In December 2013, the Government announced its intention to
replace the GST free treatment for the supply of both going
concerns and farming businesses with a 'reverse charge'
mechanism. The scheme was initially proposed by the Rudd Government
in 2009 but was not implemented. Corporate and Commercial lawyer,
Sam Bassingthwaighte, provides an overview on how the reverse
charge arrangements may apply and highlights some of the potential
implications of the proposed changes.
Currently, a supply of a going concern may be treated as GST
free. Without the GST exemption, the seller would be required to
charge GST (treating the sale as a taxable supply), in respect of
which the purchaser would be able to claim an input tax credit, if
they are registered for GST.
Under the existing legislation, there are a number of conditions
that must be met in order for the going concern exemption to apply.
These include, but are not limited to, both the seller and
purchaser agreeing in writing that the sale is of a going concern
(usually addressed in the GST clause in the contract for sale),
everything necessary for the continued operation of the business
being supplied to the buyer and both parties being registered for
There is a separate GST exemption for the sale of land which has
been used to carry on a farming business (as defined in the GST
Act), where the purchaser intends to continue farming the land.
Unlike the going concern exemption, there is no requirement for the
parties to agree in writing before the exemption applies or for the
purchaser to be registered for GST.
The current treatment of the supply of going concerns and
farmland as GST free provides two main benefits to the
the purchaser does not have to fund the GST component and then
wait to receive the benefit of the offsetting credit; and
as stamp duty is generally calculated on the GST inclusive
price the cost to the purchaser is reduced.
The seller carries the GST risk if a sale has been wrongly
classified as a GST free supply.
'REVERSE CHARGE' MECHANISM
The Government has indicated that the reverse charge mechanism
will commence when the amendments to the GST Act are passed and
become law, which is likely to be the first half of 2015.
Transitional provisions will be included to preserve the current
position for contracts already on foot.
The proposal renders both supplies of going concerns and
farmland taxable and introduces a system allowing parties to agree
to reverse the GST burden, making the purchaser liable to pay the
GST not the seller. Essentially, this achieves the same result that
occurs with an ordinary taxable supply, where a contract contains
either a GST inclusive price or requires the purchaser to reimburse
the seller the GST payable in addition to the principal amount.
However, the mechanism differs from an ordinary taxable supply as
provided all the parties are registered for GST , once the
parties agree to reverse charge the 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 seller (as
such, a tax invoice is not required); and
provided the purchaser is entitled to full input tax credits,
the GST liability should be completely offset resulting in the same
cash flow benefit that arises under the current scheme.
Until the draft legislation is released, uncertainty will remain
as to how the reverse charge mechanism will operate. Depending on
the drafting of the legislation and the consent of the States and
Territories, the stamp duty and GST exemptions under the previous
mechanism may no longer be available.
The potential pitfalls of the proposed mechanism are as
GST: the current cash flow benefit will not be available to a
purchaser who is not entitled to a full input tax credit in respect
of the acquisition.
Stamp Duty: the reverse charged GST may be included in the
dutiable value of the transaction resulting in the purchasers
having to pay more duty.
On Sales: for purchasers wishing to develop and on-sell real
property forming part of a going concern or farming business, it
may be necessary to carve out that real property in order to
preserve the application of the margin scheme for the future.
Purchasers should ensure that any future contracts they enter
into provide for the potential application of the reverse charge
mechanism, even before the legislation is passed.
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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