A property developer sells a new apartment for $800,000 including GST. The purchaser is claiming the First Home Owner Grant. What is the GST-exclusive price the developer receives?
Correct Answer
B) $727,273
When a price includes GST, the GST-exclusive amount is calculated by dividing by 1.1 (or multiplying by 10/11). $800,000 ÷ 1.1 = $727,273. The GST component of $72,727 must be remitted to the ATO by the developer.
Why This Is the Correct Answer
Option B correctly applies the GST reverse calculation formula. When a price includes GST at 10%, the GST-exclusive amount is found by dividing the total by 1.1 (or multiplying by 10/11). $800,000 ÷ 1.1 = $727,273. This represents the actual revenue the developer receives, with the remaining $72,727 being the GST component that must be remitted to the Australian Taxation Office under the Goods and Services Tax Act 1999.
Why the Other Options Are Wrong
Option A: $800,000
$800,000 incorrectly assumes the developer keeps the entire amount including GST. This violates GST legislation requiring registered businesses to remit the GST component to the ATO. The developer cannot retain GST collected from purchasers.
Option C: $720,000
$720,000 incorrectly calculates GST by simply subtracting 10% of the total ($80,000) from $800,000. This method fails because GST is 10% of the GST-exclusive price, not 10% of the GST-inclusive price.
Option D: $750,000
$750,000 appears to subtract 6.25% rather than applying the correct GST calculation. This doesn't align with any standard GST calculation method and significantly overestimates the GST-exclusive amount the developer receives.
Deep Analysis of This Finance Taxation Question
This question tests understanding of GST calculations in Australian property transactions, specifically the reverse calculation from GST-inclusive to GST-exclusive prices. Under Australian tax law, GST is 10% of the GST-exclusive price, making the GST-inclusive price 110% of the base price. When given a GST-inclusive amount, you must work backwards to find the original price before GST was added. This is crucial for property developers who must remit the GST component to the ATO while keeping only the GST-exclusive portion as their revenue. The calculation involves dividing by 1.1 (not subtracting 10%), as the 10% GST is calculated on the original price, not the final price. This principle applies across all GST-registered property transactions and affects contract settlements, developer cash flows, and tax obligations.
Background Knowledge for Finance Taxation
Under Australian GST legislation, registered businesses must charge 10% GST on taxable supplies including new residential properties. When prices are quoted GST-inclusive, the GST component represents 1/11th of the total price. The GST-exclusive price is calculated by dividing the inclusive price by 1.1. Property developers must register for GST if their annual turnover exceeds $75,000 and must remit collected GST to the ATO through Business Activity Statements. The First Home Owner Grant mentioned is irrelevant to GST calculations but indicates this is a new property transaction subject to GST.
Memory Technique
Remember 'GST Goes Backwards by 1.1' - when you see a GST-inclusive price, always divide by 1.1 to get the GST-exclusive amount. Think of it as 'unwrapping' the 10% GST that was 'wrapped around' the original price.
When you see any question asking for GST-exclusive amounts from GST-inclusive prices, immediately identify the division by 1.1 calculation. Look for keywords like 'including GST' or 'GST-inclusive' as triggers to apply this rule.
Exam Tip for Finance Taxation
Always divide GST-inclusive amounts by 1.1 to find GST-exclusive prices. Never subtract 10% directly from the total - this is the most common error in GST calculations.
Real World Application in Finance Taxation
A property developer quotes $550,000 including GST for a new townhouse. When preparing the contract and calculating cash flow, they need to determine their actual revenue after GST obligations. Dividing $550,000 by 1.1 gives $500,000 GST-exclusive revenue, with $50,000 GST to be remitted to the ATO. This calculation affects their profit margins, financing arrangements, and quarterly BAS reporting requirements.
Common Mistakes to Avoid on Finance Taxation Questions
- •Subtracting 10% directly from the GST-inclusive price
- •Forgetting that GST is calculated on the exclusive price, not the inclusive price
- •Confusing GST-inclusive and GST-exclusive calculations
Related Topics & Key Terms
Key Terms:
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A property developer in Queensland sells a new townhouse for $550,000 including GST. The developer is registered for GST and the margin scheme does not apply. What amount of GST must be remitted to the ATO?
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