GST Changes: Time For Action
Added by: National
Source: Property Australia
Date Published: 01 March 2005
Added To Web: 10 March 2005
New legislation finally allows property owners to pass on GST liability, previously unrecoverable from tenants. Property Australia analyses what the new regulations mean for landlords.
Last month Federal Parliament passed amendments to the GST Transition Act, effectively allowing property owners to add GST to a tenant’s rent.
The rule applies even where a lease makes no mention of GST, and means it can effectively be “passed on” to tenants by requiring them to either accept an increase in the price of supply, or pay the 10 percent GST themselves via a ‘reverse charge’ mechanism.
There are several options available in the process:
Tenants can agree to pay GST themselves (i.e. 10 percent of the current GST-exclusive price) or will be forced to do so if they do not accept an arbitrated offer (more on this later). The exception is if the agreement/contract expressly disallows a price increase to allow for GST;
Property owners can make an arbitrated offer for a GST-related price increase by following a process requiring them to make an initial offer and, if this is rejected by the tenant, a final offer of an amount determined by an independent assessor (again, more on this below);
An assessor can determine the ‘appropriate change in consideration’ based solely on the impact of the New Tax System changes on the owner’s costs and expenses. Note that this is not a market review.
Owners with ‘grandfathered’ leases will need to consider their position and prepare for the price change process to ensure it is completed by July 1, in order to avoid becoming liable for unrecoverable GST.
Processes & timelines
Timeliness is important in this issue, with June 30 a looming and immovable deadline. The three-step process for resolution takes 77 days to complete:
28 days for the initial offer; then
28 days for an arbitrated assessment period; then a further
21 days until the tenant becomes liable for the GST itself.
In detail, the steps a landlord must take are:
The landlord makes an initial offer of a price increase. At this point, the tenant may choose to pay the GST itself under the ‘reverse charge’ mechanism
The initial offer remains open for at least 28 days. Within this time the tenant may:accept the offer; reject the offer; or agree to pay the GST itself
If the tenant chooses to either accept the offer or pay the GST itself, then the process is finished.
If the tenant rejects the offer, or does not respond, the landlord can apply to the arbitrator to appoint an assessor. (Potential arbitrators are to be identified in regulations that are being finalised). This part of the process remains open for 28 days
The assessor must determine an ‘appropriate change’ to pricing (more on this below)
The landlord must then make a final offer of a price increase as determined by the assessor. This offer must be open for a further 21 days
If by the end of this 21-day period the tenant has not accepted the arbitrated offer, it will itself be liable to pay for GST under the reverse charge mechanism
Appropriate changes in pricing
Theoretically there is no limit to the increase in price that a landlord can offer. However, for the initial offer to have any credibility – and to follow the clear intention of the legislation – it should be the landlord’s estimate of an ‘appropriate change’ that an assessor would arrive at.
In determining an appropriate change, the assessor must only take into account the impact of the New System Tax changes (as defined by the Trade Practices Act) on the landlord’s costs and expenses.
This is a similar exercise that most suppliers of goods and services undertook in the lead-up to the introduction of the GST.
At the time, Treasury explained the three factors in the calculation of an appropriate change in price as:
The direct cost of GST on supply (i.e. 10 percent)
Cost reductions the supplier gained when other taxes were abolished as GST was introduced
The net recurrent compliance costs the supplier incurs in imposing GST
As a supplier – in this case a landlord – might incur more in compliance costs than is achieved in cost reductions, the ‘appropriate change’ could, again theoretically, be greater than 10 percent.
However, in practice a tenant could effectively cap any increase to only 10 percent by electing to pay the GST itself. As most tenants will be entitled to a GST credit, there will be no net increase in their rental.
Fixing the fine detail
While the resolution of this long-running query is a positive step forward, some issues do remain to be resolved:
Review opportunities – the Property Council continues to pursue this issue, which is subject to a test case, with the Australian Taxation Office
Arbitrators and assessors – there is no direction as to who arbitrators or assessors will be, and affected parties will need to wait for the regulations. This is of particular concern given the timeframes involved
The arbitration process – there is little guidance as to the scope of negotiation between supplier and recipient once the arbitration has begun. For example, are the parties involved prevented from agreeing a position between themselves to the exclusion of the arbitrator’s position?
On the whole, landlords stand to lose most from inaction, and the Property Council has urged landlords to seek professional advice to resolve the issue with tenants and trigger the legislation’s rent review process as a matter of urgency.
If the GST position between landlords and tenants has not been resolved before 1 July, landlords are liable for the cost of GST until it is.
With thanks to Andrew Howe (Greenwoods & Freehills – 02 9225 5919; [email protected]) and Heydon Miller (PricewaterhouseCoopers – 02 8266 3377; [email protected]) for supporting material.
by Andrew Howe & Heydon Miller
http://propertycouncil.gravitymax.com.au/nat/page.asp?622=269624&E_Page=17720
Added by: National
Source: Property Australia
Date Published: 01 March 2005
Added To Web: 10 March 2005
New legislation finally allows property owners to pass on GST liability, previously unrecoverable from tenants. Property Australia analyses what the new regulations mean for landlords.
Last month Federal Parliament passed amendments to the GST Transition Act, effectively allowing property owners to add GST to a tenant’s rent.
The rule applies even where a lease makes no mention of GST, and means it can effectively be “passed on” to tenants by requiring them to either accept an increase in the price of supply, or pay the 10 percent GST themselves via a ‘reverse charge’ mechanism.
There are several options available in the process:
Tenants can agree to pay GST themselves (i.e. 10 percent of the current GST-exclusive price) or will be forced to do so if they do not accept an arbitrated offer (more on this later). The exception is if the agreement/contract expressly disallows a price increase to allow for GST;
Property owners can make an arbitrated offer for a GST-related price increase by following a process requiring them to make an initial offer and, if this is rejected by the tenant, a final offer of an amount determined by an independent assessor (again, more on this below);
An assessor can determine the ‘appropriate change in consideration’ based solely on the impact of the New Tax System changes on the owner’s costs and expenses. Note that this is not a market review.
Owners with ‘grandfathered’ leases will need to consider their position and prepare for the price change process to ensure it is completed by July 1, in order to avoid becoming liable for unrecoverable GST.
Processes & timelines
Timeliness is important in this issue, with June 30 a looming and immovable deadline. The three-step process for resolution takes 77 days to complete:
28 days for the initial offer; then
28 days for an arbitrated assessment period; then a further
21 days until the tenant becomes liable for the GST itself.
In detail, the steps a landlord must take are:
The landlord makes an initial offer of a price increase. At this point, the tenant may choose to pay the GST itself under the ‘reverse charge’ mechanism
The initial offer remains open for at least 28 days. Within this time the tenant may:accept the offer; reject the offer; or agree to pay the GST itself
If the tenant chooses to either accept the offer or pay the GST itself, then the process is finished.
If the tenant rejects the offer, or does not respond, the landlord can apply to the arbitrator to appoint an assessor. (Potential arbitrators are to be identified in regulations that are being finalised). This part of the process remains open for 28 days
The assessor must determine an ‘appropriate change’ to pricing (more on this below)
The landlord must then make a final offer of a price increase as determined by the assessor. This offer must be open for a further 21 days
If by the end of this 21-day period the tenant has not accepted the arbitrated offer, it will itself be liable to pay for GST under the reverse charge mechanism
Appropriate changes in pricing
Theoretically there is no limit to the increase in price that a landlord can offer. However, for the initial offer to have any credibility – and to follow the clear intention of the legislation – it should be the landlord’s estimate of an ‘appropriate change’ that an assessor would arrive at.
In determining an appropriate change, the assessor must only take into account the impact of the New System Tax changes (as defined by the Trade Practices Act) on the landlord’s costs and expenses.
This is a similar exercise that most suppliers of goods and services undertook in the lead-up to the introduction of the GST.
At the time, Treasury explained the three factors in the calculation of an appropriate change in price as:
The direct cost of GST on supply (i.e. 10 percent)
Cost reductions the supplier gained when other taxes were abolished as GST was introduced
The net recurrent compliance costs the supplier incurs in imposing GST
As a supplier – in this case a landlord – might incur more in compliance costs than is achieved in cost reductions, the ‘appropriate change’ could, again theoretically, be greater than 10 percent.
However, in practice a tenant could effectively cap any increase to only 10 percent by electing to pay the GST itself. As most tenants will be entitled to a GST credit, there will be no net increase in their rental.
Fixing the fine detail
While the resolution of this long-running query is a positive step forward, some issues do remain to be resolved:
Review opportunities – the Property Council continues to pursue this issue, which is subject to a test case, with the Australian Taxation Office
Arbitrators and assessors – there is no direction as to who arbitrators or assessors will be, and affected parties will need to wait for the regulations. This is of particular concern given the timeframes involved
The arbitration process – there is little guidance as to the scope of negotiation between supplier and recipient once the arbitration has begun. For example, are the parties involved prevented from agreeing a position between themselves to the exclusion of the arbitrator’s position?
On the whole, landlords stand to lose most from inaction, and the Property Council has urged landlords to seek professional advice to resolve the issue with tenants and trigger the legislation’s rent review process as a matter of urgency.
If the GST position between landlords and tenants has not been resolved before 1 July, landlords are liable for the cost of GST until it is.
With thanks to Andrew Howe (Greenwoods & Freehills – 02 9225 5919; [email protected]) and Heydon Miller (PricewaterhouseCoopers – 02 8266 3377; [email protected]) for supporting material.
by Andrew Howe & Heydon Miller
http://propertycouncil.gravitymax.com.au/nat/page.asp?622=269624&E_Page=17720
