Hi All,
I received this from my accountant at KPMG today:
Can anyone translate the jargon to english?
I received this from my accountant at KPMG today:
The following discussion deals with GST adjustments in respect of property developers or builders who acquire and develop properties for the principal purpose of making taxable supplies but subsequently let the properties as domestic residences.
Because the properties were acquired for the principal purpose of making taxable supplies (i.e. development and sale), the developers are permitted a full second-hand goods input tax credit on the purchase price of the properties.
As the properties are being used for the non-taxable purpose of domestic rental, adjustments by way of GST output tax must be made in respect of both capital and revenue costs.
Section 10.8 of the GST Act allows adjustments to be made on the lesser of cost or market value. These adjustments are commonly made based on one ninth of the domestic rental received (i.e. the market value of the use of the properties)
However, the preferable option is to make the adjustment based on cost rather than market value.
The cost adjustment for the capital asset (the properties) is calculated based on one ninth of depreciation (usually straight line at 2%). The Courts have suggested that adjusting for depreciation on the buildings only (i.e. excluding land) would be an acceptable (if somewhat rough and ready) method of making the adjustment.
In addition, an output tax adjustment is also required for costs of a revenue nature where GST has been claimed on these costs. These costs would include repairs and maintenance, rates and insurance. The Courts have a suggested that an output tax adjustment of 25% of the GST claimed in this respect would be acceptable. Direct costs of letting such as agents fees should not be claimed.
When the relevant entity disposes of the property it will be a taxable supply, and it must charge GST on the supply and pay the GST to the IRD. The Courts have held that on the sale of the properties, taxpayers are entitled to recover the capital output tax adjustments made on the deemed supplies for the properties, whether that was by way of a one-off adjustment or periodic adjustments. However, the recovery of the output tax adjustments is again based on the lesser of cost or market value. Presumably the properties will have gone up in value and as such the amount of capital output tax adjustments made previously can be claimed in entirety as input tax adjustments.
The above treatment was established by the Courts in the decision C of IR v Lundy Family Trust & Behemoth CA 2005.
Because the properties were acquired for the principal purpose of making taxable supplies (i.e. development and sale), the developers are permitted a full second-hand goods input tax credit on the purchase price of the properties.
As the properties are being used for the non-taxable purpose of domestic rental, adjustments by way of GST output tax must be made in respect of both capital and revenue costs.
Section 10.8 of the GST Act allows adjustments to be made on the lesser of cost or market value. These adjustments are commonly made based on one ninth of the domestic rental received (i.e. the market value of the use of the properties)
However, the preferable option is to make the adjustment based on cost rather than market value.
The cost adjustment for the capital asset (the properties) is calculated based on one ninth of depreciation (usually straight line at 2%). The Courts have suggested that adjusting for depreciation on the buildings only (i.e. excluding land) would be an acceptable (if somewhat rough and ready) method of making the adjustment.
In addition, an output tax adjustment is also required for costs of a revenue nature where GST has been claimed on these costs. These costs would include repairs and maintenance, rates and insurance. The Courts have a suggested that an output tax adjustment of 25% of the GST claimed in this respect would be acceptable. Direct costs of letting such as agents fees should not be claimed.
When the relevant entity disposes of the property it will be a taxable supply, and it must charge GST on the supply and pay the GST to the IRD. The Courts have held that on the sale of the properties, taxpayers are entitled to recover the capital output tax adjustments made on the deemed supplies for the properties, whether that was by way of a one-off adjustment or periodic adjustments. However, the recovery of the output tax adjustments is again based on the lesser of cost or market value. Presumably the properties will have gone up in value and as such the amount of capital output tax adjustments made previously can be claimed in entirety as input tax adjustments.
The above treatment was established by the Courts in the decision C of IR v Lundy Family Trust & Behemoth CA 2005.
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