The concern with the end of the GST “going concern” concessions

The Assistant Treasurer has recently announced that the Federal Government will be removing the current GST free concession, which can apply in relation to the supply of going concerns, and implementing a new ‘reverse charge’ mechanism.

Under the current system, the sale of a business may be GST free, if the transaction meets certain requirements (for example, if an ongoing business or farming venture is being sold). If the transaction is eligible to be a GST free transaction, then the purchase price for the transaction will be a GST exclusive price, and the purchaser will not need to pay the vendor an amount for GST. If the Australian Taxation Office does not consider the transaction to qualify for the GST concession, the vendor will be responsible at law for the payment of GST, interest and penalties.

There has been little information released to date regarding the details of the new reverse charge system, however we do know that under the new system, all transactions will attract GST and the responsibility for payment of GST shifts from the vendor to the purchaser.

Certain transactions may be eligible for a ‘reverse charge’ mechanism whereby the purchaser, who will be responsible for payment of GST on the transaction, may claim for input tax credits (if eligible) in the same tax period, which can result in a nil GST effect. The purchaser would need to be registered for GST to obtain this benefit.

The new mechanism is advantageous to vendors, who will lose the risk of having to pay GST on transactions which have been mischaracterised as a GST-free going concern.

However, the changes may not be so attractive to purchasers. The major concern in the new arrangement is the implication it will have on State imposed transfer duty (stamp duty). Currently, duty is assessed on the whole consideration for the purchase which, if the parties have deemed it to be GST free, doesn’t include an amount for GST.

There is speculation that under the new system, the States will assess transfer duty on the whole consideration for the purchase, which will include the GST portion and on the true ‘purchase price’. What this effectively means is that on top of GST, purchasers may end up paying 10 percent more transfer duty than they would under the current system. Whether this will occur depends on the drafting of the legislative provisions.

No date has been set for the commencement of the change; however it has been flagged to occur sometime within 2014. Parties need to be mindful that contracts entered into now, which don’t settle until after the commencement date of the legislative changes, may be caught by the changes. Any contracts being entered into now should consider including provisions dealing with the potential application of the new arrangement.

For further information about the new reverse charge mechanism, please contact Kott Gunning’s Commercial Team on (08) 9321 3755.

The information published on this website is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.