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Taxation Institute Exposes Major Trap for Property Owners in Australian Business Number Law

Publication date: 03 Apr 00 | Source: THE TAX INSTITUTE

An deliberate policy decision in formulating the Australian Business Number (ABN) legislation may require thousands of property owners to register for an ABN before 31 May to avoid having tax at 48.5% deducted from rental payments, says the Taxation Institute of Australia.

The ABN was introduced by the Government as part of its New Tax System and requires those receiving payments in the course of business dealings to register for an ABN or have tax withheld at the highest marginal tax rate of 48.5%. Persons who must have an ABN must register with the Tax Office by 31 May this year as the withholding system commences from 1 July 2000.

"Residential property owners who rent out their houses can be caught in this ABN trap if the tenant uses any part of the property for business purposes", says Ray Conwell, President of the Taxation Institute. "Even if the owner does not know of the tenant's business use, tax will have to be deducted by the tenant from the rent if the owner does not have and quote an ABN.

"This means that every property owner will need to consider applying for an ABN just in case the tenant uses the property partly for business purposes," he said.

"Suppose, for example, that a house owner transfers interstate and rents out their house while they are away to a tenant who, unknown to the owner, runs a part time word processing and secretarial service from one room in the house. Under the ABN legislation, the tenant will be required to deduct tax of 48.5% from the rental payments unless the owner has and quotes an ABN."

It means that the many thousands of residential property owners who let their house will seriously need to consider applying for an ABN to avoid being caught in this trap. This will put added pressure on the issuing of ABNs by the Tax Office in the period leading up to 1 July 2000 when the Tax Office is barely coping with existing applications", says Ray Conwell.

The Taxation Institute called on the Tax Office to make it clear who has to register for an ABN and not allow taxpayers to be caught in an ABN ambush.

Appendix

Technical Explanation:

Where residential property is leased to a person who uses part of it to carry on a business, the PAYG provisions require the tenant to withhold 48.5 percent of the rent unless the landlord has an ABN. The reasons are:

The leasing of property, even for residential purposes is a "supply" (s 9-10 of GST Act via s 995-1 of 1997 Act);

The receipt of rent is an "enterprises" " (s 9-20(1)(c) of GST Act via s 995-1 of 1997 Act);

Therefore, the payment of rent is a payment for a supply made in the "furtherance of an enterprise" " (s 12-190(1) in Schedule 1 Taxation Administration Act 1953);

As the rental payment is not made wholly for private purposes, the landlord cannot rely on the lease in s 12-190(4) in Schedule 1 Taxation Administration Act 1953..