In December 2013, the Government announced its intention to replace the GST free treatment for the supply of both going concerns and farming businesses with a 'reverse charge' mechanism. The scheme was initially proposed by the Rudd Government in 2009 but was not implemented.
Corporate and Commercial lawyer, Sam Bassingthwaighte, provides an overview on how the reverse charge arrangements may apply and highlights some of the potential implications of the proposed changes.
Currently, a supply of a going concern may be treated as GST free. Without the GST exemption, the seller would be required to charge GST (treating the sale as a taxable supply), in respect of which the purchaser would be able to claim an input tax credit, if they are registered for GST.
Under the existing legislation, there are a number of conditions that must be met in order for the going concern exemption to apply. These include, but are not limited to, both the seller and purchaser agreeing in writing that the sale is of a going concern (usually addressed in the GST clause in the contract for sale), everything necessary for the continued operation of the business being supplied to the buyer and both parties being registered for GST.
There is a separate GST exemption for the sale of land which has been used to carry on a farming business (as defined in the GST Act), where the purchaser intends to continue farming the land. Unlike the going concern exemption, there is no requirement for the parties to agree in writing before the exemption applies or for the purchaser to be registered for GST.
The current treatment of the supply of going concerns and farmland as GST free provides two main benefits to the purchaser:
The seller carries the GST risk if a sale has been wrongly classified as a GST free supply.
The Government has indicated that the reverse charge mechanism will commence when the amendments to the GST Act are passed and become law, which is likely to be the first half of 2015. Transitional provisions will be included to preserve the current position for contracts already on foot.
The proposal renders both supplies of going concerns and farmland taxable and introduces a system allowing parties to agree to reverse the GST burden, making the purchaser liable to pay the GST not the seller. Essentially, this achieves the same result that occurs with an ordinary taxable supply, where a contract contains either a GST inclusive price or requires the purchaser to reimburse the seller the GST payable in addition to the principal amount.
However, the mechanism differs from an ordinary taxable supply as follows:
Until the draft legislation is released, uncertainty will remain as to how the reverse charge mechanism will operate. Depending on the drafting of the legislation and the consent of the States and Territories, the stamp duty and GST exemptions under the previous mechanism may no longer be available.
The potential pitfalls of the proposed mechanism are as follows:
Purchasers should ensure that any future contracts they enter into provide for the potential application of the reverse charge mechanism, even before the legislation is passed.
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