The Assistant Treasurer has announced that the current GST-free
treatment of going concerns and farmland will be abolished
'sometime in 2014'. In its place, a reverse charge
mechanism will apply.
GST-free going concerns and farmland
Currently, a supply of an enterprise can be GST-free if the
vendor supplies to the purchaser 'all of the things necessary
for the continued operation of the enterprise'. This means that
sales of businesses (or parts of businesses capable of operating
independently) and commercial buildings leased to tenants are often
able to qualify as GST-free if the parties agree in writing.
A sale of farmland will be GST-free if a farming business has
been conducted on the land for the last five years and the
purchaser also intends that the land will be used for a farming
The two principal benefits of the current GST-free treatment
stem from a GST-exclusive purchase price, which means:
a lower financing cost for the purchaser as it does not need to
fund the GST amount; and
duty is payable on the GST-exclusive purchase price (rather
than a GST-inclusive price).
The provisions have always created some tensions in negotiating
contracts, as the GST-free treatment usually benefits the purchaser
but, if the parties get the GST treatment wrong, the vendor has the
risk of paying the GST and interest and penalties.
How does a reverse charge work?
Reverse charge means that the purchaser is liable to account for
the GST on the sale, rather than the vendor. If the purchaser is
registered for GST and able to claim full input tax credits in
relation to its purchase, the transaction should be revenue neutral
for the purchaser from a GST perspective.
As a result, the purchaser should still retain the benefit of
only having to fund a GST-exclusive purchase price.
It is not clear what position the state revenue authorities will
take with respect to the duty base but there is a risk that their
position may be that duty should be calculated on a GST-inclusive
price under a reverse charge arrangement.
What devil is in the detail?
For land owners
The amendments will not fix the current problems.
If the parties mischaracterise a supply as eligible for the
reverse charge, the supply will default back to being a taxable
supply, and the vendor will bear the risk of unpaid GST, interest
GST clauses will need to be specifically drafted to deal with
the reverse charge. It will be important for vendors to have a
fall-back position, which is that if the supply is taxable and not
eligible for the reverse charge, the vendor is still able to
recover the GST amount (and possibly interest and penalties) from
Parties should not assume that all of a transaction will qualify
for the reverse charge. It may be that part of the supply will
qualify for a reverse charge, which will need to be specifically
dealt with in the contract, but that other parts of the supply will
need to be governed by a usual GST gross-up clause: for example,
the sale of a commercial building that is partly leased to
Complex issues are likely to arise for developers, particularly
in the interaction with the margin scheme provisions.
For example, if a developer acquires a property under the new
reverse charge mechanism, will the developer then be eligible to
sell developed lots under the margin scheme, and if so, what will
be the developer's acquisition cost for calculating the
Further, what happens to existing developments currently
eligible for the margin scheme but where sales are not expected
until 'sometime' after 2014?
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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