The Federal Government has announced that the GST exemptions on the sale of “going concerns” and farm land will be replaced with a ‘reverse charge’ arrangement “sometime in 2014”.

Details of the ‘reverse charge’ mechanism have not been released, but it has been recommended that the seller would be liable for GST on the sale of a going concern or farm land unless the parties agree to apply the reverse charge mechanism. The reverse charge mechanism will require the buyer to remit the GST on the transaction instead of the seller.  The buyer will then be able to use its input tax credit entitlements on the purchase to offset its GST liability. This would result in a net zero GST payment, if the purchase of the going concern or the farm land is a “creditable acquisition” by the buyer.

The transaction will still need to satisfy the test for the supply of a going concern or farm land, and the buyer must be registered or required to be registered for GST for the reverse charge to apply.  However, the test for the supply of a going concern will be relaxed.

The policy behind the proposed changes is to create more certainty in business to business transactions. This may be the case in circumstances where the acquisition is fully creditable.  However, we expect that uncertainty will still remain in transactions involving partly-creditable or non-creditable businesses (for example, retirement villages and other businesses involving residential real estate or other input taxed supplies).

Buyers of real estate could also see an increase in stamp duty on a transaction, if the state revenue authorities take the view that stamp duty should be assessed on reverse-charged GST in the same way that it is currently assessed if included in the price and paid to the seller. 

We are looking to include appropriate clauses in contracts being negotiated on behalf of our clients to ensure that the impending changes are adequately addressed.