Margin scheme question

Discussion in 'Accounting & Tax' started by sdprop, 24th Nov, 2017.

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  1. sdprop

    sdprop Active Member

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    Hi All,
    My accountant it working out my gst bill after the sale of one of our property inside the 5 year gst period (3.5 years in). We are using the margin scheme and he stated that the rent earned over the 3.5 years is added to the sale price during the calculations. Is this the case?
    It just seems odd. The 5 year gst rule is designed to slow down people buying, subdividing, building and selling. Ok I stuffed up on that at the start. If I sold straight away there would be no rent to add onto the sale price and my gst would be lowered by the margin scheme. The way my accountant is calculating it, the more time I hold onto the property and rent it out the more gst I pay. I thought the longer I held the property and rented it, the less I looked like a developer. Thoughts?
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    Since when does the income from an asset get added to the capital gain? Is he also adding back the depreciation claimed (which he should) and the tax you've paid/lost over that period?

    @[email protected]
     
  3. sdprop

    sdprop Active Member

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    gst not cgt. So I think I pay gst on 1/11 of the margin (margin being sale price - purchase price).
     
  4. D.T.

    D.T. Specialist Property Manager Business Member

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    That bit is correct, but I never thought rent came into that equation.
     
  5. Scott No Mates

    Scott No Mates Well-Known Member

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    My bad.
     
  6. Mike A

    Mike A Accountant Business Member

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    He is adding back rent ? Seriously this guy or girl has no idea what they are doing. They should have admitted this is outside their area of knowledge and referred the work to someone who can do the calcs. This is truly incompetent.

    Margin scheme is simply sales price less purchase price. Thats it. Sometimes a valuation is required but those are for particular types of transactions. Eg pre 2000, sold as a going concern, etc

    He may be adjusting BAS returns for a division 129 gst adjustment but if its resi then rent is input taxed.

    Refer them to this GST and the margin scheme

    Are they also adjusting the GST for purchases you incurred but didnt claim as you wouldnt have claimed any GST during the construction phase if your original intention was to retain them for investment purposes.

    And find a new accountant.

    Sometimes i wonder why some accountants even stay in practice.
     
    Last edited: 24th Nov, 2017
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  7. sdprop

    sdprop Active Member

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    Bit more on this. He is claiming it is ''extent of creditable purpose'' in calculating my BAS.
    See wording:
    The adjustment to the claim on your development costs is due to the fact that you rented the property for part of the time that it was held.
    The adjustment is worked out based on the % of the sale proceeds over the total of the proceeds plus the rent – this gives 88.3%
    Unfortunately the GST on the margin is not adjusted down by this percentage.
     
  8. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    No.

    There is a statutory formula for determining thr loss of input tax credits. After 3.5 years it is all but nil. Tax credits cannot be claimed after four years or 16 quarters after the tax invoice not sale date. The margin scheme calc is a issue a year one accounting grad could calculate. One less the other MAY be the Gst due.

    I wonder what the sales contract says.

    Out of depth? OMG. What other mistakes will youu be liable for.
     
  9. Hamish Blair

    Hamish Blair Well-Known Member

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    I would look at some of the ATO GST margin scheme guides eg GST and property
     
  10. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I would have thought the tax rulings more applicable. Formulas and other views found in GSTR 2006/7 and 2006/8 are important and technical. Then other ruling also impact and cant be overlooked. eg GSTD 2014/2 and many others.

    The basic GST rule regarding validity of tax invoices and adjustment periods are both also highly relevant.

    If so many accountants get it wrong I would be inclined to think a DIY effort may be problematic.
     
  11. Mike A

    Mike A Accountant Business Member

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    YES, the GST on purchases can be claimable in part as decreasing adjustments (refunds) for change of use rather than as credits. Most will still be claimable despite the four year rule. BUT – the formulae for claiming them is complex and often the decreasing adjustment is for significantly less than 100% of the GST paid.

    We regularly calculate the adjustments for developers in these scenarios. We request that the detail of individual purchases during the development and construction phase be downloaded to excel spreadsheet and we categorise them, apply the thresholds and other rules and then insert the formulae to calculate the adjustments.
     
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  12. sdprop

    sdprop Active Member

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    The example he has sent me to is in GSTR2009/4 example 19. David (in the example) is a developer who built for immediate sale, the market softens and he rents the properties out.
    In my case I built with intent to rent, rented for 3.5 years then decided to sell due to a change in circumstance. I am using the margin scheme to minimise my gst bill but I can't see how this ruling affects me???
     
  13. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    And.......what cant be seen.

    When you build to sell 100% creditable. When you change your mind the entitlements change and your supplies comprise two purposes. One gives no tax credits and so other gets reduced credits.

    One affects other. No such t hing as 100% input tax credits when there is a mix of supplies.
     
    Last edited: 27th Nov, 2017
  14. Mike A

    Mike A Accountant Business Member

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    when more facts are given changes the story altogether. so no they are not adding sales to calculate the margin. they are adding sales for your Division 129 GST adjustment.

    sounds as though the output based indirect method is being used and the ATO accepts that method where the premises are being leased while concurrently held for sale.

    so yes the formula for this is

    estimated or actual sales proceeds / (estimated or actual sales proceeds + rental proceeds)

    e.g. XYZ Pty Ltd builds new residential premises which it intends to sell and claims all the input tax credits during the construction phase of $100k.

    they complete the premises but continue to hold for sale due to weaker market conditions and rent. rental income during the adjustment period is $50k and expected sale price is $600k.

    so you have an increasing adjustment to make of

    600,000 / (600,000 + 50,000) = 92.3 %

    100,000 x [100 - 92.3%] = 7,700
     
  15. sdprop

    sdprop Active Member

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    Sorry about not knowing the technical parts. I have had to piece it all together myself.
    I know understand what he has done, thankyou for all the replies.
    The issue I have is I did the development for long term leasing and not for sale. This is supported by it being leased from day 1 for 3.5 years and not being on the market until it was sold 3.5 years after completion. I actually registered for gst to use the margin scheme for the sale to get me out of trouble with the 5 year rule.
    I have asked him to seek advice on whether he is 100% correct and there is no alternative.
     
  16. Mike A

    Mike A Accountant Business Member

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    It sounds like he knows what he is doing. If you want external confirmation discuss with steve baxter at indirectax.net. ive used him for many gst issues. Good and reasonably priced

    Your Advisor | indirectax.net

    Tell him i referred you as i know him very well. A nixe guy and knows GST like the back of his hand
     
  17. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Registration for GST isnt a choice for a developer. The choice to sell after 3.5 years is less than the 5 year requirement which is often problematic and not what some beleive as so simple as an aviidance rule...you lose input tax credits. Hence a taxable supply using either general supply or margin scheme. The entitlement to ITCs should be maximised to extent possible. The ITCs should be claimed against the GST on sales.

    Record keeping is the key issue.

    Then the issue of how profit is calculated and taxed a further issue
     
    Last edited: 29th Nov, 2017
  18. sdprop

    sdprop Active Member

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    Thankyou Michael and Paul for taking the time to bring me up to speed and set my mind at ease. I made a lot of errors on this project and it is still teaching me lessons. To my accountants credit he has been very patient and understands that I wish to build my knowledge.
    Thanks Michael for the contact. I'll save it for later.
     

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