1. 2004-5 Cents per km Rates

The recently published rates to be used when calculating deductions for car expenses in the 2004-5 income year are set out below:-  

Engine capacity non-rotary engine cc	Engine capacity rotary engine cc	Kilometre Rate (cents)
0 – 1,600	0 – 800	52.00
1,601 – 2,600	801 – 1,300	62.00
2,601 +	1,301 +	63.00

Adequate records must be kept when claiming tax deductions for your car usage to prove that the business travel actually occurred.  These records include:-

• Diary entries or similar evidence of relevant trips
• Reasonable estimates of kilometres travelled during these trips
• Details of why the travel is business related
• Details of the specific car used and your ownership interest in the car.

You should also remember that travel from your home to your place of employment (or first place of employment for the day) is normally considered private travel and not eligible for inclusion as business kilometres in your claim.  Similarly, the last trip of the day to return home is usually considered private travel.  There are exceptions to this general rule but they are very specific and usually only involve the cartage of goods and tools for trades-persons who travel direct from home to customers.

Where your annual business travel exceeds 5,000 kilometres, there are alternatives to the cents per kilometre method when determining income tax deductions for your car.  However, these involve significantly more record keeping requirements.  Should you require assistance in determining your car expense claim, please do not hesitate to contact our office.

2. MARGIN METHOD MAYHEM

Significant changes to the operation of the GST margin scheme in relation to the sale of real property are currently before Parliament.  Taxpayers registered for GST who currently own or are looking to buy real property for use in their enterprise may incur further costs as a result of additional GST being payable. 

What is the margin scheme?

These special rules provide a mechanism to ensure that enterprises registered for GST only pay GST on the value they add to real property whilst they use it in their enterprise.  Currently, where they buy the property either from an unregistered vendor, under the margin scheme or as part of a GST-free acquisition like a going concern, they cannot recover the GST on the purchase.  When they sell the property subsequently they are allowed to calculate their GST liability as one eleventh of the difference between what they sold the property for and what they paid for it.  Therefore they only pay GST on the value they added to the property whilst it was used in their enterprise.

Where the property was held at 1st July 2000 , they could apply the margin scheme based on a valuation of the property as of that date or the date they first registered for GST.

Below we have summarised some of the proposed changes and their potential impact.

(a)  VENDOR AND PURCHASER MUST AGREE TO USE THE MARGIN METHOD FOR IT TO APPLY.

The current position

Currently, so long as the vendor did not purchase the property as a full taxable supply (10% GST was applied on the full property price), then the vendor could choose to apply the margin method when they sold the property.  Unless the purchaser negotiated that the margin method was to apply, they technically had no choice in the matter.  Some purchasers were caught short when they thought they were buying property as a full taxable supply, when in fact the margin method was being used.  This meant that not only were they unable to recover the GST on the acquisition, but they effectively paid more for the property than was planned.

The proposed change

To rectify this perceived problem, the new Bill will require both the vendor and purchaser agree to use the margin method in writing before it can be applied.  This agreement does not need to form part of the contract of sale, however it would be advisable for a clause covering the margin method to be included in that contract.  The amendment will be effective from the date the Bill is assented into law, which presumably will be sometime in May 2005.

This change, in its proposed form, will potentially have a dramatic impact on contracts signed prior to the time this legislation was announced but which settle after the date this law is assented.  This will affect many recently signed contracts as well as many off-the-plan sales as shown in the following example.

Example

Roger has signed a contract to sell Peter a block of land for $106,000 on 1st March 2005.  The sale is to settle on 30th June 2005.  He acquired the land for $40,000 from an unregistered supplier on 1st October, 2000.  Although the contract does not stipulate that the margin method was to be used, it was always Roger’s intention to use this method in working out his GST liability.  Had the margin method been applied, Roger’s GST liability would be $6,000 (1/11th of [$106,000 - $40,000]).  This is a good thing for Roger as his sub-division costs (net of GST) were $58,000, resulting in an estimated profit after GST of only $2,000.  

Let us assume that the proposed legislation changes become law on 1st June 2005.  Peter had been verbally informed that the margin method was to be applied.  He had reconciled himself to the fact that the land was going to cost him $106,000 without a GST recovery even though this was not spelt out in the contract.  As he is going to develop this land he decides he would like to get an input tax credit after all on the purchase.  He refuses to give his written agreement to Roger to allow Roger to apply the margin method.

As a result, Roger can no longer apply the margin method.  His GST liability is now 1/11th of $106,000 or $9,636.36, and he is making a $1,636.36 loss on the sale of this block of land.  Meanwhile Peter has made a windfall gain as the land cost has reduced to $96,363.64 net of GST recovered.  The windfall is purely due to this legislation change.

Recommendation

It is preferable that this change does not get passed into law and is rejected by Parliament.  However, if the Government is to persist with this change, there should be a transitional rule where any contract for the sale of real property that was signed prior to the 17th March 2005 will apply the old rules regardless of when the contract actually settles.  In this way, the status quo on open transactions will remain in place.

Should you be entering into contracts to sell land and buildings and want the margin method to apply, it is absolutely essential that you insert a clause into the contract that “the vendor and the purchaser agree to use the margin method”.  This clause must then remain in place before you sign the contract and should not be deleted.  Otherwise you may not get the consent from the purchaser to use the margin method and may be forced to sell the real property as a full taxable supply.

(b) NEW MARGIN METHOD RULE FOR GST- FREE REAL PROPERTY ACQUISITIONS

The second change affects all taxpayers who currently hold real property in their enterprise, and purchased it GST-free using the going concern or GST-free farm land rules.  Effective from the 17th March 2005, these amendments change the base to be used when calculating the gross margin from being the GST-free price the taxpayer paid for the property to a valuation of the real property as at the 1st July 2000. 

The impact of this is shown in the following examples.

Example – Old Rules

A hotel is purchased on 1st January 2004 for $1 million GST-free and is subsequently sold under the margin method for $2.1 million on 1st March 2005.  Therefore the margin on this property is $1.1 million (the difference) with a GST payable of $100,000.

Example – New Rules

Alternatively, the same hotel is sold under the margin scheme for $2.1 million on 20th March 2005.  The hotel was actually built in 2001 and the value of the land at 1st July 2000 was $230,000.  Under the new rules, the margin is the difference between the value at 1st July 2000 ($230,000) and the sales price ($2.1 million).  This is $1,870,000 and the GST payable is $170,000.  This increased GST liability of $70,000 is a cost to the current holder.

The additional $70,000 is the GST on the value added by the original owner ($1 million sales price less cost of $230,000 or $770,000 net).  By acquiring the property GST-free, the new intermediate owner inherited the GST contingent liability of the original owner who avoided the liability by selling the property as a going concern.

Had the hotel been sold as a margin method supply by the original owner rather than GST-free, this new law would not apply and the current owner could use the purchase price as their base for applying the margin scheme.

Some taxpayers and advisors would suggest the current owner sell the hotel as a GST-free going concern and avoid the problem.  However the rules attached to selling a property GST-free under the going concern or farm land concessions are so complex there is no guarantee they will be met.  Well-informed purchasers, knowing they will inherit this contingent GST liability, will now probably refuse to buy real property GST-free.  Meanwhile affected property developers will not be able to sell real property GST-free.

Why is the law being changed!

Basically, Treasury and the ATO have suddenly realised that there is a permanent loss of revenue where the property is acquired GST-free and sold under the margin method.  The initial holder did not pay GST on the value they added to the property whilst it was held, and the new owner only paid GST on the value they subsequently added to the property.  The proposed law change results in the new holder paying GST on the value they added to the property as well as the value the previous holder or holders added to the property.  This is clearly inequitable for the current holder.  

Transitional risk!

As this law change is planned to be effective from the 17th March 2005, any property owner still holding real property acquired GST-free will now be subject to these rules.  Suddenly they are being penalised with retrospective effect.  As the price of land is driven by market forces, they cannot pass on this extra tax impost forced on them.  In some cases, such as property developers who acquire the property GST-free, the land may already be sold off-the-plan making it impossible to pass on this impost even if a higher price could be justified.  A much fairer approach would be to only apply the new rules to real property acquisitions made GST-free after the 17th March 2005.

Other Problems

This proposed law change generates other problems such as obtaining accurate valuations, or where the property was first used in an enterprise some time after the 1st July 2000.  These are not covered in detail here.

Where to from here?

Although the law amendments are currently before Parliament, they have not yet been passed, and there is still hope that they may not go through.  If you are adversely affected by these changes there is still the opportunity to voice your opinion by contacting your local member of Federal Parliament.  However we suggest you act quickly as the amendments, if accepted, are likely to be passed in May 2005.  

If you are looking to buy or sell real property we strongly recommend you contact us before proceeding so we can assess the impact of these new laws and any other relevant issues and advise you accordingly. 

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