Edited version of your private ruling

Authorisation Number: 1012588451409

Ruling

Subject: GST and renovation of a residence

Question 1

Should you be paying goods and services tax (GST) twice for what is essentially the same product/service?

Answer

The facts provided do not indicate that you are paying GST twice.

Relevant facts and circumstances

You are not registered for the goods and services tax.

You have engaged a builder to undertake renovations and do some small extensions to a residence.

The contract for the work to be done was signed some 6 months ago.

The builder engaged numerous subcontractors to perform the work.

You inform us that the subcontractors invoiced the builder for their services inclusive of GST and the builder added an amount plus GST when subsequently invoicing you.

You are in possession of tax invoices, issued by subcontractors, for renovation services. You recently viewed the subcontractors' invoices and were alerted on what the subcontractors charged and you realised that the subcontractors charged the builder GST and the builder has also charged you GST on their invoices.

You believe that you have been paying GST twice because the subcontractors included GST on their supplies and because the builder also included an amount for GST when subsequently invoicing you.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

Reasons for decision

Summary

The facts provided do not indicate that you are paying GST twice.

Detailed reasoning

The Property and Construction Industry Partnership - issues register is a Tax Office document containing the Office's view in relation to the relevant industry. This document is available on the Office website at www.ato.gov.au.

Part 14.5.1 of the Property and Construction Industry Partnership - issues register provides that when an owner makes acquisitions through agents the general law of agency may apply. That is, a thing done by an agent as agent for the owner is a thing done by the owner.

Similarly, when a client makes acquisition through a builder for renovation services and the builder pays subcontractors as an agent for the client and is reimbursed by the client for the payment, the reimbursement will not be subject to GST. This is because the reimbursement is not consideration for a supply made by the builder. In this situation the payment is effectively incurred by the client, rather than by the builder.

The Property and Construction Industry Partnership - issues register also explains that the terms of an agreement will determine whether a particular amount recovered from the owner forms part of the consideration for the supply of services or is merely a reimbursement of costs incurred by the agent on behalf of the owner.

A payment is a reimbursement when the agent is compensated exactly (meaning precisely, as opposed to approximately) for an expense already incurred although not necessarily disbursed. In general, the owner considers the expense to be his own and the agent incurs the expenditure on behalf of the owner.

The following is an extract form the Property and Construction Industry Partnership - issues register:

Example

An agent purchases a $5,500 air-conditioning unit for the owner of a building and claims the reimbursement. The owner is entitled to the input tax credit if it is a creditable acquisition.

In the example above, if the agent charges the owner more than $5,500, it would not be a reimbursement, that is, the agent charges a mark-up. Assuming the agent who is registered for GST charges the owner $6,050 and invoices the owner for $6,050 being sale of an air-conditioning unit from the agent to the owner; GST payable by the agent would be 1/11 of $6,050 which is $550. The agent is entitled to claim the input tax credit of $500 which is 1/11 of $5,500. The owner is entitled to claim an input tax credit of $550 if the unit is a creditable acquisition. If the agent claims the reimbursement of $5,500 plus a service fee of $550 for organising the purchase and installation, etc; GST payable by the agent would be $50 being 1/11 of $550. The owner is entitled to an input tax credit of $550 (that is, 1/11 of $5,500 + 1/11 of $550) provided the unit is a creditable acquisition.

In this case we are informed that:

· the builder engaged numerous subcontractors to perform the work;

· the subcontractors invoiced the builder for their services inclusive of GST; and the

· builder added a percentage plus GST when subsequently invoicing you.

It should be noted that where an agent incurs a cost that is reimbursed by the owner, the agent is not entitled to claim an input tax credit on the acquisition. Where an amount is incurred and not reimbursed, the cost will represent an ordinary operating cost of the agent's enterprise and an input tax credit will be available to the agent (assuming it is otherwise a 'creditable acquisition' for the agent).

In this case the builder charged you a percentage more than what they paid the subcontractors and added an amount for GST for their services to you. Therefore, where the builder charges a mark-up and adds an amount for GST that would not be a reimbursement. The builder is effectively charging you for their services. Where the builder is registered for the GST then his supplies will be taxable and they will need to remit GST on his taxable supplies.

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 a supply is taxable where it is made for consideration, in the course or furtherance of an enterprise carried on by the supplier, the supply is connected with Australia and the supplier is registered or required to be registered for GST.

However, the supply is not taxable to the extent it is GST-free or input taxed.

To reiterate, when a client makes acquisition through a builder for renovation services and the builder pays subcontractors as an agent for the client and is reimbursed by the client for the payment, the reimbursement will not be subject to GST. This is because the reimbursement is not consideration for a supply made by the builder. In this situation the payment is effectively incurred by the client, rather than by the builder.

However, where the a builder incurs an expense for the supply of construction services from subcontractors and seeks to recover this cost by including it in the price of his services to the client, then the builder if registered for GST will be making taxable supplies and will be liable to pay GST on the price of the services supplied to the client if the requirements of section 9-5 of the GST Act are satisfied.