So Much To Learn, So Little Time
Sydney Morning Herald
Saturday July 1, 2000
The GST is finally here. But what will it mean for the property sector, and what outstanding issues are still on the negotiating table?
The new tax system is unquestionably far more property-friendly than it was six months ago.
To his credit, the Federal Treasurer, Peter Costello, will allow landlords to pass on GST to tenants from July 1, 2005, saving the industry more than $1.2 billion.
Under the previous system, property owners would have been forced to pay their tenant's GST under a wide range of circumstances. But leases are GST-free until 2005, unless there is a review.
The tax reforms will deliver enormous benefits to the property industry. Gone or going are many of the inefficient, indirect taxes that have white-anted it for years. Fortunately, much of the hard work in ironing out the industry's GST problems is nearly finished. We are now tying up a few loose ends, including the tax effect on CPI-based rents, the definition of a ``going concern", turnover rents and grouping provisions.
A whole new battle is being fought, however, in an effort to stave off the threats posed by the Ralph business tax reforms.
On CPI-linked rents, the Australian Competition and Consumer Commission (ACCC) has told the property sector it can't build-in the post-GST spike to CPI-linked rents and must instead use the underlying inflation rate.
The problem here is nobody knows what the underlying inflation rate is because it's not officially published. The Australian Bureau of Statistics advises it will produce a CPI figure in the September quarter, which will allow business to isolate the GST effect on inflation.
The ABS figure, however, will be published only once, which is next to useless, and it does not have the official endorsement of the ACCC.
The Property Council is talking to the ACCC about our proposal for an independent underlying inflation forecast to be used as the tool to calculate CPI-based rents for two years.
As they stand, the GST grouping provisions won't allow property trusts to consolidate their GST compliance into a trust.
The rules allow companies to group their GST provisions as a way to slash the number of business activity statements that must be completed.
The exclusion of property trusts will add millions of dollars to administration costs and countless hours in wasted management time.
The Taxation Office has yet to produce a proper definition of a ``going concern".
The sale of a building deemed to be a going concern won't attract GST. This will mean reduced stamp duty bills for property owners (stamp duty is levied on post-GST values).
For a building to be classed as a going concern it must be tenanted at the time of sale. A definition of ``tenanted" that recognises market dynamics is being negotiated.
The abolition of wholesale sales tax has caused a few headaches for retail landlords in calculating future turnover rents.
With ACCC guidelines saying business can't profit from the GST, landlords must increase turnover rents only up to the old WST level. But what is the old WST level?
To ensure nobody is worse off, one option is for an independent consultant to produce formulas which can be used to adjust turnover rents and be applied to model retail categories such as specialty shops, supermarkets, department stores and chain stores.
The Government has advised it is set to introduce its entity tax legislation into Parliament covering collective investment vehicles.
Treasury has not kept its promise to fully consult with the industry and as a result we know the legislation will water down Ralph's original CIV concept.
That means:Trusts offering different unit classes, such as options and convertible notes, will be taxed as companies;Hotel trusts and stapled securities will be taxed as companies;Many wholesale funds and interposed trusts will be taxed as companies;Trusts with fewer than 300 unit-holders will be taxed as companies.
With so much value to be gained from the tax reforms, we need to fight harder for the bits Treasury is trying to exclude from the package.
© 2000 Sydney Morning Herald
