New Legislation Confirms Salaries are GST – Exempt

New recent legislation has been disclosed to verify that GST is not collectable and payable on the Salaries component of Service (or Maintenance) Fees.

This will deliver benefits to the Owner/operators of the Retirement Villages industry and its residents.

1. The manager of the villages will be able to pass on an immediate saving to the current residents of the estimated 532 (see below) Retirement Villages in Australia paying GST on the service fees, of a reduction in fees.

2. It will have a worthwhile marketing ‘discount’ of reduced fees by eliminating the 10% GST on the Salaries component of the service fees ) for its future clients on the re-sale of existing units and sale of new units.

3. As a consequence, many villages marginally over the GST-free $150,000 Registration Turnover Threshold (“RTT”) will be eligible to de-register, or not register if under, for the GST Act, as they fall below the RTT as set out in Clause (b) of Section 23.5 of the GST Act. This will then be a saving of the full amount of GST for the benefit of all residents, and a significant flow-on benefit in marketing strategy – to advise purchasers that there is no GST on the service fees.

SCOPE OF SAVING :

To emphasise the enormity of the saving, a conservative calculation based on a survey of 264 villages in Victoria reveals that only 28% are larger villages paying the GST on its service fees. Extrapolating that percentage to the 1,900 villages in Australia (refer the National Retirement Village Market Overview – April 2011), it is conservatively estimated that 532 villages would be paying a sum of $9.6 million GST on salaried costs per annum, escalating each year thereafter as CPI adjustments increase – if the GST on salaries is not eliminated.

NEW LEGISLATION :

1. This necessitates very detailed direction for access , as the revelations are ‘buried’ deep in the texts.

Please note that the excerpts of legislation are quoted in ‘italic’s and are all ‘copy and paste’ true reproductions of the actual various legislations, to facilitate reference. They include the occasional ‘bold’ and ‘blue’ words which are already highlighted in the Acts).

2. The word “Salaries” includes wages, and all associated on-costs such as Holiday and Sick Pay, LSL, compulsory Superannuation etc, for which PAYG withholding is deducted and transmitted to the Australian Taxation Office in the Business Activity Statement(“BAS”). It does not include payments made to any contractors who include GST in the accounts submitted, nor an Owner/operator charge for any off-site payment of staff.

Intensive computer research has revealed a ‘one-liner’ in a Media Release on 11 January 2011 when the Acting Treasurer – The Hon Bill Shorten MP issued his N0.004 (Ref. Press release – EXEMPTING TAXES, FEES and CHARGES FROM THE GST) which states (Para 8) that “Examples of fees, charges and taxes exempt from GST include

Taxes: Income tax, Medicare levy and Stamp duties”. (Writer’s underlines).

Following this discovery, a new Act was accessed (refer A NEW TAX SYSTEM (GOODS AND SERVICES TAX) (EXEMPT TAXES, FEES AND CHARGES ) DETERMINATION 2011 (No. 1) which promulgated as under :

This Determination lists Australian taxes, fees and charges which are exempt from the Goods and Services Tax. (Writer’s underlines)

I, BILL SHORTEN, Assistant Treasurer and Minister for Financial Services & Superannuation, make this Determination under section 81-5 of the A New Tax System (Goods and Services Tax) Act 1999.

Dated 15 December 2010

The Hon Bill Shorten MP

Assistant Treasurer and Minister for Financial Services & Superannuation

( Click on “Volume 2”), to :

Schedule 1 Australian taxes, fees and charges

Part 1 Commonwealth

( Scroll right down to near the very bottom), to :

Item Australian tax, fee or charge Australian law

16.37 TFN withholding (ESS) tax Income Tax (TFN withholding tax (ESS))

Act 2009

This confirmed that the Income tax mentioned in his Media Release specifically identifies the PAYG Withholding tax – as Australian Tax – being GST-exempt.

Then ( Scroll down past “Contents Items 1-5”), to :

Schedule 1 Australian taxes, fees and charges………………………………………………………….

( Skip Parts 1-9 the Commonwealth and States of Australia, scroll down to) :

Item 4 Australian taxes, fees or charges (Act section 81.5)

For subsection 81.5 (2) of the Act, Australian taxes, fees and charges are specified in Schedule 1.

Note Under subsection 81.5 (1) of the Act, the payment of any Australian tax, fee or charge (other than the GST), or the discharging of a liability to make such a payment, is to be treated as the provision of consideration, to the entity to which the tax, fee or charge is payable, for a supply that the entity makes.

However, under subsection 81.5 (2) of the Act, the payment of any Australian tax, fee or charge that is specified, by legislative instrument, by the Treasurer, or the discharging of a liability to make such a payment, is not the provision of consideration. (Writer’s underlines)

This new legislation is promulgated to clarify the ambiguity of Section 81.5 of

A NEW SYSTEM (GOODS AND SERVICES TAX) ACT 1999 (“GST Act”)

Effect of payment of tax

Australian tax not consideration

with the clauses (1) and (2) being somewhat contradictory, and the clause (3) prevailing with the words “to which the tax is payable”, with “consideration” and “supply” that the entity makes to you.

However, with the legislation (as underlined above) now quite specific that the tax is not ‘consideration’ (also as stated in the heading -“Australian tax not consideration”) of the Section 81.5, the payment of tax is outside the jurisdiction of the GST Act.

CONCLUSION :

It is pertinent to note that, with no notice or publicity of the rectifying legislation, the retirement village industry may not be aware of the benefits of lower fees to its members and potential new entrants, and will continue to impose and collect the GST surcharge on the total service fees which, together with the PAYG withholding tax of the employees is a duplication of tax on the Salaries.

Any thought of assuming the net salaries after the income tax PAYG withholding of each individual, to be included as turnover subject to GST would be too ludicrous to even contemplate, and would indeed be impossible of calculation.

Thus the Salaries component of service fees should – by law – not be a part of the “registration turnover threshold” requiring registration under Section 23.5 of the GST Act.

PARTICIPANTS :

a) This is primarily an accounting matter for the Management Companies (which invoice/charge the residents the Service fees) to consider and address.

b) It is not an issue for the Australian Taxation Office (“ATO”) which has just passively accepted whatever GST has been remitted to them in the past, and will continue to do so in the future with the Management Companies’ regular (BAS), without any access to any financial accounts for reference.

IMPLEMENTATION :

Following a segregation of the expenditure budget to identify the gross costs of employees with PAYG deductions (being the GST-exempt component) the Service fees will need to be calculated and charged into two separate categories of income, as follows :

(a) Monthly Service fees (“Registration Turnover”) subject to GST, and

(b) Monthly Salaries portion (GST-exempt).

A precedent for the treatment of GST-free income is set in a village (Burnside Village, Victoria) owned by Stockland (the largest village owner in Australia – refer the National Retirement Village Market Overview – April 2011), which further includes :

(c) Monthly Contribution Water Rates GST-free, and

(d) Monthly Contribution Council Rates GST-free.

Thus, the process and accounting of segregation of GST-free income is already in operation.

However, from a practical point of view, with only four months left of the 30 June financial year and the work in segregating the Salaries component costs, it is probably appropriate to review any changes for implementation for the ensuing financial year. .

It is important to note that the total income to cover the full costs of maintenance and salaries does not change with the reduced level of GST transmitted to the ATO.

Jim Burrowes , CA

RRVV Hon. Treasurer

15 February 2012