As a registered BAS Agent that deals with GST every day, we often hear people say that GST is easy – just add 10%.
In fact it is so easy, that 19 years after it was introduced, changes and corrections are still being made, and even more concerning, business people are still getting in wrong.
So, let’s look at some of the “easy” parts of our GST system for a builder who decides to build a house.
Firstly, when he buys the land, there may or may not be GST in the purchase price, and even if there is GST he may or may not be able to claim the GST back. When he has settlement of the land, the solicitor fees may not or may not be fully inclusive of GST as there are some expenses that are GST free. When the builder obtains a permit, again some components have GST and some don’t. Once he starts to build, he may use subcontractors. Again, some may charge him GST and some won’t. And some, will charge GST even thought they aren’t registered to charge GST. The insurance he takes out doesn’t have a straight 10% in it. The holding costs, such as loan interest, rates & water do not have GST in them. Unless he has to get the water carted to the site, then it does have GST. And if the property is in an area using a septic system, then there is no GST in the cleaning costs.
If he has to pay accommodation for his subcontractors to stay in the area, for the first 27 days he is charged 10% GST in the accommodation cost. From day 28, he is charged 5.5%.
Deciding to put solar on the house, the builder may or may not have GST applied to the solar rebate, depending on how the rebate is treated.
While building the house, he may decide to update his vehicle. If he spends, say $90,000 on a vehicle, the cost will include the vehicle, plus GST, plus stamp duty & registration costs, plus luxury car tax. Therefore, the cost of the vehicle is not a straight forward 10%. The vehicle may also be subject to the Car Tax Limit (different to luxury car tax), so therefore the GST he can claim is reduce to the limit applying to that year (currently about $5200), however he if decides to sell it the next day for $88,000 he has to pay the ATO $8,000 GST.
Now what happens once he has finished building the house having claimed GT on the eligible expenses along the way.
If he decides to sell the house, he has to calculate how much GST is in the sale price. To start with he needs to go back and have a look at the GST treatment when he purchased the land. The way the land was purchased will determine if the sale price includes a straight 10%. If he purchased the land using the margin scheme, he can reduce the amount of GST in the sale price. If he claimed GST at the time he bought the land, then the sale prices includes a full 10%.
And so, even though not all his costs included GST while building, he now has to add GST to the full sale price.
But, what happens, if he changes his mind and now decides to keep the house and rent it out. Well…. he has to pay back all the GST he has claimed as GST on residential property is different to GST on a premise built to on sell. And now he can’t claim any GST on any running costs of the house.
I hope he has a good bookkeeper who can help him workout if he may a profit and made sure he has claimed GST correctly!
And this builder is a pretty normal example of what business owners have to face every day navigating our complicated GST system.
Wait until we start telling you how "easy" the food and medical industries … stay tuned.
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