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” mechanism.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 “during 2014”.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 are:
- 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.