Most Read Contributor in Australia, September 2016
On 14 December 2013, the Assistant Treasurer, Senator Arthur
Sinodinos, announced that the Federal Government intends to replace
the GST-free treatment for the supply of both going concerns and
farming businesses with a "reverse charge"
Following the Board of Taxation's recommendations made in
December 2008, a Treasury discussion paper was released by the Rudd
Government in May 2009 proposing this measure but it was not
implemented. Now it has been adopted by the Abbott Government.
A draft Bill has not yet been released and the timing for its
introduction to Parliament is unknown, although the indication is
Further, this measure was treated by the Rudd Government as a
change to the GST base, requiring the unanimous agreement of the
State and Territory Governments. If this is so, unanimous agreement
is likely to be forthcoming, since the proposal will increase GST
revenue where purchasers cannot claim input tax credits.
When the Bill is introduced, it is expected to include
transitional provisions, allowing contracts entered into before the
legislation takes effect to proceed with the GST treatment intended
by the parties.
The reverse charge mechanism
The proposal for the supply of going concerns and farming
businesses is to:
remove the GST-free treatment, rendering each taxable; and
introduce a voluntary system permitting parties to agree to
reverse the GST burden, making the purchaser liable to pay the GST,
not the supplier.
In reality, this mechanism produces the same result as occurs
for an ordinary taxable supply, where a contract either contains a
GST-inclusive price or requires the purchaser to reimburse to the
supplier the GST payable in addition to the price. In this sense,
the mechanism is unlikely to be "voluntary", but dictated
by market forces.
However, the reverse charge mechanism differs from an ordinary
taxable supply as follows:
once the parties agree to reverse charge the GST, provided all
parties are registered for GST, the agreement has legislative
backing in addition to contractual enforceability;
the purchaser is directly liable to the Commissioner of
Taxation to pay the GST, it is not reimbursed to the supplier
(therefore, a tax invoice is not required); and
the purchaser reports its reverse charged GST liability in its
next BAS and (to the extent the purchaser is entitled to) claims an
input tax credit for that liability in the same BAS for the same
tax period, which should produce a neutral cashflow position.
Among the adverse consequences of the proposal for purchasers
GST burden: for those purchasers not entitled
to an input tax credit, the price for going concerns and farming
businesses will increase by the GST payable.
Stamp duty: purchasers will pay more stamp
duty, as the reverse charged GST is likely to be included in the
dutiable value of the transaction.
One argument is, because the reverse charged GST is payable
directly by the purchaser to the Commissioner, it cannot form part
of the consideration received by the supplier. However, State and
Territory Revenue Offices are likely to treat an agreement to
reverse charge GST itself as additional consideration provided by
the purchaser. This is because, in the absence of that agreement,
the supply would be an ordinary taxable supply meaning GST would be
received by the supplier and form part of the dutiable value.
On-sales: for purchasers wishing to develop
and on-sell land forming part of a going concern or farming
business, the advantage of the current GST-free status of the
supply of that land is the ability to apply the margin scheme in
the future, if GST has not been paid in the chain of acquisition of
the development land. It may be necessary to carve out eligible
land from the supply of a going concern or farming business and
apply the margin scheme on its acquisition, thereby preserving the
application of the margin scheme for the future.
The content of this article is intended to provide a general
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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