Australia: GST Going Concern Exemption to be Abolished
09 January 2014
Posted by: Authors: A. Koumoukelis, J. Grimble , S. Healy and
Authors: A. Koumoukelis, J. Grimble , S. Healy and C. Steele (Gadens Lawyers)
The Abbott Government has announced it will adopt a controversial measure proposed (but not implemented) by the former Rudd Government to replace the GST-free going concern and farm land exemptions with a new ‘reverse charge’ mechanism.
The adverse consequences may be twofold.First, the proposal may increase stamp duty for purchasers of going concerns. Secondly, purchasers wishing to on-sell under the margin scheme may face greater complexity and increased GST ‘costs’ up-front.
What is the ‘reverse charge’ and when will it commence?
The main feature of the proposed ‘reverse charge’ mechanism is to allow the purchaser to self-assess GST on the transaction as if it were the vendor, and allow the purchaser to claim an input tax credit (to the extent it is entitled to do so) in the same tax period.
The use of the reverse charge is voluntary and therefore can only be used where both parties agree, otherwise the vendor would need to account for GST in the usual manner.
The Abbott Government has stated that the proposed measure will commence when the amending legislation is passed and becomes law. It is possible this may affect contracts made before the amending legislation is introduced if settlement happens after the amendments commence.
It should be noted that the Rudd Government considered that the unanimous agreement of the States and Territories would be required for this measure as it comprises a change to the GST base.
What are the stamp duty implications for purchasers?
The going concern exemption has been popular with purchasers for two main reasons.
Cash flow – a saving on funding costs where GST on an ordinary taxable supply is generally payable with the balance of the purchase price at completion but a credit or refund for the GST may not be available for several months.
Stamp duty – the State and Territory Governments levy stamp duty on the GST inclusive purchase price (as a tax on a tax), which means the going concern exemption allows purchasers the opportunity to save stamp duty on the GST component of the purchase price.
The potential for cash flow savings should be preserved under a ‘reverse charge’ mechanism but there is a risk the stamp duty saving could be lost. The ‘reverse charge’ mechanism requires agreement between the parties and it is possible that some of the State and Territory Revenue Offices may regard that agreement as additional consideration – ie, if the purchaser had not agreed to remit GST on the transaction, the vendor would be required to remit that amount. If that view is adopted, stamp duty may be assessed on the purchase price plus the GST liability assumed by the purchaser.
What are the consequences for the margin scheme?
An overview of the proposed ‘reverse charge’ mechanism is set out in a Treasury discussion Paper released by the Rudd Government in 2009.
The 2009 discussion paper explains that all the assets supplied will be considered in assessing the eligibility of the supply as a reverse charged going concern. However, land eligible to be taxed under the margin scheme should be carved out of the reverse charge arrangement and that component of the transaction should be taxed under the margin scheme to preserve the purchaser’s entitlement to on-sell under the margin scheme.
This may increase complexity and could have adverse implications for property developers by bringing forward the GST ‘cost’. The impact may be significant for lengthy projects and land acquired for future projects.
Purchasers should ensure that contracts provide for the potential application of the ‘reverse charge’ mechanism.
This article first appeared on lexology.com.