Law – Page 3 – Thomson Hall, Campbelltown Accountants

Proposed changes to GST on property transactions

Measures to strengthen compliance with the GST law in the property development sector have been introduced into parliament this week.

The Treasury Laws Amendment (2018 Measures No 1) Bill 2018 will amend several tax laws to require purchasers of new residential premises and new subdivisions of potential residential land to make a GST payment directly to the ATO as part of settlement from 1 July 2018.

This was announced in the 2017-18 Federal Budget, is designed to counter tax evasion where some developers collect GST from their customers but dissolve their company to avoid paying it to the ATO. Currently, developers may have up to three months to remit GST after the sale of newly constructed residential premises and new subdivisions, allowing dishonest developers to avoid their GST obligations.

The government claims that the cost impacts on purchasers using conveyancing services are expected to be minor, given this change leverages the existing disbursement process and the use of standard contracts.

CPA Australia understands and agrees with the intent of the Bill, though disagrees with the assumption that the change will have minimal impact on most purchasers.

The impact on the cash flow of builders could be quite significant

In its submission on the draft legislation, CPA Australia stated that it is the experience of its members that GST on property transactions can be complex, including calculating the GST payable, and that such transactions may be outside the skills of many BAS and tax agents, let alone conveyancers.

Technicality confusing business buyers & sellers

Are you getting ready to sell your business? Do you understand the difference between your business and your company? It is a technicality that is catching many business owners unawares, but can have big ramifications for your financial future.

Whether you are just starting out in business or have been in business for 30+ years, it is important to understand the difference between the business that you operate compared to the entity that owns the business.

The business is generally all of the parts that are required to operate the business, including the intellectual property, the plant and equipment, the supplier lists and all other aspects of the business.

Why does this matter?

This distinction is important because when you are selling your business, you are generally not selling the company or entity that owns the business.

There are a number of reasons for this, but the main reason is liability.

The best way to illustrate this point is with an example. If Smiths Holdings Pty Ltd has been operating Smiths Fast Food for 10 years, then Smiths Holdings Pty Ltd, as a separate legal entity, is responsible for everything that has happened in that 10 years. If there is a past employee that wants to make a claim or a liability to a supplier in that 10 years, the liability for that injury sits with the private company, Smith Holdings Pty Ltd.

However, a person buying Smiths Fast Food does not want to take on that liability. They were not operating the business at the time, and should not be responsible for those claims. The company Smiths Holdings Pty Ltd should be, and is, responsible.

What does this mean for the sale process?

While it is preferable to only buy a business and not a company, it is possible to buy the company that operates a business.

This is done where you buy the shares in the company that operates the business. If you choose to buy the shares in a company, there are a number of ways that you can protect yourself:

Engage your accountant and lawyer to undertake an extensive review of the company’s history to try to ensure that you identify any skeletons in the closet.
Have the former owner provide you with ‘warranties’. A warranty is a promise that someone makes to you that they have disclosed an aspect of the company to you. For instance, you might seek a warranty that there a no injury claims by any employee of the company. If it turns out that an employee was injured six weeks before you bought the company and they make a claim for compensation, then you can seek your loss against the seller.
One of the weaknesses of a warranty is that if you suffer a loss, you have to claim that against the seller. If you put some money aside as a ‘retention’ for a set period of time, generally you can access those funds more efficiently.

When you are ready to sell your business, ensure that you have everything set out so that the sale process goes through as smoothly as possible.

Understanding the fundamental difference between a business and the company that owns the business is key to making sure that you can sell your business for the best possible price.

Article by Jeremy Streten – a lawyer and the author of The Business Legal Lifecycle. and contributor to mybusiness,com.au

Depreciation changes for investment property

This article has been provided by BMT Quantity Surveyors

This month, the government released draft legislation regarding the proposed changes to plant and equipment depreciation as announced in the May federal budget.

The draft outlined further details around a property investor’s eligibility to claim depreciation and provided a range of scenarios to be aware of should this legislation pass.

In a positive move, the government has provided the public with an opportunity to have their say on the new measures, with public consultation open until the 10^th of August 2017.

While these measures are yet to be legislated, we have taken a proactive approach in reviewing how these intended changes could impact investors. Following is an in-depth look at the possible outcomes.

Limiting depreciation on second-hand assets

Section two of Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 advises that the Bill intends to amend the Income Tax Assessment Act 1997 (ITAA 1997) to limit deductions for plant and equipment in residential premises.

In essence, the proposed new law reduces the amount an investor can deduct for a previously used depreciating asset for the purpose of gaining or producing assessable income.

Should the proposed legislation be passed, this means that residential property investors won’t be able to claim depreciation for plant and equipment assets found in second-hand properties in which contracts exchanged after 7:30pm on the 9^th of May 2017.

Investors can learn more about the proposed changes, who is affected and what they mean by visiting our blog post, ‘What do the proposed changes to depreciation mean for you?’

Capital gains tax changes and implications

The draft legislation outlines some detail around a reduced Capital Gains Tax (CGT) liability for property investors.

Any property investor who is unable to claim depreciation on previously used plant and equipment due to these amendments will be able to claim a capital loss for the decline in value of the plant and equipment assets. This capital loss will only be able to offset a capital gain and if needed can be carried forward to offset future capital gains.

A value that relates to the previously used depreciation assets will need to be established at the time of purchase. A decline in value will then need to be calculated for the assets so that a termination value can be determined at the time the property is sold. The difference between the value at the time of purchase and the termination value will be the capital loss which will reduce the owner’s CGT liability.

How will the changes affect an investor’s cash return?

The following scenario compares the cash return an investor will receive for a three year old house purchased for $600,000 both before and after the proposed new measures.

In the example, the owner receives a rental income of $560 per week or a total income of $29,120. Expenses for the property, such as interest, council rates, property management fees, insurance and repairs and maintenance total $41,028.

In scenario one, the owner is able to claim a total depreciation claim of $12,397 for both capital works deductions and plant and equipment depreciation.

Using depreciation, this investor will experience a weekly cost of $56 per week to hold the property.

In the second scenario, as the owner exchanged contracts on the property after 7:30pm on the 9^th of May 2017, they are only able to claim $6,126 in capital works deductions and will be unable to claim $6,271 in plant and equipment deductions.

This reduced claim would result in the investors weekly cost of holding the investment property increasing from $56 to $101, a difference of $45 per week or $2,340 in the first full financial year.

As you can see, the proposed changes will limit the depreciation deductions available to property investors, which will lead to a cash flow reduction each year.

While we believe that generally the integrity measure has merit, the proposed changes go much further than what is necessary to deliver on the Government’s intention of stopping subsequent owners from claiming deductions in excess of an assets value. The approach proposed in the draft legislation treats residential property investors differently by extinguishing a property investor’s ability to claim a deductions based upon a transaction.

We believe this is caused by gaps in current legislation around establishing a depreciable value for second-hand plant and equipment.

BMT Tax Depreciation will be making a submission detailing this concern along with suggestions of alternative methods which will better resolve this integrity issue.

To view the draft legislation and make a submission click here.