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.

Property depreciation tax changes passed

As part of the 9th of May 2017 federal budget, the Australian Government proposed amendments to legislation relating to plant and equipment (division 40) deductions.
The proposed changes, outlined in Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 , have now been legislated after being passed by the Senate on the 15th of November 2017.
This has resulted in a change to the Income Tax Assessment Act 1997 and denies property investors from claiming income tax deductions for the decline in value of ‘previously used’ depreciating assets (plant and equipment) within residential investment properties.
The government’s intention in making this legislation amendment was to deliver an integrity measure which addressed concerns that some plant and equipment assets were being depreciated by successive property investors in excess of their actual value.
These changes affect investors who purchase second-hand residential properties after 7:30pm on the 9th of May 2017 by limiting the depreciation they can claim on existing plant and equipment assets.
The following video has been prepared by BMT Quantity Surveyors to explain the changes.

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:

  1. 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.
  2. 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.
  3. 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