The Assistant Treasurer, Arthur Sinodinos, announced in mid-December 2013 that the Federal Government would proceed with the changes to the GST treatment of ‘going concerns’ and farmland.
Currently the sale of a business or leased commercial premises could be GST-free if the transaction is considered the sale of a going concern. The sale of farmland is also GST-free. However it is proposed to change the rules by replacing the existing GST-free treatment with a ”reverse-charge” mechanism.
Current rules for sale of a going concern
Currently, the supply of a going concern may be classified as GST- free where certain requirements are satisfied.
For a sale of a going concern to be GST free, the following requirements need to be satisfied:
- everything necessary for the business's continued operation is supplied to the buyer;
- the seller carries on the business until the day it is sold, that is, until settlement;
- the buyer is registered or required to be registered for GST;
- payment is made for the sale; and
- before the sale, the buyer and seller agree in writing that the sale is of a going concern.
If you are seeking to treat the transaction as GST –free care should be taken to not only ensure there is a sale of a going concern but the transaction documents drafted meet the requirements.
The main benefits of treating the transaction as a sale of a going concern and therefore GST-free is twofold:
- The cash flow impact for the purchaser of not having to fund the GST cost upfront.
- Any stamp duty payable on the transaction is payable on the GST inclusive price hence if the transaction is GST-free there will be stamp duty savings to the purchaser.
The Board of Taxation has recommended that the GST treatment be changed as follows:
- The sale of a "going concern" will be treated as a taxable supply, not a GST-free supply.
- If the parties agree in writing, the GST on such sales can be "reverse charged" so that it is payable by the purchaser and not the vendor. Otherwise the vendor would need to account for GST as if it was a normal taxable supply.
- Both the vendor and purchaser must be GST registered.
- The parties may also be able elect to apply the "margin scheme" if land is being sold as a part of a going concern sale.
One of the key benefits of the current GST-free exemption provisions is the cash flow benefits available to the purchaser. That benefit should continue if a reverse charge mechanism is introduced, provided that the purchaser is entitled to full input tax credits for its acquisitions. This is because the purchaser's reverse charged GST liabilities and input tax credit entitlements should net out to "nil" in the same GST return.
In respect of the stamp duty benefit, it is arguable that if a GST liability is reverse charged and imposed directly on the purchaser, the GST payable by the purchaser does not form a part of the "consideration" provided to the vendor for a dutiable asset, such that stamp duty should not be imposed on the reverse charged GST. However, there may be a risk that some State or Territory revenue authorities will take the view that the purchaser's agreement to reverse charge the GST means that the purchaser has voluntarily assumed a liability of the vendor. Assumed liabilities can form part of the consideration for the transfer of dutiable property. Consequently, there may be a risk that some State or Territory revenue authorities will seek to impose duty on the reverse charged GST.
As to when the proposed changes will take effect, the Assistant Treasurer's media statement does not provide any guidance on when the legislation may be introduced, other than that it will likely be "during 2014". The legislation will apply prospectively.
If you are involved with a contract for a going concern or farmland with an extended settlement date and intending to apply GST-free treatment, you should have the transaction document reviewed to minimise the risk of being caught-out by the proposed changes.