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Building allowance a rort?

Slumlord 22 January 2012 28

Hoping someone with a better understanding of tax and/or consumer law can give a view here.  Am in the process of building.  Our builder, a large business with good buying power, gives us an allowance of $30 per m2 for tiles to be selected from only 2 shops.  At those shops I’m told that if we’re building through builder X our quoted price is the full list price of the tile, but, as I did yesterday, if I tell them i’m buying privately i can get a much better price – for what it’s worth i was quoted $28m2 yesterday.

Now, the tile shop openly told me that while I am ‘charged’ the list price, our builder pays them a much lower price because of their buying power, and the tile shop invoices me directly for any cost above the set allowance.  Basically they collude to get more money from you.

To give a practical example and explain why I’m not convinced what’s going on is legal.  My allowance is $30m2.  My tile of choice is $35m2 retail.  Lets say for argument sake my builder is paying $22m2.  My builder buys it off the shop and gst is payed on the purchase (gst on $22 m2).  The shop then invoices me directly for the difference between my allowance and the full retail price (allowance $30m2, retail $35m2, difference is $5 m2 on which i pay gst).  However no gst is payed on the $8 m2 that is the amount between what my builder paid and my allowance.

The way I see it a few people win and lose in this situation.  My builder wins because they charged me an allowance of $30m2, but only paid $22m2 for the goods.  The tile shop wins because they got the sale to the builder and a bit of cream on top from me.  I lose for obvious reasons.  But taxpayers including some of you also lose because the true GST payable wasnt paid.

As I understand this is a fairly widespread practice and besides the fact they seem to be avoiding some gst, it also seems to me that collusion like this may be illegal (or at least immoral).  Over to you..


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Building allowance a rort?
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razzie 9:59 pm 27 Jan 13

Depending on the tiling shop your builder is going through, you may be able to get the tiles at trade prices and find yourself another tiler. We had a flooring allowance of $6.2k from the outset of the signed contract, but our dodgy builder tried to do a ‘variation’ and charge us another $1.2k on top towards the end of building. We told him to remove the allowance from the contract. Allowances can be removed from a contract, so you have that power. We got the files we wanted at trade price as Beaumont Tiles didn’t care who bought the tiles as long as they got to sell the tiles and were more than happy to give us trade price. Likewise we hired their best tiling customer to do our tiling and our house will be tiled for $6.3k and not $7.4k. The only negative in saving yourself $ and getting the tile/s you want is needing to get the tiling done once the house has been handed over to you. Our builder is also a vindictive bastard and has dragged out the handover instead of taking the tiling time off.
As my maintenance period has only just started I will ‘ name and shame ‘ the builder in a Riot Act post in several months, but lets just say this builder is a ‘dog’ (hint: think of a dog breed for the building company name in NSW). Stay right away unless you want to be ripped off!

Slumlord 8:58 pm 24 Jan 12

Doc Dogg said :

Sounds similar to when you buy a car using the dealers “ultra low 5% finance”. Sure you get cheaper finance but you need to pay the RRP for the car, no discounts, no negotiated freebies and there are usually fees for everything built into the loan. In the end if you had negotiated hard and brought your own finance you walk away with a cheaper and better deal.

Of the tile choices you have, are there any that list for under $30m2? It goes without saying that there is a deal going on between the builder and the tile supplier to line both their pockets. Tax issues aside, the builder would be paying 1/3 of the listing price. My parents are building 2 houses at the moment and they were able to negotiate a 50% discount on their tiles based on that (plus the tile shop let them borrow their truck to deliver them as long as my dad returned it full of fuel), I’d be surprised if a high volume builder couldn’t do better than that.

If it was me I’d be approaching the builder and asking them to renegotiate the price of the tiles.

Youre right the builder will be paying 1/3 of the list price. I mentioned earlier when i didnt identify myself as buying through a builder i was offered a decent reduction without even negotiating. Re the selection it’s open to us to choose any tile in those shops, there’s definately choices under the allowance amount (at full retail price). We’re not looking at extravagent stuff, and anythiing decent retails for about the same as or just over the allowance.

Slumlord 8:53 pm 24 Jan 12

buildingquoteHQ said :

Figuring out the GST is missing the point. These types of “allowances” in building contracts are usually dealt with as “Prime cost” (PC) items. A PC is an item that the cost of at the time of entering the contract is unknown. If the eventual cost is less than what the PC allowed then the difference should be deducted from the contract sum as a credit to the client and visa versa if the cost is more than the PC in which case the builder may charge a margin on the difference. Check what terms the builder uses; i think both the MBA and HIA contract work this way.

To the best of my knowledge all of the builders who have subscribed to buildingquote.com.au use PC’s this way; and many will actually pass on their trade price to the clients.

Suprise suprise the HIA contract doesnt list any pc items – so obviously they get around having to refund any amounts under the allowance. Good lesson for others check this clause.

Doc Dogg 11:07 pm 23 Jan 12

Sounds similar to when you buy a car using the dealers “ultra low 5% finance”. Sure you get cheaper finance but you need to pay the RRP for the car, no discounts, no negotiated freebies and there are usually fees for everything built into the loan. In the end if you had negotiated hard and brought your own finance you walk away with a cheaper and better deal.

Of the tile choices you have, are there any that list for under $30m2? It goes without saying that there is a deal going on between the builder and the tile supplier to line both their pockets. Tax issues aside, the builder would be paying 1/3 of the listing price. My parents are building 2 houses at the moment and they were able to negotiate a 50% discount on their tiles based on that (plus the tile shop let them borrow their truck to deliver them as long as my dad returned it full of fuel), I’d be surprised if a high volume builder couldn’t do better than that.

If it was me I’d be approaching the builder and asking them to renegotiate the price of the tiles.

buildingquoteHQ 10:35 pm 23 Jan 12

Figuring out the GST is missing the point. These types of “allowances” in building contracts are usually dealt with as “Prime cost” (PC) items. A PC is an item that the cost of at the time of entering the contract is unknown. If the eventual cost is less than what the PC allowed then the difference should be deducted from the contract sum as a credit to the client and visa versa if the cost is more than the PC in which case the builder may charge a margin on the difference. Check what terms the builder uses; i think both the MBA and HIA contract work this way.

To the best of my knowledge all of the builders who have subscribed to buildingquote.com.au use PC’s this way; and many will actually pass on their trade price to the clients.

Slumlord 10:28 pm 23 Jan 12

screaming banshee said :

What is the emoticon for pinching your nose between your eyes?

If you are indeed a slumlord I’m not surprised you are having trouble grasping the legality of taxation, assuming however that your probably aren’t, why don’t you tell us what you do for a crust and we’ll try and put it into familiar terms for you.

Enlighten me then genius? In simple terms for my simple mind.

nhand42 10:25 pm 23 Jan 12

> they seem to be avoiding some gst

Yes, it’s fraud. The invoice states a higher price ($35) than was actually paid ($27) so the builder can claim a GST credit on the difference.

Ignore the snark from the pundits. This isn’t capitalism. You’re not stupid. It’s just tax fraud. Happens just about everywhere, not just in construction.

buildingquoteHQ 10:05 pm 23 Jan 12

milkman said :

Holden Caulfield said :

Thoroughly Smashed said :

Holden Caulfield said :

OMG I bet the tile company doesn’t pay $30/m2 or even $22m2. They must be stopped!

It’s called capitalism. There’s even a Wikipedia entry, maybe you should check it out.

And never mind the TPA, I guess.

Where is the problem? The problem is the added margin has become visible to the end consumer.

The builder isn’t a charity. He’s hardly going to be the only person in the world to pay one price for a product only to on-sell it at a greater price.

If we want everyone to have a good income, this is what happens. Stuff costs money, deal with it.

No problem with stuff costing money, but in my opinion (and experience) the builder should concentrate on making his money from building rather than taking a few dollars off the top of allowances. Not good for client confidence i would have thought.

screaming banshee 8:53 pm 23 Jan 12

What is the emoticon for pinching your nose between your eyes?

If you are indeed a slumlord I’m not surprised you are having trouble grasping the legality of taxation, assuming however that your probably aren’t, why don’t you tell us what you do for a crust and we’ll try and put it into familiar terms for you.

Slumlord 7:42 pm 23 Jan 12

dtc said :

GST is paid on the cost of the item purchased. The list price of an item is irrelevant – for example, if the list price of a computer is $1000 and you negotiate to pay $900, you arent cheating on GST if you only pay $90 credit.

So if your builder pays $22 and you pay $5, the total price paid is $27. Its irrelevant that there exists some theoretical price of $35, because no one paid that.

If the builder pays $22 and charges you $30, then the GST paid is $3 (by you to the builder) – the difference between $22 and $30 is the builders profit. The store then charges you 50c GST on the balance. So the total GST is $3.50.

The builder doesnt ‘pay’ the GST, as its offset agains the GST the builder collects (from you) – only you (as the final consumer) pay the GST.

In other words, either you are only charged $27 (builders $22 plus the $5 from the shop) or you are charged $35 (the $30 you have paid to the builder and the $5 you have paid to the shop). Its what you pay, not what the ‘middle men’ pay, that determines the final GST.

So basically the tile shop cant pretend they are charging the builder $30m2 + me $5m2 for a total purchase price of $35m2. That defies logic anyway that they’d charge a builder more than a bloke off the street.

If the builder is buying for $22m2 then onselling to me for $30m2, then the tile shop has made their sale to the builder (not me) @$22m2 so has no right to try and invoice me another $5m2. So therefore i dont follow how you work out the $3.50 possible GST above ($3 GST to builder, 50c to tile shop – they cant both sell me the same good?)

Slumlord 7:27 pm 23 Jan 12

Holden Caulfield said :

watto23 said :

If I was the OP, i’d just want it explained and be upfront, rather than hiding some profit. From what I’ve seen, you really need a fine tooth comb going through a builders contract these days.

The issue here is the tile shop employee blabbing about their arrangement with the builder.

Either that employee is new/inexperienced or they don’t like the builder.

Apart from the $2m2 discrepancy between the allowance price and the off the street retail price, I’m still struggling to see what the OP is aggrieved at. I’d say $30m2 is the RRP and the tile shop is willing to sell at $28m2 because, shock horror, there’s a reasonable profit margin built in to the product and they can discount the RRP to win the business.

Isn’t stuff like that sort of standard practice? Sure, you’d prefer it to be up front, but in the end, if you’re paying a fair market price, what’s the big deal?

If the OP is able to buy tiles at the same rate as the builder then they’ll probably get an $8m2 discount too.

It’s not unfair, it’s just reality.

Fair call the employee probably shouldnt have blabbed. But i’ve dealt with the shop previously and know that the list price is never paid. Nnot sure how you arrive at me paying ‘fair market price’. As my OP said the list price is $35. I can walk in off the street and buy for $28. The builder can buy it even cheaper (i’d say about $22). The point is i shouldnt have to pay more than someone walking in off the street ($28), as they obviously make money when people walk in off the street to buy tiles.

milkman 7:22 pm 23 Jan 12

Holden Caulfield said :

Thoroughly Smashed said :

Holden Caulfield said :

OMG I bet the tile company doesn’t pay $30/m2 or even $22m2. They must be stopped!

It’s called capitalism. There’s even a Wikipedia entry, maybe you should check it out.

And never mind the TPA, I guess.

Where is the problem? The problem is the added margin has become visible to the end consumer.

The builder isn’t a charity. He’s hardly going to be the only person in the world to pay one price for a product only to on-sell it at a greater price.

If we want everyone to have a good income, this is what happens. Stuff costs money, deal with it.

Slumlord 7:17 pm 23 Jan 12

Holden Caulfield said :

Thoroughly Smashed said :

Holden Caulfield said :

OMG I bet the tile company doesn’t pay $30/m2 or even $22m2. They must be stopped!

It’s called capitalism. There’s even a Wikipedia entry, maybe you should check it out.

And never mind the TPA, I guess.

Where is the problem? The problem is the added margin has become visible to the end consumer.

The builder isn’t a charity. He’s hardly going to be the only person in the world to pay one price for a product only to on-sell it at a greater price.

not quite sure how this reply thing works – the problem with what you’re saying is the tile shop invoices me directly for any cost above my allowance. So, the builder isnt actually buying the tile and onselling to me for a higher price. The tile shop is selling to the builder, then the tile shop (not the builder) is billing me for a bit of cream on top. It works differently for other selections – ie they buy taps in bulk and i can only chose one of 3 taps for my house from their selection. They buy that stuff in bulk and factor in a cost in my allowances (including some cream but in a way that’s above board).

Holden Caulfield 5:15 pm 23 Jan 12

watto23 said :

If I was the OP, i’d just want it explained and be upfront, rather than hiding some profit. From what I’ve seen, you really need a fine tooth comb going through a builders contract these days.

The issue here is the tile shop employee blabbing about their arrangement with the builder.

Either that employee is new/inexperienced or they don’t like the builder.

Apart from the $2m2 discrepancy between the allowance price and the off the street retail price, I’m still struggling to see what the OP is aggrieved at. I’d say $30m2 is the RRP and the tile shop is willing to sell at $28m2 because, shock horror, there’s a reasonable profit margin built in to the product and they can discount the RRP to win the business.

Isn’t stuff like that sort of standard practice? Sure, you’d prefer it to be up front, but in the end, if you’re paying a fair market price, what’s the big deal?

If the OP is able to buy tiles at the same rate as the builder then they’ll probably get an $8m2 discount too.

It’s not unfair, it’s just reality.

watto23 4:53 pm 23 Jan 12

Holden Caulfield said :

Thoroughly Smashed said :

Holden Caulfield said :

OMG I bet the tile company doesn’t pay $30/m2 or even $22m2. They must be stopped!

It’s called capitalism. There’s even a Wikipedia entry, maybe you should check it out.

And never mind the TPA, I guess.

Where is the problem? The problem is the added margin has become visible to the end consumer.

The builder isn’t a charity. He’s hardly going to be the only person in the world to pay one price for a product only to on-sell it at a greater price.

No issues with capitalism, but if there is a budget of $30 per sqm and the builder only pays say $22/sqm then IMO you have gone $8 per sqm under budget. However as the retail price is higher they end up paying an extra $5 per sqm as well.

I know in my company if we put a markup on the supply of anything we usually have to state the markup. Its ok to do so as it covers our expenses in handling and delivering the equipment.

If I was the OP, i’d just want it explained and be upfront, rather than hiding some profit. From what I’ve seen, you really need a fine tooth comb going through a builders contract these days.

Holden Caulfield 1:59 pm 23 Jan 12

Thoroughly Smashed said :

Holden Caulfield said :

OMG I bet the tile company doesn’t pay $30/m2 or even $22m2. They must be stopped!

It’s called capitalism. There’s even a Wikipedia entry, maybe you should check it out.

And never mind the TPA, I guess.

Where is the problem? The problem is the added margin has become visible to the end consumer.

The builder isn’t a charity. He’s hardly going to be the only person in the world to pay one price for a product only to on-sell it at a greater price.

ma7trlb 1:48 pm 23 Jan 12

if you think you can save $7 per sqm by supplying the tiles yourself, then have a chat with your builder about it. However be prepared for them to refuse to let you supply them, or worse still, install them, and then blame you when something goes wrong. Its a dicey line to tread, and depending on the volume of tiles to be ordered, probably $500 you can afford to absorb.

niceplacetolive 12:51 pm 23 Jan 12

The builder is likely factoring in:
GST input and output including BAS
paperwork and time to reconcile accounts with the tiling company
delivery costs
the warranty on the tiles
dealing with the tiling company to factor in delivery times etc

Thoroughly Smashed 12:41 pm 23 Jan 12

Holden Caulfield said :

OMG I bet the tile company doesn’t pay $30/m2 or even $22m2. They must be stopped!

It’s called capitalism. There’s even a Wikipedia entry, maybe you should check it out.

And never mind the TPA, I guess.

Holden Caulfield 12:21 pm 23 Jan 12

OMG I bet the tile company doesn’t pay $30/m2 or even $22m2. They must be stopped!

It’s called capitalism. There’s even a Wikipedia entry, maybe you should check it out.

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