Registered for GSt but below the threshold

Just wondering if someone could help here. I have a friend who is a tradesman and who registered for gst as a sole trader a few years ago as he was over the GST threshold. In this last year though he has had health issues so will not make the threshold. Is he still required to charge GSt because he is registered even though he will be way under the $75k this year? He is reluctant to deregister as the banks seem to require a gst registered abn before giving finance and he is also buying property as an investment. My understanding was that once youre registered you are obliged to charge gst even if you will be under the $75k threshold, is that correct? Most of his charges are for labour so although he can offset the materials he uses he would be better off had he never registered.

 

He can cancel his GST registration and stop charging GST from the date the registration is cancelled.

Best to see the information from the ATO here.

What is he obtaining finance for? If he is purchasing equipment etc he should stay registered as he will be entitled to GST credits on the acquisition. If it is NEW equipment or a vehicle he should have signed a contract or committed to the purchase before 31 December 2009 to take advantage of the 50% tax bonus.

What has buying property as an investment got to do with it? Assuming it is residential it is all input taxed = no GST. GST only relevant where it is commercial property.

Banks will however look at the serviceability of the loan - and if he is not registered for GST then it means he is earning less than $75k and may not be a good candidate for a loan - but the bank is going to want to see prior tax returns and likely letters / documentation from his accountant before giving him finance.

Even if it is a low doc loan the bank will still need to look at serviceability via checking his actual cash receipts - so in my opinion being GST registered or not will not sway the bank.

Maybe the mortgage / loan experts here can confirm.

Hope this helps / answers the question.
SM

 

Thanks for your reply Superman!! Youre right that purchasing investment property doesn't have anything to do with his gst registration apart from the fact that the banks insist on him having it. He has purchased six investment properties over the last two years using low doc loans and although this is becoming increasingly difficult for him he doesn't want to make it even more difficult by de-registering for gst.
I guess the crux of what he is asking is once you register for gst are you obliged to charge the gst on invoices if you will not meet the threshold, or once you register for it is the threshold no longer relevant as you have to charge gst from the first $1?

 

Yes. Once registered he MUST charge GST on the invoices.

Nothing stopping him to register for the few weeks / month while the finance application is being processed and then cancelling - although it will make his bookkeeping pretty ugly. Not to mention the GST registration status (and history of registrations / cancellations) is publicly available on the ABR - so maybe not a good idea in the long run!

Also, if he now has six investment properties he should have a good accountant!

If he had accountant-prepared tax returns and even basic financial statements he should be able to apply for regular loans (not low doc) - this alone should save him a bucket in fees and interest with the lenders (This is an assumption - I am sure a mortgage broker could give a more definite answer).

Please read this press release from a few years back about how the ATO likes to look at people with low doc loans.

If he has not lodged tax returns and/or BAS statements (which I am assuming why he is going for a low doc loans in the first place) then he is already on the ATO's radar. Add the fact he has some low doc loans and the chances of the ATO chasing even harder are quite high.

Although I would never advise it, I don't have a problem with contractors / sub-contractors / small businesses not paying their GST or income tax and instead using the money to purchase property - using other people's money is great for building wealth so using the ATO's money is fantastic - you just need to have the cash available when they do come knocking!

Just think of the ATO as government sanctioned mafia - if you take the risk you may have to pay the price!

All the best
SM

 

Thanks SM that answers things nicely. He's always been pretty meticulous with getting his accounts done but just went the low doc route as many banks fail to recognise capital gain on houses held until they are sold and he wanted to refinance rather than sell to obtain the cashflow for his property shortfalls. I guess he'll just stay registered and pay the Mafia their fees. Thanks for your help!!

 

David,
SM answered the question that being registered means charging GST and remitting back to the ATO.
For a property investor, it is about being able to satisfy lender requirements. Many lenders are now requiring low doc applicants to produce BAS statements even if they earn < $75k and are not required to be registered. I have not yet worked that one out.

There are still lenders out there who do not require BAS statements but do require GST registration, so I would suggest he continue his registration. There is nothing to stop him setting up another trading business and keeping the existing one as a 'dummy' entity.

The days of refinancing for a low doc investor is becoming more difficult of using the revalue and refinance strategy to extract equity and go again. Your mate may need to consider the property type and look at the more positively geared properties to support cash flow but more importantly income and move to the full doc route.
Good luck
Greg

 

Thanks Greg, much easier to make a decision once we know all the requirements!! Much appreciated.

 

Also tell your mate he needs insurance to protect his ability to make loan repayments if he cant work.

A lot of people borrow up to their eyeballs, have insurance on all their properties, cars and everything else - but neglect to protect their most important asset - their ability to earn an income.

It is typically not that expensive (unless you are a professional base-jumper) and is 100% tax deductible.

But unfortunately insurance is boring - so people don't pay attention to it!