Are you entitled to a GST refund?
Businesses, particularly those in the services sector, may receive prepayment from customers for future services. This may take the form of a deposit, part or full payment for the anticipated services. Often this is not refundable, even if the service is not taken up by the customer.
Which leads to the question, what is the GST position on the prepayment, if the service is not taken up?
In the ATO's view despite the fact that the service was not ultimately supplied, the prepayment would still be in respect of a taxable supply and the vendor would account to the ATO for 1/11th of the sale price.
The recent case involving Qantas however, has raised doubts over this treatment. The case related to non-cancellable airfares, where customers have pre-paid the airfare, but not turned up for the flight. As the customer was not entitled to a refund of the fare, Qantas received the payment, but never supplied a service to the customer. Qantas applied for a refund of the GST from the ATO based on the fact that no taxable supply had been made. The ATO disagreed with this, and the matter ended up in court.
The Full Federal Court found in favour of Qantas in September this year, ruling that the payment was for supply of air carriage - the seat on the plane. Where this did not occur, there was no taxable supply and therefore no GST liability.
Before you try applying this to your own business, you need to look at the agreements and contracts you enter into with your customers regarding pre-payments. If your agreements are for a service which is non cancellable and the pre-payment is non-refundable, and the customer does not take up the service, thereby forfeiting the prepayment, you may find you have a situation where there has been no taxable supply and therefore no GST payable.
There are many scenarios to which this could apply, but before we get too excited, the Commissioner has applied to appeal the decision in the High court, so there may be further developments to come.
It may be worthwhile taking a look at your own facts and see how it lines up with the Qantas decision. We recommend you seek professional advice, as it will come down to the details. We can review your position with you.
Note though that there's a 4 year limit on seeking GST refunds. After that, even if you are entitled to a refund, you are out of time.
Christmas marketing - how early is too early?
Father's Day was barely over when the first of the Christmas decorations went up in the stores. If it keeps getting earlier we'll really be having Christmas in July.
Christmas has a psychology of its own, and as many retail businesses know, Christmas and the message of gift giving (read 'spending') stretches well beyond the traditional Christmas months.
For retailers, the earlier they can get customers into the Christmas spirit the more likely the customers will spend up in preparation for the season - with gifts, decorations and other special bits and pieces.
Sales help encourage "it was on sale" impulse buying.
As a consumer, it's hard not to think about Christmas with all the lights, decorations and advertising around the shops.
While retailers enjoy the thought of the Christmas season, for other businesses, Christmas is the traditional slow-down time. The longer the Christmas period stretches, the less likely sales are to be made in the last quarter of the calendar year, as customers delay decisions and purchases until the New Year.
If your market slows down leading up to Christmas, look at what you can do to pull sales forward. It may be a special offer or packaging, or offering payment plans to lock a sale in. Even if the sales don't eventuate this year, any targeted marketing will give you a good base to kick off 2012.
Buying a business - it's not just about the price
Reaching a price is only the beginning of the debates when it comes to buying or selling a business.
Many people think that agreeing on a price is the hardest thing to agree on, but differences of opinion on how the sale price should be apportioned across different assets can be a minefield.
A solution that's sometimes proposed is to show the sales price on the contract and let both sides manage their own apportionment, but this depends on the assets you are buying. Try and avoid this trap.
In a typical business sale, plant and equipment, goodwill and stock are all part of the purchase. These assets will have different tax treatments, and this is what can lead to disagreements about how the price is allocated.
Goodwill is a capital asset. The vendor will calculate a capital gain or loss on the sale of the business. Even with a capital gain, tax may be reduced to nil using the CGT small business concessions. For the purchaser, there is no tax deduction on the purchase of goodwill; it becomes a capital asset and a tax offset will only be available if the business is disposed of.
Plant and equipment is also a capital asset. The vendor will account for their tax position on these assets based on their written down value. Where the assets have been substantially depreciated there will be more of an income adjustment. For the purchaser, the plant is normally a depreciable asset and will be written off over its effective life. So, you get a tax write-off but it takes time.
Stock is on revenue account. The vendor will account for stock in the income for the year of the sale. For the purchaser, the stock is only deductible when it is sold.
Therefore, for vendors, the tendency is to try and push more of the sale price into goodwill, as this creates the best tax outcome for them.
Purchasers will want to take the full sale price in stock and plant as this will give them a faster tax write-off. Purchasers are also concerned with the timing of the tax benefit; over time it may equalise, although there are circumstances where tax benefits can be lost.
It is best to settle the apportionment of the price on the contract, rather than let both parties make up their own minds. The Tax Office has good data matching capability and if they detect a difference in the way the price was accounted for by the parties, they will investigate further. The price should be apportioned on a fair market value basis and the ATO does have the power to allocate price where they believe there has been an artificial apportionment to achieve a tax benefit.
While the ATO can do this even if the contract shows the apportionment, they are far less likely to do this when the parties are dealing at arm’s length, so it's well worth working through an agreement on price.
Quote of the month
"Commitment is an act, not a word."
Jean-Paul Satre
|
Newsletter
