A developer sells a new apartment for $750,000 including GST. The developer is registered for GST and the purchaser is not eligible for any GST exemptions. How much GST is included in this sale price?
Correct Answer
A) $68,182
When a price includes GST, the GST component is calculated as: Total price ÷ 11 = $750,000 ÷ 11 = $68,182. This represents the 10% GST component included in the total sale price of the new residential property.
Why This Is the Correct Answer
Option A is correct because when calculating GST included in a GST-inclusive price, you divide the total by 11. The formula is: GST component = Total price ÷ 11. Therefore: $750,000 ÷ 11 = $68,182. This represents exactly 10% GST of the GST-exclusive price ($681,818). The division by 11 accounts for the fact that the GST-inclusive price represents 110% of the original GST-exclusive amount, so 1/11th equals the 10% GST component.
Why the Other Options Are Wrong
Option B: $75,000
Option B incorrectly calculates 10% of the total GST-inclusive price ($750,000 × 0.10 = $75,000). This would be correct if calculating GST to add to a GST-exclusive price, but not for extracting GST from a GST-inclusive price. This common error overstates the GST component by treating the inclusive price as the base price.
Option C: $67,500
Option C appears to calculate 9% of the total price ($750,000 × 0.09 = $67,500). This is incorrect as it doesn't reflect the proper GST rate of 10% or the correct formula for extracting GST from an inclusive price. This calculation has no basis in GST legislation.
Option D: $70,000
Option D seems to be an arbitrary calculation that doesn't follow any recognized GST formula. It's neither 10% of the total price nor the correct division by 11 method. This figure doesn't align with any standard GST calculation methodology under Australian tax law.
Deep Analysis of This Finance Taxation Question
This question tests understanding of GST calculations for new residential property sales in Australia. Under the A New Tax System (Goods and Services Tax) Act 1999, new residential properties are subject to 10% GST when sold by GST-registered developers. The critical concept is calculating the GST component when the total price includes GST (GST-inclusive pricing). This differs from calculating GST on a GST-exclusive price. The formula divides by 11 because when 10% GST is added to a base price, the total becomes 110% of the original amount. To extract the GST component from an inclusive price, you divide by 11 (which represents 1/11th of the total). This calculation is essential for property professionals as it affects settlement statements, developer margins, and purchaser costs. Understanding GST implications is crucial for compliance with Australian Consumer Law disclosure requirements and accurate financial advice to clients.
Background Knowledge for Finance Taxation
Under Australian GST legislation, new residential properties are subject to 10% GST when sold by registered developers. The GST can be calculated as either GST-exclusive (GST added to base price) or GST-inclusive (GST component within total price). For GST-inclusive calculations, the formula is Total ÷ 11 = GST component, because the inclusive price represents 110% of the original amount. The GST-exclusive price would be Total ÷ 1.1. This applies to new residential properties, with different rules for commercial properties and established residential properties. Understanding these calculations is essential for settlement statements and compliance.
Memory Technique
Remember 'Divide by ELEVEN to get GST from HEAVEN' - when the price includes GST (GST-inclusive), always divide by 11 to extract the GST component. Think of it as the 'heavenly' price includes everything, and you need to divide by 11 to find the GST portion.
When you see a GST-inclusive price in an exam question, immediately think 'Eleven Rule' and divide the total by 11. If the question asks for GST to be added to a price, multiply by 0.1 instead.
Exam Tip for Finance Taxation
Look for keywords like 'including GST' or 'GST-inclusive' - this signals to divide by 11. If it says 'plus GST' or 'excluding GST', multiply by 0.1 to add GST.
Real World Application in Finance Taxation
A property developer markets a new apartment at $750,000 'including GST'. When preparing the contract of sale and settlement statement, the conveyancer must correctly identify that $68,182 represents the GST component. This affects the developer's BAS lodgement, determines the actual sale proceeds after GST remittance to the ATO, and ensures accurate disclosure to the purchaser. Incorrect GST calculations can lead to compliance issues, incorrect financial reporting, and potential disputes at settlement.
Common Mistakes to Avoid on Finance Taxation Questions
- •Calculating 10% of the GST-inclusive price instead of dividing by 11
- •Confusing GST-inclusive with GST-exclusive calculations
- •Using incorrect divisors like 10 instead of 11
Related Topics & Key Terms
Key Terms:
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