Accounting and Taxation of Floor Area Bonuses in Construction: A Case Study

Authors: Arif Aktaş, Dr. Assistant Professor Günay Deniz Dursun

Abstract

In the construction sector, which is one of the most important economic sectors in Turkey, with the added value it creates, employment increases every year compared to the previous year. In our country, located in an earthquake zone, urban transformation projects are one of the most positive steps taken, especially for the safety of life and property. It is inevitable that old houses, which have been built for many years, face a high risk of collapse in possible earthquakes due to their lack of durability. 

At this point, the demolition of these buildings, which have reached the end of their economic life, have become unusable due to their lack of earthquake resistance, negatively spoil the environment and the city’s appearance with their old appearance, and make the use of social areas unadvantageous, and replace them with new ones, is also very important for the cities to breathe easily. 

Knowing how these renovation works will be accounted for and taxed by the parties, professionals, the state, and credit institutions when they are delivered to the landowner in return for a flat is essential. The aim of the research prepared with this importance is to reveal how to account for construction contracts in return for flat with an example application.

Introduction

Developing technology makes it possible to detect risky buildings in Turkey, and new buildings are being built due to the fact that our country is in an earthquake zone and the increasing population density. In addition to new buildings, old buildings are being demolished, and renovation works are being carried out.

Knowing how these renovation works will be accounted for and taxed by the parties, professionals, the state, and credit institutions when they are delivered to the landowner in return for a flat is essential. In our country, especially in recent years, construction contracts in return for flat are frequently encountered due to urban transformation. 

construction contract in return for flat: It is the process of land owners who do not have enough money or equipment to build on their vacant land or who do not want to incur expenses to build a new house hand over their land to construction contractors to build a building and receive a house or shop from the new building free of charge. In this study, after explaining the accounting recording system in construction works in exchange for flats, construction transactions in return for flats will be examined in terms of Value Added Tax, Income, and Corporate Tax. 

The subject will be explained with an example application. This study, titled “Accounting, taxation and an Application of Construction Contract in return for flat,” will be examined in terms of the Tax Procedure Law (VUK), but no Turkish Accounting Standards have been examined.

Accounting and Taxation of Floor Area Bonus Construction Operations

2.1. Accounting Recording System in Construction Works in Exchange for Flats

Enterprises within private construction that engage in construction activities in return for flats produce and sell independent sections such as buildings, flats, and workplaces entirely on their own behalf. These businesses are no different from businesses that produce products.

It is possible to express the operation of cost calculations according to option 7/A in the construction contract in return for a flat in the following order (Çankaya, 2003: 400):

In private construction, as construction expenses are incurred, production expense accounts (direct raw material and material expenses, direct labor expenses, and general production expenses) are “debited” and recorded in the journal. At the end of the period, the amounts accumulated in these expense accounts are transferred to the relevant reflection accounts. The balances of the reflection accounts are debited to the semi-finished goods – production account as production is completed. It is closed by comparing production expense accounts and reflection accounts.

While the costs related to incomplete constructions (semi-finished products) are kept in the (Semi-Finished Products – Production Account) account, the costs related to completed constructions (finished goods) are recorded in the 152 Finished Products account. 151 Semi-finished Products – The production account is credited and closed for the cost of the completed part.

Costs related to “sold” completed goods are recorded as expenses by crediting account 152 Finished Goods and transferring them to account 620 Cost of Goods Sold. Based on the sales invoice issued, the same products are recorded as income in the 600 Domestic Sales account. Apart from construction transactions, accounting records for other monetary transactions are made in line with financial accounting practices.

 2.2. Cost Determination of Delivery of Housing to the Land Owner

In works carried out in the form of land in exchange for flats, some of the independent parts of the construction belong to the land owner, and some of the parts belong to the contractor company. 

The land owner gives the land share of the independent sections that will remain to the contractor company based on the contract to the contractor company. In return, the contractor company carries out the construction of the independent sections that will be given to the landowner in accordance with the contract.

The amounts paid and the expenses incurred for the housing and workplace to be given to the land owner by the contractor in return for the land constitute the cost of the land purchased from the land owner for the contractor (Sezer, 2015). The cost of the independent sections left to the contractor company constitutes the construction cost. In constructions built on someone else’s land in exchange for flats, the total cost consists of the sum of the land cost and construction costs (Yılmaz, 2015: 253).

The cost of the houses delivered to the land owner is calculated by dividing the total cost of the construction by the total construction square meters and multiplying the value found by the total square meters of the flats delivered to the land owner (Çatıkkaş et al., 2016: 33-34).

2.3. Value Added Tax (VAT) in Construction Works in Exchange for Flats

There are two separate deliveries in the construction work in return for land. The first one is the delivery of the land from the landowner to the contractor. It is stated in the VAT General Communiqué No. 30 that the second one is the delivery of an independent section (residence or workplace) from the contractor to the land owner. In the case of land delivery, if the land owner is an honest taxpayer, the land delivery is subject to VAT. 

It has been announced that the land owner is not a taxpayer and that VAT will not be applied on the delivery of the land to the contractor in exchange for an independent section as a one-time activity (Yaşar, 2007: 174). It is stated in the said communiqué that VAT will be applied based on the equivalent value in the deliveries of independent sections made by contractors to the land owner. Those who trade real estate must apply VAT (Saraçoğlu, 2011: 239).

According to the first paragraph of the first article of the VAT Law No. 3065, All deliveries and services within the scope of commercial, industrial, agricultural, and self-employment activities carried out in Turkey are subject to VAT. According to Annex-1 Article 11 of Decree No. 2007/13033 published in the Official Gazette No. 26742 dated 30.12.2007, the VAT rate is determined as 1% for residences with a net area of up to 150 m2. The VAT rate is determined as 18% for residences with a net area of over 150 m2 and for all workplaces regardless of size.

The Council of Ministers of the Republic of Turkey made changes to the VAT rate on housing sales with the decision numbered 2012/4116, which entered into force on 01.01.2013. Accordingly, in places outside the metropolitan municipality, 1% VAT will continue to be applied on residences up to 150 m2, and in metropolitan municipalities, 8% and 18% VAT rates will be applied in addition to the 1% VAT rate, taking into account different criteria. According to this, Land unit m2 tax value is determined pursuant to Article 29 of the Real Estate Tax Law;

• Between 0 – 499 TL; %one
• Between 500 – 999 TL; 8%
• over 1000 TL; 18%
• VAT rates will apply.

Land square meter unit values can be determined on the official website of the Revenue Administration. In addition, the website includes detailed square meter values of all cities, neighborhoods, avenues, and streets.

In the decision numbered 2012/4116 of the Council of Ministers of the Republic of Turkey, VAT will be applied to housing sales, and VAT rates have been announced. Therefore, in the invoices to be issued to the land owners, the VAT must be calculated on the equivalent value, and the invoice must be issued.

However, the most critical problem in invoices issued to the land owner is who will cover the VAT amount. In this regard, if the two parties have not made any agreement on who will bear the VAT, the VAT amount they do not collect from each other will be considered and accounted for as a Legally Unacceptable Expense by the contractor company. This issue will be taken into consideration when preparing the Corporate Tax return.

2.4. Income and Corporate Tax on Construction Works in Exchange for Flats

In the construction of independent sections, in return for land share, the contractor carries out construction work on the landowner’s land and collects the cost of this work by taking the independent section from the construction carried out on the land. If we consider for a moment that there is no such system, the contractor must pay a payment equal to the market value of this land, that is, the purchase and sale value on the date of purchase, in order to purchase this land. Under normal circumstances, the contractor pays the cost of land that he would purchase by paying the market price by providing a construction service to the landowner. 

The fee for the service provided here, that is, the construction work done, should be equal to the market value of this land. The approach that the price of this service provided by the contractor to the land owner (or, as is generally accepted in practice, the price of the land purchased) consists of the construction cost of the independent sections he has built for the land owner, is not suitable in commercial life. Such an acceptance style means ignoring the contractor’s cost of work, that is, accepting that he only carries out work at cost. Obviously, this is not suitable for economics and trade (Turut, 2009: 332).

The taxable event in Tax Procedure Law No. 213 It is defined as “Tax receivable arises with the occurrence of the event on which the tax laws bind the tax or the development of the legal situation.” In construction works in return for land, the date on which the incident occurs is the date on which the construction is completed, the building use permit is obtained, and the flats are delivered to the land owner. 

On this date, the contractor has a tax liability (Azaltun and Altunbaş, 2017: 23). Therefore, the event that gives rise to tax occurs with the delivery of flats or workplaces to the land owner. Receiving partial or complete fees from third parties while the construction is ongoing does not mean the contractor has earned income. 

Such fees received are in the nature of advances, and although they do not constitute profit or loss, they are tracked in advance accounts. Since the cost is finalized once the construction is completed, it is not possible to determine the net profit.

The earnings of contractors engaged in construction works in exchange for flats are considered commercial income within the framework of Article 37 of the Income Tax Law (Income Tax Law) No. 193. Since the exact profit/loss of commercial private constructions will only be revealed in the year they are completed, the taxable income will be determined in the year the work is completed. 

The income obtained from the independent sections sold and delivered to the buyers in the completed year is declared and taxed in the year in which they are obtained, within the scope of commercial profits. In order for taxation to occur, commercial income must first be found. Commercial income is related to the completion and sale of independent sections.

 Even though the independent sections have been completed, if the sales transaction has yet to be made, then a declaration will be submitted, but no taxation will be made. Since the sections that have been completed but have yet to be sold are considered inventory for the business, they are not treated as income elements in determining commercial income. These sections are kept in stock until they are sold and are taxed by being included in the commercial income of the year they are sold (Çankaya, 2003: 389-390).

Accounting and Taxation of Floor Area Bonus Construction: An Application

3.1. Aktaş Sanayi ve Ticaret Limited Şirketi Periodic Accounting Transactions

The main activities, which can be summarized as buying and selling in a commercial enterprise, turn into buying, production, and sales in an industrial enterprise. With this transformation, production activity generally shows a much more complex nature than others (Büyükmirza, 2009: 1). Within the scope of this study, the accounting records to be made in practice will be like the accounting records made by production enterprises.

Aktaş Sanayi ve Ticaret Ltd., which is the subject of the research. Ltd. It is assumed that it started its activities by signing a construction contract with the land owner in exchange for a land share for the vacant land located in the Bostancı neighborhood of Kadıköy district of Istanbul. A few examples of the transactions made by the company during the period are given below. The construction will be 800 m2.

A) CDE Mimarlık Ltd. for the project drawing process of the land. Ltd. Assuming that an agreement has been reached and a transfer of 20,000 TL + VAT is made to the bank account against an invoice of 20,000 TL + VAT as the service fee on 01.05.2017, the journal entry to be made is as follows.

B) MES İnşaat Malzemeleri Ltd. Ltd. It is assumed that 60 tons of iron were purchased from the company on 05.06.2017 for 80,000 TL + VAT, and a check dated 01.11.2017 was given in return.

C) HFR Hafriyat Ltd. Ltd. The excavation from the construction site was transported by. It is assumed that the transportation fee was transferred from the bank account based on the 40,000 TL + VAT invoice dated 20.06.2017.

D) Onur AKTAŞ decided to buy flat number 2 for 250,000 TL and deposited an advance of 150,000 TL into the company account on 25.06.2017. The journal entry to be made regarding this is as follows.

E) Saruhan Beton Ltd. Ltd. It is assumed that 500 m3 of concrete was purchased from the company on 15.07.2017 for 90.000 TL + VAT, and a check dated 01.12.2017 was given in return.

F) External workers were provided for some labor work. Duman Labor Ltd. In response to the 40,000 TL + VAT invoice dated 31.07.2017 from Şti., it was assumed that the 20,000 TL payment was made from the company’s bank account and the following record was made.

Assuming that the construction could not be completed at the end of the year it started, the costs were transferred to the semi-finished products – production account. The reflection accounts were closed, and a closing record was created. Since the construction was not completed, no income was recorded.

As the materials required for construction were purchased in the following year, they were recorded in the debit of the 150 Raw Materials and Materials account. The expenses of outsourced subcontractor labor and the expenses of workers within the company are recorded in the debit of the 720 Direct Labor Expenses account. Assuming the construction was completed on 28.02.2018, 1,209,000.00 TL in the 151 Semi-Products – Production account was transferred to the 152 Finished Products account.

Flats 1 and 8 were delivered to the landowner. It is assumed that flat number 1 is 100 m2 and flat number 8 is 80 m2. In order to calculate the cost of the houses delivered to the land owner, the unit cost per square meter must be calculated. Unit cost per square meter is obtained by dividing the total cost of construction by the total square meter. 

The cost of the land owner’s flats will be calculated after multiplying the square meters of the flats to be purchased by the land owner by the unit square meter value. According to VUK Article 267 cost basis, if the cost price of the goods for which the comparable price will be determined is known or it is possible to extract it, then the contractors determine the equivalent price by adding 5% for wholesale sales and 10% for retail sales to this cost value. Accordingly, 10% needs to be added to this cost we calculated since it is a retail sale. 

The total cost of the construction is 1,209,500.00 TL, a total area of 820 m2.

1.209.500,00 TL / 820 m2 = 1.511,88 TL/m2

Flat number 1: 100 m2 x 1.511,88 = 151.188,00 TL

VUK 267 cost basis: 151.188,00 x 0.10 = 15.118,80 TL

Total cost: 166.306,80 TL

Flat number 8: 80 m2 x 1.511,88 = 120.950,00 TL

VUK 267 cost basis: 120.950,00 x 0.10 = 12.095,00 TL

Total cost: 133.045,00 TL

Invoices were issued for the flats delivered to the land owner; for flat number 1, 166,306.80 TL was recorded as the credit of the 600 Domestic Sales Account, 13,304.54 TL, which is the 8% VAT amount, was recorded as the credit of the 391 Calculated VAT Account, and 179,611.34 TL was recorded as the debit of the 120 Buyers account. 

For flat number 8, 133,045.00 TL was recorded as the credit of the 600 Domestic Sales Account, 10,643.60 TL, which is the 8% VAT amount, was recorded as the credit of the 391 Calculated VAT Account, and 143,688.60 TL was recorded as the debit of the 120 Buyers account.

Land share cost transfers have been recorded. The cost of the flats delivered to the land owner, 299,351.80 TL, was credited to the 320 Sellers account and recorded as the debit of the 710 Direct Raw Materials and Materials Account. Then, it was recorded in the debit of 151 Semi-Products – Production accounts and then in the debit of 152 Finished Products accounts. The transaction was completed by debiting the relevant amount to account 620 Cost of Goods Sold.

320 Sellers and 120 Buyers accounts opened in the land owner’s name were closed by working mutually. However, there remains a balance of 23,948.14 TL, which is the VAT amount of the invoices issued to the land owner in the 120 Buyers account. In our example, it has been agreed that the landowner will pay this amount.

It is assumed that all flats were sold within a short time after the construction was completed. In flat sales, 2,032,407.41 TL was recorded as the credit of the 600 Domestic Sales account, 162,592.59 TL was recorded as the credit of the 391 Calculated VAT account, and 2,195,000.00 TL was recorded as the debit of the Buyers account. The cost of the flats, 1,209,000.00 TL, was recorded as a debit of 620 Cost of Goods Sold account and as a credit of 152 Finished Goods account.

At the end of the period, the amounts in the expense accounts were closed and transferred to the income statement accounts. 2,331,759.21 TL was debited to 600 Domestic Sales accounts in the income statement and credited to the 690 Period Profit or Loss account. 1,508,851.80 TL was credited to the 620 Cost of Goods Sold account, 693.60 TL was credited to the 632 General Administrative Expenses account, and 1,509,545.40 TL was debited to the 690 Period Profit or Loss account. While a debit of 822,213.81 TL was recorded in the 690 Period Profit or Loss account, 180,887.04 TL was recorded in the 691 Period Profit Tax and Other Legal Liability Provision account, and 641,326.77 TL was credited in the 692 Period Net Profit or Loss account. 

The amounts in the income statement accounts have been transferred to the balance sheet accounts. For this transaction, 180,887.04 TL was debited to the 691 Period Profit Tax and Other Legal Liability Provision account, and 180,887.04 TL was credited to the 370 Period Profit Tax and Other Legal Liability Provision account. 641,326.77 TL was debited to account 692 Period Net Profit or Loss and credited to account 590 Period Net Profit.

3.2. Aktaş Industry and Trade Limited Company Tax Calculations

Aktaş Sanayi Ticaret Limited Şirketi, which is the subject of the application, deducted 136,800.00 TL VAT during the construction period. Aktaş Industry and Trade Ltd. Ltd. Since the square meter value of the land on which the company built was 585.00 TL, sales invoices were issued at an 8% VAT rate. A calculated VAT of 186,540.73 TL was incurred due to the invoices issued after construction completion. The difference of 49,740.73 TL is the VAT amount to be paid, credited to the company’s “360 Taxes and Funds Payable” account.

In practice, since the landowner has no real obligation and does not carry out this activity continuously, VAT does not arise on the land delivery made by the landowner.

Aktaş Industry and Trade Ltd. Ltd. All independent sections built by the company were sold in the year the construction was completed and taxed as commercial income. The company had a period-end commercial gain of 822,213.81 TL. Since there are no legally unacceptable expenses in the company’s records, this entire amount constitutes the financial profit, the Corporate Tax base. 

According to Provisional Article 10 of the Corporate Tax Law No. 5520, the Corporate Tax rate for 2018 was announced as 22% by the Council of Ministers of the Republic of Turkey. Therefore, the company will pay 180,887.04 TL Corporate Tax from the profits of this construction project.

Conclusion and Recommendations

As a result of the increasingly ongoing urban transformation in our country, land or house owners are building new buildings by making agreements with contractors in exchange for flats. In light of these developments in the sector, it is vital to know the accounting of construction contracts in exchange for flats.

The accounting records to be made in the construction contract in return for the flat are like the accounting records made by production enterprises and cost accounting records are made. However, the most crucial issue in construction transactions in exchange for flats is the determination of the VAT rate and the land share allowance in housing. 

The total construction cost (the materials purchased during the construction and the expenses directly related to the construction of the construction) is divided by the total area (square meters) to obtain the unit cost. This cost is the cost per square meter of construction. After multiplying the total square meters of the flats to be purchased by the land owner by the unit square meter cost, the cost of the land owner’s flats is calculated. 

VAT base is determined by adding 10% for retail sales and 5% for wholesale sales to the cost calculated within the scope of the cost basis specified in VUK Article 267. The statement regarding the VAT rate to be applied in housing sales was made with BKK, numbered 2012/4116. According to this, In places outside the metropolitan municipality borders, the VAT rate is 1% for residences up to 150 m2. 

For residences located within the metropolitan municipality with an m2 value between 0-499 TL, the VAT rate is 1%, and residences with an m2 value between 500-999 TL. The VAT rate for residences with an m2 value of over 1000 TL is announced as 8%, and the VAT rate for residences with an m2 value of over 1000 TL is announced as 18%. Land square meter unit values can be determined on the official website of the Revenue Administration.

There are many differences between the Turkish Accounting Standards (TMS) 11 Construction Contracts Standard issued by the Public Oversight Authority (KGK) and the VUK. There are differences in the Income or Corporate Tax calculations to be paid between construction businesses that apply TMS and companies that make tax calculations according to VUK, as in the example application in the article. 

There is a significant difference in profit and loss determination, especially in works that extend from the year the construction started to the following year. From this perspective, TMS and VUK should be harmonized in order to eliminate differences in essential issues such as tax calculations and profit-loss determination.

Another critical issue is that the field of construction accounting, which belongs to the construction sector, which is one of the leading sectors in Turkey, should be given more courses in universities. As a result of globalization and developing technology, the fields of activity in this sector are also expanding. 

Constantly updated financial legislation must be implemented correctly by companies. Therefore, knowing construction accounting and teaching this course in universities is essential. In addition, the issue should be addressed within the scope of training programs organized by professional organizations in order for professionals to specialize in construction accounting.

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