The Federal Coalition government announced in early 2014 that it would seek to replace the GST going concern exemption with a reverse charge mechanism. This was in response to a review by the Board of Taxation, which recommended introducing a reverse charge mechanism to eliminate complexities associated with the current going concern rules.
Under the current rules, the going concern exemption allows the sale of certain assets on a GST-free basis where certain criteria are satisfied. Such assets include the business of tenanted commercial real estate. To date, purchasers have benefited from the going concern exemption through improved cash flow and a lower stamp duty liability on land transfers. The stamp duty reduction arises because duty is levied on the GST-inclusive price and where the going concern exemption applies, no GST is payable.
A reverse charge mechanism would require the purchaser of a GST taxable supply to remit to the ATO the GST that would otherwise be remitted by the vendor – effectively shifting the GST liability away from the vendor to the purchaser. The purchaser would then be entitled to claim an input tax credit for making a creditable GST acquisition.
Depending upon the detail of the legislation introducing the change (a draft of which has not yet been released), the reverse charge mechanism may potentially lead to greater costs. The state revenue offices may be required to charge stamp duty on the GST inclusive price on the basis that, although paid by the purchaser, the GST is still part of the “consideration” for the supply of the property in circumstances where the vendor would not have sold the property on the relevant terms but for the purchaser’s agreement to accept the reverse charge. Therefore, unless the legislation is carefully worded, or the Federal Government works with the State governments to introduce amendments to legislation to ensure stamp duty is not levied on the GST inclusive price where a reverse charge mechanism applies, there is a risk that the change may produce unintended consequences.
Last month, it was reported that senior Treasury officials met with a delegation representing the property industry to ensure the change was implemented in a way that did not increase stamp duty as Treasury did not want to implement the change at the expense of creating an additional burden on the industry.
Draft legislation is due to be released by mid-year, with a bill expected before Parliament by the end of the year.