to actively seek out such opportunities, and

work closely with each industry association / body to:

] Determine the type of information most relevant to that group;

] Provide the specific information to be disseminated, in a readily accessible format;

] Ensure that the information provided remains up to date.

We note that based on interviews for this project, itappears that many people in these two categories havelittle knowledge about GST implications associated withproperty purchases and development.


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3. The Margin Scheme : Applying the Margin Scheme created problems for a

considerable number of participants. Specific issues were:

There was frequently concern about the basis for applying a valuation to a

property. Further, where retrospective valuations had to be applied, there was

potential for mistakes to be made;

The sales contract needed to specify whether the vendor intended to apply the

margin scheme, and this frequently did not occur;

The difficulty of applying the Margin Scheme to large sub divisions, where

development took place over a considerable period of time, and different parts

of a land holding were used for different purposes; Application of settlement adjustments could be very complicated;

The timing of the purchase influenced calculations, specifically whether the

property was purchased before or after 1/7/2000.

Recommendation 3 : Consider means by which State Governments could assist in

simplifying processes, particularly in relation to the Margin Scheme. Such actions could

include:

] State Governments recording not only the sales price of property transactions, butalso specifically recording the GST paid on each property transaction (as

applicable). This would then provide a clear and unambiguous record for the future.

] State Governments changing the wording of Sale of Land Contracts to includereference to potential GST liability and applicability of the Margin Scheme. The key

message here to stakeholders would be that they should seek their advice of their

tax professional.

Recommendation 4 : A key issue for communications is the message that the sales

contract must specify if the vendor intends to apply the Margin Scheme. This message is

a key message for solicitors and real estate agents.


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4. Variety of t raining options available : Tax agents have a range of training options

available to them and were reasonably satisfied with those options. Nevertheless,

given the complexity of situations they face, further training options would be well

received.

In addition, the option of providing training to members would be welcomed by some

industry bodies. This training would be at a less detailed level than that required by

tax agents.

Recommendation 5 : The ATO could consider offering tax agents and members of

industry bodies training in GST and property.In order to provide this training to tax agents, it would be necessary to have experienced

staff who could present and discuss case studies relating to relatively complex cases,

and who could discuss situations raised by tax agents in terms of:

] Key issues that the ATO would consider in such a case;

] The factors that would influence the position the ATO would take.

Training offered to industry members (eg, real estate agents, valuers), would be of a

significantly lower level of complexity. Its key objective would be to create awareness byinforming members of situations where GST could apply, and that they should advice

vendors and purchasers to obtain accounting advice in relation to this.

5 . Provision of information . The ATO was seen as an important source of information

about GST and property. However, the way in which the ATO provides this

information could be improved. Key suggestions for improvement are listed below.

Recommendation 6: ATO should consider the following as means of improving its

communications with stakeholders.

] Specialist GST service : Participants wanted ready access to specific people in the ATO with expertise in GST. This was raised as a requirement by tax agents, both for

their own use, and for use by larger clients, and by representatives of industry

bodies, both for their own use and use of their members. This suggests that there is

high demand for such a service. The key principles here are:


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A small group of specialists would be available to discuss issues and problems

with stakeholders, with a view to helping them determine how they should treat

a specific GST property issue;

These specialists would become known to regular users of the service, thus

promoting a good working relationship and two way trust;

These specialists would not need to be immediately available at all times, but

would need to be able to respond reasonably quickly to request for information

or assistance.

] Website : A number of actions that could improve both the functionality of the

website, and perceptions of its utility were identified:

Those who had attended training provided by the ATO in relation to getting best

use out of the website were very complimentary about it. The ATO could

consider means of expanding the reach of its training program in order to

provide training to a greater number of tax agents.

Consider providing information not only along the lines of specific forms of

taxation (GST, FBT, etc), but also in relation to common situations faced by

taxpayers, such that information can be identified by situation as well as by tax

type or by legislation. Thus for example, case studies of typical situations suchas subdividing a house block into two and building a second house on the block,

or sub dividing a farm could be presented, along with information about the

various types of tax that might apply in each situation, with links to information

about those taxes. This would inform the reader about the total situation and

factors to consider, rather than relying on the individual knowing which taxes

they should search for information about.

] Tax Agent Phone Line : At present, tax agents have little confidence in the

information provided via the tax agent phone line. In order to address this, the ATOshould consider offering the following:

Encouraging ATO staff to provide their name to tax agents;

Providing a reference number in relation to individual queries, so that responses

to individual situations can be identified and tracked.


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6. Help and Ass istance tool : There was considerable interest in the idea of an

interactive tool, with all parts of the market potentially seeing such a tool as offering

value. However, the optimum features of such a tool would depend on the ultimate

target audience, and there were varying views on who would most benefit from such

a tool.

Some tax agents considered the key value would be for clients and junior staff, while

industry leaders tended to think such a tool would be of most interest and value to

individuals and small property developers.

In contrast, some of the more experienced tax agents saw this as a tool they could

potentially use themselves.

The key limiting factor to such a tool for the more experienced practitioners was

considered to be related to the degree of complexity that such a tool would be able

to manage. Many said that if it was not possible to build a tool which could cope with

multiple ownership structures, different types of land uses and multiple and changing

land uses, the tool would not be used by experienced practitioners. However, if the

tool could manage this level of complexity, it could be used by experienced

practitioners. In this case, another desired feature was the ability to provide a clear

record of how decisions were made to treat a situation in a particular way.

Recommendation 7 : We recommend that the ATO should carefully consider the

objectives of providing an interactive tool, and who the key target market for such a tool

is.

In order to be useful to experienced practitioners, the tool would need to:

] Be able to manage complex situations and structures, including multiple ownershipstructures, different types of land uses and multiple and changing land uses;

] Include a structured process which would allow practitioners to work through eachissue;

] Provide the ability to record answer to each issues, and importantly, to record therationale of the tax agent for arriving at that answer.

If the target audience was less experienced staff and clients, the tool would not need to

be able to manage this level of complexity. A decision tree type tool which could do the

following would be sufficient:


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] Demonstrate the type of information that was required, and thus the type ofquestions that need to be asked of asked of clients (or that clients could work

through themselves);

] Demonstrate how the effect altered based on different responses to the same set ofquestions.

7. GST Margin Scheme Solver : We note that one of the accounting firms included in

this research (name withheld, but available upon request), had recently released an

interactive tool designed for tax agents and property developers to use to assist

them in calculating the impact of the Margin Scheme. This tool features:

A GST Margin Scheme decision tree;

A Margin Scheme calculator;

Relevant legislation, ATO guidance and Margin Scheme commentary;

A help desk service.

Recommendation 8 : As this program appears to offer many of the features the ATO

was considering developing, we suggest that the ATO discuss this tool with the

accounting firm, with a possible view to licensing the tool. Contact details can be

provided should the ATO wish to pursue this option.

8. Informing tax agents of new information sources : It was assumed by tax agents

that any new information source would be delivered online.

Recommendation 9 : The ATO currently has a service whereby it provides email

notification to individual tax agents when different types of new information are made

available on its website. However, it was apparent from this research that not all agents

are aware of this option, and thus more effort to promote this service should be made.

The Tax Agent Portal may be an appropriate means of promoting such information.


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Commercial in Confidence Introduction26

3. INTRODUCTION

3.1 Background

The Australian Taxation Office (ATO) has identified the area of GST relating to property

transactions as one which can be quite problematic for tax agents. This is because:

The law relating to property transactions is complex.

Tax agents sometimes lack sufficient knowledge and capability in relation toproperty.

Accordingly, property related tax issues account for increasing call volumes, repeat

queries and some tax agent errors. This means that the ATO is exposed to a variety of

GST property risks, including incorrect reporting of the sale transfer or purchase of real

property, margin scheme, commercial residential premises and retirement villages, and

disengaged property developers.

It is important to the ATO that it assists tax agents in meeting compliance obligations on

behalf of their clients, provides relevant support and information to intermediaries, andaddresses key GST property risks.

3.2 The Issue Facing the ATO

ATO canvassed some options which it could potentially use to provide practical help and

assistance for tax agents in relation to GST property issues, and to improve voluntary

compliance in the industry.

One of these options is a decision making interactive tool which could be made available

on the ATO website. However, development of such a tool would require a substantial

investment in terms of time, money and resources, and the ATO therefore wished to

determine how much interest there would be in such a tool.

In addition, the ATO wished to identify any alternatives which could address the tax

agent issues.

Accordingly, the ATO commissioned Chant Link & Associates to undertake research to

address this issue. That research is the subject of this report.


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Commercial in Confidence Research Objectives27

4. RESEARCH OBJECTIVES

4.1 Overall Objectives

There were two overall objectives for this research as follows:

Tax Agents : To understand the issues currently facing tax agents reporting GST

property transactions, and identify ways in which the ATO can assist agents in meeting

compliance obligations of their clients.

Industry Leaders : To explore GST related property issues from the perspective of key

industry groups.

4.2 Operational Research Objectives

Within the broad parameters of these overall objectives, there were a range of specific

research objectives, as follows:

Tax Agents

1. To explore the cause of GST property related tax issues, including:

Identifying the challenges and practical legislative or capability difficulties tax

agents face in relation to GST reporting on property;

Identifying the common questions/issues tax agents have regarding property

transactions and GST;

Identifying the GST property tax topics which cause the most confusion for tax

agents and their clients;

Determining how registered tax agents are currently successfully reporting GST;

Determining whether tax agents are currently using ATO/industry body

information to assist them with GST property transactions;

To determine how frequently tax agents use the ATO website for help and

assistance in relation to GST property transactions;

To determine whether tax agents have any specific training about GST in

regards to property transactions.


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Commercial in Confidence Research Objectives28

2. To identify whether tax agents need further information and/or education from the

ATO in relation to GST property issues, and if so, what approach from the ATO

would help tax agents to overcome property related GST issues;

What type of agents are most likely to need help;

What the ATO can do to practically help.

3. To determine what benefit a help and assistance tool designed for GST property

issues would be for tax agents. Specifically, to explore:

What sort of tool would be useful to their practice ( “tool” here was very broadly

defined, and could cover a range of options, including an interactive tool);

What types of features it would ideally include;

What the best way for the ATO to make that tool available would be (i.e. print,

online etc);

How this delivery method would assist tax agents.

Industry Leaders

Specific research objectives were as follows:

1. To gather key insights and feedback on GST property issues as related to their

members and constituents.

2. To elicit suggestions on the most effective delivery method of GST property

information.

3. To identify future trends, challenges and barriers to communication within the

industry; for example; skills shortages, supporting regional firms.

4. To explore positive ways the ATO may be able to address the skills shortage in the

property segment in relation to tax, specifically GST.

5. To identify which type of tax agents would benefit most from an online tool; for

example; different size tax agents, locations or customer types.

6. To make recommendations on key GST property information required by their

members/industry.


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Commercial in Confidence Research Approach29

5. RESEARCH APPROACH

5.1 Stage 1: Workshop

This stage involved a workshop, undertaken by teleconference, where the participants

included the ATO project team and the Chant Link & Associates team. The workshop

addressed the following issues:

] Research Objectives: Ensure the appropriateness of the research objectives, and

assign priorities to those objectives.

] GST and Property transactions : Provide Chant Link & Associates with further

information about GST and property transactions.

] Research Sample: Reach final agreement regarding the research sample.

] Draft discus sion guides: Chant Link & Associates provided draft discussion

guides to form the basis of discussion of the key areas to be included in the

interviews. Chant Link & Associates then modified the discussion guides after the

workshop on the basis of these discussions, and provided them to the ATO for

approval prior to conducting the interviews.

] Recruitment Process: Reach agreement on the recruitment process to be used

and the timing for this. It was agreed that the ATO would recruit appropriate tax

agents, and canvas industry groups for willingness to take part in the research.

] Timing: Reach agreement on the overall research schedule.

5.2 Stage 2: Qualitative Research

In total, 25 tax agents from 22 different accounting practices were interviewed. This

research was undertaken as follows:

Tax agents; face to face interviews : Face to face interviews were conducted with tax

agents from 8 accounting practices in Melbourne and regional Victoria. The original

objective was to conduct 10 of these interviews face to face. However, it was only

possible to arrange interviews within the limited time constraints for this research. In

three of these interviews, two tax agents were interviewed together, resulting in a total

sample of 11 tax agents interviewed face to face.


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Tax agents; telephone interviews : Telephone interviews were conducted with tax

agents from 14 accounting practices from various regions in Australia.

The ATO assisted in achieving this sample by recruiting appropriate tax agents to take

part in this research.

The total sample of tax agents, including both face to face and telephone interviews, is

shown in the following exhibit. It shows that in total, agents from 8 metropolitan practices

and 14 regional practices were included in this research.

Exhibit 4: Sample of Tax Agents Interviewed

Vic NSW QldInterviewtype Metro-

politan RegionalMetro-politan Regional

Metro-politan Regional

Face toface 4 4

Telephone 2 4 3 5

A note on i nterpretation : It should be noted that research is based on a small sample

of tax agents. Further, these agents tended to well have established relationships withthe ATO, and were on the whole very experienced practitioners, and as such are

unlikely to be typical of all tax agents.

This means that the sample is not statistically representative of the population of tax

agents. Thus, caution must be exercised when viewing results and the proportion of

participants who responded in certain ways. Thus, for example, where “most” of these

participants agreed with a certain point of view, this does not necessarily mean that this

is true for the wider population of tax agents.

Accordingly, the findings in this report should be considered in conjunction with otherintelligence held by the ATO.

Industry leaders; telephone interviews : Telephone interviews were conducted with

representatives from seven key industry and taxation organisations. These organisations

were:

] Royal Institute for Consulting Surveyors;

] Real Estate Institute of Australia;


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] Housing Industry Association;

] Property Council of Australia;

] Australian Property Institute;

] Institute of Chartered Accounts of Australia;

] Department of Treasury and Finance (SA). Note, this was not an association, butthey had counterparts in each State with similar issues.

Discussion Guides: The discussion guides used in the interviews with the tax agents

and with the industry leaders are included in the Appendices to this report.


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Commercial in Confidence Main Findings; Tax Agents32

6. MAIN FINDINGS; TAX AGENTS

6.1 Overview of Sample

The tax agents interviewed represented a variety of practice sizes, as follows

] 3 from Big 4 firms;

] 6 from second tier firms;

] 12 from smaller practices, but which were part of larger accounting practicenetworks;

] 1 from a small firm.

The majority of participants had extensive experience working as tax agents, with 20 or

more years’ experience. The least experienced had been working as a tax agent for 3

and a half years.

6.1.1 Perceived Expertise in GST Property Issues

Expertise related to practice size : Participants varied widely in their level of expertise

in relation to GST property issues. The extent of expertise tended to be related to size of

practice rather than whether the practice was located in a capital city or regional area.

] Larger practices could afford to have individuals who specialised in certain areas,whereas tax agents in smaller practices had to work across a wide variety of issues;

“It is only the larger practices who have a high hourly charge out rate, who can afford

the time to keep up with tax implications of various transactions. ....More and more

people are getting out of accounting practices because of the burden of keeping upwith legislation and tax across such a broad range of issues.”

] Larger practices tended to attract larger clients, who typically had more complexproperty issues to deal with.


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Some specialists : A few who worked in the Big 4 or second tier practices had high

levels of expertise, as property was their specific area of specialisation. One for

example, had in the past taken a three year sabbatical to work with a property

development group. These participants provided advice to a wide range of clients,

including very large property developers and consortiums, including Public Private

Partnerships.

Many had moderate levels of knowledg e: However, the majority dealt with property

issues along with a wide variety of other tax related issues. Some said they had a variety

of property related clients, and property accounted for a reasonable proportion of their

work. Others only came across property issues, and specifically GST property issues, on

a relatively infrequent basis.

While all felt they were able to obtain necessary information if they did not know the

answer to specific issues raised, many felt that they as individuals lacked a detailed

knowledge of the relevant issues because:

] They did not deal with GST property issues on a frequent basis;

] They regarded some of the issues as quite complex, and in these cases they feltthey needed to obtain specialist advice;

] There was wide variation in the type of issues faced in GST and property.

“Every case is unique – it is hard to say which issues are the most common because

they are all different. That is what causes the difficulties; each case has its own

complexities.”

However, the majority of participants did have specialists available (across a wide range

of areas; not just in GST property issues) they could go to for advice. In the case of the

Big 4 and the Second Tier practices, these specialists were within their own practice and

were readily accessible.

Smaller practices : In the case of those working in smaller practices, most had joined

larger groups. This meant that although the individual practice might be small, the tax

agents within that practice had access to specialists in the group overall. In particular,

this appeared to be a strategy used by many small regional practices, where the practice

typically had only a few tax agents, as this structure allowed them access to a wide

range of expertise.


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There was a strong view amongst participants that tax has become such a complicated

area that agents in small practices could not possibly keep up to date with all they

needed to know.

“We were very small and all the compliance and issues for running this business were

getting so huge that we either closed our doors or got bigger. So we merged with

another business and then joined the larger group. They (i.e. the group) also have

expert staff – some with Masters in Tax, who are there to give us advice and assistance

when the issues get very complex. They also have good relationships and links into the

Tax Office for their input when required.”

As the importance of the right advice increased (as well as litigation for the wrong

advice) the individual accounting practices passed any larger or more complex issues

through the central group so it could review the situation and collectively decide on the

best advice to give the client. Large property transactions were typically the type of

transaction that would be reviewed by the central group because of their complexity,

and because of the financial implications for the client (and possible litigation risks to the

practice) if the advice was incorrect.

6.2 GST Property Related Issues

6.2.1 Client Types

While there were differences across agents and the GST property related issues they

faced because of differences in client bases, some common themes emerged.

Clients in relation to property issues could be divided into three broad categories as

follows:

] Clients who di d not have experience in property development : This group

usually consisted of individuals, partnerships, trusts and family trusts, SMSFs, smallbusinesses and some charities, who lacked a good understanding of GST and

property issues. The tax agent was often not aware that the client had any property

dealings in the previous year until preparing a tax return for that year. For their part,

the client was frequently unaware that their actions may have triggered a GST

event. In many respects, this was the most problematic group as:

It was a very disparate group with widely varying levels of financial

sophistication;


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Members of this group might face a GST property issue only once or twice in

their life;

Members of this group were frequently not aware that they might be liable to pay

GST. In particular, some participants noted that while clients were aware of GST

as it related to commercial property, many did not even consider it in relation to

residential property. Thus clients frequently:

Did not think of GST implications at the time of negotiation / purchase of

property;

Were not aware that they needed to keep specific records;

Did not search out relevant information or advice. By the time they becameaware of the relevant GST issues, it was often difficult to extricate the

information required.

“Most issues are confusing for clients because if they are only doing this once they

have had no experience, it’s just not in their thinking.”

“A lot of people dabble in property. Property has boomed, and everyone thinks they

can buy some property, sub-divide it, and make a lot of money.”

“The legislation is too complicated for mum and pop businesses to understand. It is

not always logical because you need to know all the exceptions.”

“It’s the small businesses and individuals who get hammered. They don’t understand

what they are doing, and don’t realise how this (i.e. GST legislation) affects them.

They’re not the ones trying to get around the system; they just don’t think about it.

One of my clients copped a $30,000 bill that he didn’t know he had to pay, and then

he gets wacked 12.5% interest until it is all paid.”

Key situations where GST property issues were likely to arise for these clients are

summarised in the following exhibit. In each of these situations, clients were not

necessarily aware of the possible need to register for GST, and not aware that they

might need to keep detailed records of expenditure and income.


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Exhibit 5: Summary of Key Situations; Small Clients

Common Situations Common Concerns

Property gi fted / inherited

Changing ownership structure

Building demolished to prepare for sale

No sales contract

Incomplete or unknown history/usage ofland

May be multiple owners and ownershipstructures

Sub division of l and held

Land may have been held for considerableperiod of time

Intention in relation to land changed overtime

Margin scheme rules may have changedover period of ownership

One-off property development

Sub dividing home property and buildinghouse / unit on part of land

One off purchase of land for propertydevelopment

Different GST provisions depending onwhether a development was sold or rented

Purpose of property holding changed

Property; eg, residential units, may havebeen built to sell, but some are rented

because unable to sellMay have intended to hold property, butinstead sold

Sales rules applied to transaction; i.e.,claimed GST credits when building, butsituation changed

B&B operation

Renting out rooms in own home

Purpose built B&B accommodation

Charge clients GST but do not pay this to ATO

Do not charge clients GST and turnover >$75,000 – not aware of threshold and/or,not aware of likely income

Farm sub divi sion

Selling small portion of farm to propertydeveloper or individual

Dividing farm ownership amongst multipleparties – usually family members

Changing ownership structure

Has operated as a business, and notaware that different rules apply to property

Basis for calculations quite complex wheresome land hand held and some sold

If plant and property are sold at differenttimes, different rulings may apply

Margin scheme Vendor intends to apply the marginscheme, but doesn’t specify this in thecontract

Establishing appropriate valuations,including retrospective valuations


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Because of the situations described above, taxpayers in this group were likely to:

] Make mistakes in relation to GST calculations;] Not consider the full range of costs prior to undertaking a transaction. This meant

that profits were often smaller than expected, or that indeed, losses were made;

] Not have funds available to pay GST liabilities at the time they were due forpayment;

] Incur large interest payments to the ATO until their GST liability was paid in full.

It is worth noting that while the dollar amounts in relation to GST liabilities for individual

tax payers could appear relatively small, they were often very significant for the

individual(s) involved.

] Small t o medium entities in the business of property development : This groupusually consisted of partnerships, trusts, and companies who were in the business

of purchasing, developing and selling property. This group tended to have the

fewest GST property issues because:

They were relatively knowledgeable about what they needed to do becauseproperty management and development was a prime business for them, and

Their property issues tended to be relatively simple, as their developments were

generally smaller and fairly straight forward;

They tended to undertake the same types of property developments, and thus

once they had established the appropriate structure and procedures, this

continued to be the most appropriate approach for them in the future.

Where this group did face GST issues, they tended to be sufficiently knowledgeable

to as a minimum, be aware that they required accounting advice.

“Developers usually understand what they are doing. They have been through it all

in the past. They understand the problems. And even then some will come to us for

advice before they go ahead.”

While this group tended to have the fewest GST property issues, key situations

where GST property issues were likely to arise for these clients are summarised in

the following exhibit.


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Exhibit 6: Summary of Key Situations; Mid Sized Clients



Property; eg, residential units, may havebeen built to sell, but some are rentedbecause unable to sell

May have intended to hold property, butinstead sold


Multiple use property

Eg, rental of combination of short term andlong term accommodation

Part of the land in a holding is developedand part is held aside and retained forfuture development

Different GST treatments apply to shortterm and long term accommodation

Definition of “short term” and “long term” agrey area

How long land held for prior todevelopment (more or less than 5 years),and how it has been used in this period.

Multiple uses, owners, and st ructures

Multiple legal entities and structures maybe involved in both previous and currentownership eg, individuals, partnerships,

joint ventures, super funds, trusts, familytrusts, charities

Further the land may have had multipleuses, each of which is subject to adifferent treatment

Need to establish legal structure, and thismay change during ownership.

Possible different GST implications fordifferent structures and owners; eg,charities

Margin scheme Vendor intends to apply the marginscheme, but doesn’t specify this in thecontract

Establishing appropriate valuations,including retrospective valuations

] Large to very large entities i n the business o f property development: Thisgroup included companies, charities and government organisations which were inthe business of purchasing, developing and selling property. While organisations in

this group often had extremely complex GST property issues, they were generally

structured to deal with these issues, and to seek expert advice.

Many of the issues faced by this group were similar in type to those faced by the

small to medium entities, as described above, but because the developments were

generally much larger, and could involve ownership by multiple entities, the issues

tended to be more complex.


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Further, because the type of developments they undertook were more likely to vary

from project to project, they were more likely than smaller developers to be

presented with issues they had not faced before.

Projects were often of very high value, which meant there were significant

implications if they did not structure their business in the most effective way. Key

situations where GST property issues were likely to arise for these clients are

summarised in the following exhibit.

Exhibit 7: Summary of Key Situations; Large Clients



Property; eg, residential units, may havebeen built to sell, but some are rentedbecause unable to sell

May have intended to hold property, butinstead sold


Multiple use property ; examplesincluded:

Rental of combination of short term andlong term accommodation

Accommodation which include acombination of hotel rooms andapartments

Retirement and nursing home, which mayinclude a combination of residential,assisted living and high care facilities

Each type of use is subject to differentGST provisions

Different GST treatments apply to shortterm and long term accommodation.

Some input tax credits; eg, provision ofutilities, must be allocated across differentuses

Definition of “short term” and “long term” agrey area

Multiple legal entities and st ructures may be involved in ownership eg,partnerships, joint ventures, super funds,trusts, charities, governmentorganisations, and this included public

private partnerships

Need to establish legal structure, and thismay change during ownership.

Complex legal entities, which could includetaking into consideration the CrowningRights of the State

Possible different GST implications

gst on property transactions - 99 page research report

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