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GST Registration

QUESTION I have a new Company resident client and the company received a contract from foreign company to work here at the mine. The foreign company provides everything only the company received the labour or services payment working at the mining. The company income received from foreign company for first year is $150,000 and 2nd year is $246,000.

Does the company require to register for GST for the income received from the foreign company? Just need to confirm and if you can give me some GST rulings for foreign resident contracting Australian company to work with them would be a great help for my future reference.

ANSWER by Tony van der Westhuysen BA LLB (Tax Law) MBA November 8 2016
Where a non-resident makes a supply in Australia, that supply will be connected with the Indirect Tax Zone under s 9-27 of the GST Act. For all practical purposes, the Indirect Tax Zone is simply another name for "Australia". On the face of it therefore, that non-resident company would have an obligation to register for GST if the value of their taxable supplies met or exceeded the registration turnover threshold of $75,000. In your case, the value clearly exceeds this limit.

A non-resident can avoid this requirement if they enter into a reverse charge agreement with the resident company (see s 83-5(1) (d) of the GST Act). Where such an agreement is in place, the GST is "reverse charged" so that the recipient of the supply (the resident company) agrees to pay the GST on behalf of the non-resident supplier. The GST in this case would be 10% of the price of the supply (in your case $15,000 in the first year and $24,600 in the second year). If the supply represents a creditable acquisition for the resident company under s 11-5 of the GST Act, then they will be entitled to an equal and offsetting input tax credit for the GST that was reverse charged.

Capital Works Amortisation

QUESTION My client owned half share of a commercial rental property (acquisition date 21/6/1999) and recently purchased the other half share. When the commercial property was initially bought it was used in the printing industry (construction date 19/03/93). The building capital works rate used for the first purchase was 4% PC. On purchase of the remaining half share the client has completed an office fitout for commercial office rental. What rate should the following items be:

  • Initial half share - is this still 4%?
  • Purchase of the remaining half share?
  • Building construction costs associated with office fitout?

ANSWER by Mark Chapman B.Comm LLM (Tax Law) January 18 2017
The capital works deduction is not spread over a fixed term but is calculated according to the use of the building. The 4% rate will only apply where the building is being used for an eligible industrial activity. A commercial office rental does not qualify as an industrial activity and therefore for the purposes of Div 43, the building is no longer an industrial building. Accordingly, all three elements (the original 50%, the newly acquired 50% and the recent office fit-out) should be depreciated at the 2.5% rate.

Deduction for Gift Donation

QUESTION A question for commentary/case law on S 30-222 Income Tax Assessment Act to do with GST deductions on gifts (in this case artwork). Particularly interested in sub section below:

(2) In deciding what is a reasonable amount, have regard to the effect of those terms and conditions, or that *arrangement, on the *GST inclusive market value of the gift.

ANSWER by Tony van der Westhuysen BA LLB (Tax Law) MBA January 17 2017
The definition of "market value" is modified to account for any input tax credit that a donor would be entitled to if he orshe purchased the thing being valued. So the net effect on an entity’s resources in acquiring something that is donated must allow for the fact that the cost to the donor is partly offset by the input tax credit that he or she is entitled to.

The term" GST-inclusive market value", as defined in the GST Act will be inserted in the Dictionary to the ITAA 1997, so when this term is used it expressly includes the GST component without adjusting for any input tax creditentitlement. Accordingly s 30-220(2) inserts a specific rule for adjusting that value that the donor can claim as a deduction to account for the input tax credit entitlement.

CGT on Sale of Retirement Unit

QUESTION The question is capital gains arising on disposal of a retirement home unit.

For the owner it was her main residence however 7 years ago the owner moved into high care nursing home and so the retirement unit was then rented. The owner has now passed away and the executer of the deceased estate will now put the retirement unit up for sale. Given the property has earned assessable income for over 6 years will the sale of the unit be subject to capital gains tax.

If the unit is subject to tax will the special rule in s118-192 not apply as the retirement unit was not in use as a main residence by the owner at time of death, in which case the executor will need to allow for capital gains tax based on number days used as the principal place of residence.

ANSWER by Mark Chapman B.Comm LLM (Tax Law) 2nd Dec 2016
PBR 61605 addresses substantially the same facts (understanding that the home was acquired after 19 September 1985). As the same provisions in s118-145 can still apply then, as the unit was rented out, a maximum 6 years of absence in the nursing home can apply to the unit as her main residence if the owner had no other main residence. CGT would apply pro rata (1/7) in relation to the seventh year to which the main residence exemption cannot apply.

In regard to the second question I agree with the member’s observation which also matches the ruling. Neither way of attracting the effective exemption for the two year period following death in s118-195 is attracted so CGT applies pro rata to the period of ownership by the estate following death also.

It follows that the period of occupation prior to going into care and no more than 6 years of the absence in the nursing home, during which the unit was rented out, attract a (partial) CGT main residence exemption. The remainder of the period of ownership by the owner and her estate attracts CGT.

Residency of Trust and CGT

QUESTIONOur question concerns the residency of a trust with a corporate trustee and the related capital gains tax implications (if any). The relevant background facts are as follows:

Our client (individual) ceased to be an Australian tax resident (permanent move to Singapore) from January 2015; He is the sole shareholder and director of a company. This company was incorporated in Australia; The company is also the trustee of a discretionary trust. We note the following:

Under Australian taxation law, a trust is deemed to be a resident trust if the trustee is a resident OR the central management and control of the trust is located in Australia; and
Under the Corporation law, a company is deemed to be a resident where it is incorporated in Australia OR the central management and control is in Australia.
The Double Tax Treaty between Australia and Singapore is not clear on the capital gains tax impact of a change in residency.

Given the above, does the trust ever cease to be an Australian resident under domestic tax law and, if so, would capital gains tax event I2 be triggered?

ANSWER by Clifford Hughes Bjuris, LLM (Tax Law) FTIA December 14 2016
On the facts that you have instructed it is most likely that the trust will remain an Australian resident and not cease. However, the client has other issues in that the company is in breach of the Corporations Act.

Under Sec.6(1) ITAA36, "resident trust for CGT purposes" is referred to the meaning under the ITAA97.

In sec.995-1 ITAA97, "resident trust for CGT purposes" is relevantly defined on the basis that:

(a) for a trust that is not a unit trust, a trustee is an Australian resident or the central management and control of the trust is in Australia; or

As the trust in your query has a corporate trustee, we then need to revert to sec.6(1) ITAA36 where para (b) to the definition of "resident" provides that:

(b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

Given your instructions that the corporate trustee is incorporated in Australia, the result of combining those definitions is that, whilst the same company remains the corporate trustee, the trust could never cease to be a "resident trust for CGT purposes".

Note that residency of a company determined under the Corporations Act is not relevant for the purposes of determining tax residency of that company.

In order for your client trust to cease being a resident trust for CGT purposes the present corporate trustee would need to be placed with a company incorporated overseas (and which does not have it' central management & control in Australia), or with an individual who is not tax resident of Australia.

Corporations Act

Section 201A Corporations Act provides that at least 1 director of a company must be ordinarily resident in Australia. On the facts you have instructed, your client is in breach of that provision.

Where the resident director requirement is breached, the company is required to remedy the breach as soon as possible. If it does not, ASIC can decide to issue a penalty notice (currently $1,062.50) or commence prosecution for breach of the Act.

You should therefore make your client aware of the above requirement and recommend they rectify as soon as possible.