GST and the sale of a going concern
In the course of giving business advice we come across many different situations. Leigh Adams Business Lawyers is well aware of the importance of taking GST into account. John, a businessman, has had 3 bad experiences with GST. Here is how we solved his problems and saved him lots of money. The first and the third experiences relate to real property. The second relates to the sale of a going concern.
John’s first problem
John recently sold a commercial property which he inherited from his father. He negotiated to sell the property for $2 million. However, this price did not include GST and the buyer refused to add GST to the negotiated price. John had a friend who was a financial planner and he told John that he could apply the margin scheme which would mean GST was only payable on the difference between the price his father paid for the property and the sale price had recently renegotiated. John was very happy about this because his father bought the property for $1 million ten years ago. John thought he could use the margin scheme to halve his GST bill.
John decided to double check the advice he had been given. He came to see us and after discussing the matter with John, we discovered that when his father bought the property the vendor paid 10 per cent GST on the full sale price. There was no margin scheme. We advised John that under section 75-5 of the GST Act he cannot use the margin scheme on the sale of the property where normal GST was applied when the property was bought. This means that John could not use the margin scheme when selling the inherited property because the normal 10 per cent GST was paid on the sale price when it was bought by his father, who left the property to John.
We advised John that he was liable for the GST on the full $2 million with no right to recover the extra amount from the purchaser. We explained to John that proceeding this way avoided the possible embarrassment (and expense) of receiving a letter from the ATO demanding not only the additional amount of GST on the sale, but also associated fines and penalties. John was very happy that we had provided him with certainty in his business dealings.
John’s second problem
John also owned a butcher’s shop. However, after his father’s death, he decided to retire as a butcher to pursue his other business ventures. John decided to lease the shop to his business partner and he later agreed to sell the premises to that business partner for $500,000. John had been paying GST on the rent however nothing was said about GST when the two business partners shook hands on the deal to sell the shop. After searching the internet, John thought he had solved this problem as he read that leasing is an “enterprise” for GST purposes and that the sale could be treated as the “sale of a going concern” and therefore “GST free”.
Our second solution
We told John that his sale was not GST free. We advised John that in paragraph 108 of GSTR 2002/5 the ATO states, “The owner of an enterprise which consists solely of the leasing of property cannot make a ‘supply of a going concern’ when supplying to the lease the real property which is subject to the lease.” This is because one of the things that must be supplied is the benefit of the lease covenants – which disappear when the lease merges with the fee simple. We advised John that he is not able to supply his business partner (the lessee) all the things – the property plus the covenants – necessary for the continued operation of the existing enterprise of leasing the property. Again, John avoided potential fines and penalties because he came to us for advice before he acted.
John’s third problem
John’s third GST issue concerned the sale of a residential property. John had demolished his principal place of residence and subdivided the allotment into two. He built two residences, one which he lived in and the other which he put on the market for $1.1 million. He told his conveyancer that he had not rented out the second residence before selling it, that he is not registered for GST and that this was a one off transaction. On these facts, the conveyancer did not think GST was an issue and on the sale contract the conveyancer inserted that the sale was not a taxable supply. However, the conveyancer was not sure about this and suggested to John that John should double check this advice with John’s solicitor. He sent John to us for our opinion.
Our third solution
We informed John that this sale would likely be subject to tax. In a private binding ruling (No 1011228795667) the ATO held that a sale on the same facts required the vendor to register and pay GST, for the following reasons. For GST purposes “an enterprise” includes “an activity, or series of activities, done…in the form of an adventure or concern in the nature of trade” (GST Act, s 9-20). The acts of demolishing an existing place of residence, then subdividing, building (and selling) a new residence “go beyond the mere realisation of a capital asset” and therefore constitute “an enterprise”. The sale of new residential premises is neither GST free nor input taxed. As the sale price exceeds the threshold of $75,000 John was required to register for GST. With no top-up clause in John’s contract the sale price of $1.1 million is therefore the GST inclusive price, so that the value for GST purposes is 10/11ths of the price, being $1 million (GST Act, s 9-75) and the GST payable is 10 per cent of the value (s 9-70) amounting to $100,000.
The goods and services tax captures all sorts of transactions. If you want peace of mind and certainty moving forward, call 02 9964 0022 or email firstname.lastname@example.org and ask for Leigh. We get you there.