This article discusses various scenarios where SMSF and GST interact.
Basic Framework of GST
GST is often described as a consumption tax because the effective burden falls on the ultimate consumer. The concept of “taxable supply” is a fundamental building block of the GST legislation. GST is payable on taxable supplies. The definition of taxable supply (s 9-5 GSTA 1999) has four positive elements and two negative elements.
Positive elements: An entity makes a taxable supply if
- the entity makes the supply for consideration
- the supply is made in the course or furtherance of an enterprise
- the supply is connected with Australia
- the entity is registered or required to be registered
Negative elements: The supply is not a taxable supply to the extent that it is GST-free or input taxed.
There is a finite list of GST-free supplies and input tax supplies. Examples of GST-free supplies are supplies of medical services, certain food, and exports of goods. Examples of input taxed supplies include financial supplies, leases and sales of residential properties.
An entity registered for GST charges GST on the taxable supplies, and claim input tax credits (ITCs) on creditable acquisitions. An entity registered for GST does not charge GST on GST-free supplies but is entitled to input tax credits on its acquisitions. An entity registered for GST does not charge GST on input taxed supplies and is generally not entitled to input tax credits.
GST registration can be voluntary if the entity is carrying on an enterprise. It must be registered for GST if it is carrying on an enterprise and its GST turnover is more than the registration threshold of $75,000. For the purpose of calculating the GST turnover, the value of input taxed supplies is expressly ignored.
SMSF and GST Registration
An SMSF is predominantly making financial supplies, that is, the provision of an interest in a super fund. Financials supplies are a category of input tax supplies. When buying and selling shares, an SMSF is also making financial supplies; when investing and leasing residential properties, an SMSF makes input taxed supplies as well. With these activities alone, an SMSF will never meet the $75,000 GST registration threshold. A common scenario when an SMSF would need to evaluate its turnover is when selling and leasing commercial properties, as these supplies are not on the list of input taxed supplies.
An SMSF may register for GST when purchasing a commercial company.
An SMSF may also register for GST in order to claim reduced input tax credits.
Reduced Input Tax Credits
Acquisitions in relation to making input tax supplies such as leasing residential properties are not entitled to any input tax credits. However, there is an exemption for making another type of input taxed supplies – financial supplies. A special rule allows a prescribed percentage (generally 75%) of the input tax credits claimed for “reduced credit acquisitions” that relate to making financial supplies.
Not all acquisitions for making financial supplies are reduced credit acquisitions. For example, an SMSF can’t claim any input tax credit on audit and taxation services. The aim of the reduced credit acquisitions is to encourage entities making financial supplies to out-source services to third parties. Suppose these entities can’t claim any ITC, they would be in favour of in-sourcing the services to their employees as there is no GST charged by the employees. Since audit and taxation services are generally out-sourced anyway, no incentive is provided for these expenses.
There is an exhaustive list of reduced credit acquisitions under subregulation 70-5.02(2). If something is not specified as an item within the table, it’s not a reduced credit acquisition.
Common reduced credit acquisitions:
Investment portfolio management functions: establishing a financial plan or investment strategy; ongoing implementation, execution, or refining of that plan or strategy; ongoing implementation or execution of a given investment mandate.
Administrative functions: maintaining member, employer and trustee records and associated accounting; processing applications, contributions, benefits and distributions; ensuring compliance with industry regulatory requirements (excluding taxation and auditing services).
The following purchases are generally not reduced credit acquisitions:
- Accounting services that are not related to maintaining member, employer or trustee records
- Providing advice and preparing financials statements (other than those provided under a regulatory requirement)
- Legal services (including legal costs to set up SMSF)
Mixed Supplies and Financial Acquisitions Threshold
The most common form of taxable supply an SMSF makes is in relation to commercial properties. For GST registration purpose, an SMSF must register for GST when its turnover in relation to commercial properties is above $75,000; an SMSF may also voluntarily register for GST when this turnover is under $75,000. When the SMSF is registered for GST, the ITCs on purchases in relation to the taxable supply are fully claimable.
As a fund is making financial supplies at the same time while leasing a commercial property, a fund is making mixed supplies. The financial acquisitions threshold intends to allow entities that make a relatively small amount of financial supplies, as compared to their taxable supplies or GST-free supplies to claim full input tax credits for financial acquisitions. There are two tests to apply for financial acquisitions threshold. The one most relevant to SMSF is that the ITC entitlements in relation to those financial acquisitions would exceed 10% of the total ITCs to which the entity is entitled.
Although an SMSF is predominantly providing an interest, the test is not on the proportion of the supplies made, but on the ITCs.
For example, a fund makes the following expenses (GST inclusive):
Maintenance of member records and associated accounting (excluding auditing and tax) $110 (ITC $10)
Repairs to commercial property $1,100 (ITC 100)
10/(10+100)=9% The fund can claim full ITC of $110.
Note the fund still can’t claim ITC on fund set up costs and other purchases excluded from reduced credit acquisitions.
When a commercial property is sold as part of a GST-free sale of a going concern, the seller is not liable for GST on the sale; and both the seller and the purchaser may still be able to claim GST on other expenses that relate to selling and buying the property.
A sale of a going concern is GST-fee is all of the following apply:
- payment is made for the supply
- the purchaser is registered (or required to be registered) for GST
- the buyer and seller have agreed in writing that the sale is of a going concern
- the supplier supplies all things necessary for the continued operation of the business
- the supplier carries on the business until the day of supply
In-specie Contribution of Commercial Property
The key issue around in-specie contribution of a commercial property to a super fund is whether it is a taxable supply. In ID 2005/70, it is established that the supply is not for consideration, i.e. it fails one of the positive elements of the taxable supply definition. However, under section 72-5 of the GST Act, the fact that a supply is made to an associate without consideration does not stop the supply being a taxable supply if:
- the associate is not registered or required to be registered, or
- the associate acquires the thing supplied otherwise than solely for a creditable purpose
In order for an in-specie contribution of a commercial property not classified as a taxable supply, it’s essential that the SMSF is registered for GST and use the property for a creditable purpose.
Margin scheme can be used on the sale of commercial properties or new residential properties. Under the margin scheme, GST liability is 1/11th of the margin rather than the total selling price on the sale of the property. The broad aim of the margin scheme is to ensure that GST only applies to the value added to real property after 1 July 2000 rather than the total consideration for the supply.
The margin is generally the difference between the sale price and either:
- the amount you paid for the property, or
- an appropriate property valuation
If a property is sold using the margin scheme, any GST charged can’t be claimed by the purchaser.