Many advisors will be aware that the sale of farming land, tenanted commercial property or a business can be carried out on a GST-free basis where the relevant statutory requirements are met. From a practical perspective, the exemptions usually result in lower financing and transfer duty costs and cash-flow relief.
What is the reverse charge?
The ‘reverse charge’ mechanism operates by requiring the purchaser to self-assess the GST on the transaction as if it were the vendor, and claim the input tax credit it would otherwise be entitled to in the same tax period. As the claiming of the input tax credits and the remission of the GST payable occurs in the same tax period, the transaction would create a nil effect for the purchaser in most cases.
In order to apply the reverse charge mechanism, both parties must be registered for GST and agree that it applies. If the reverse charge is not to be used, the vendor will be liable to account for GST in the ordinary manner.
How is transfer duty affected?
There is a risk that the State revenue authorities will view the reverse charging of the GST portion of the purchase price as a liability voluntarily assumed by the purchaser.
In Queensland, Section 12(1) of the Duties Act 2001 provides that the consideration for a dutiable transaction includes the assumption of any liability. If the revenue authorities adopt the position that an assumption of liability has occurred on the part of the purchaser, transfer duty may also be assessed on the GST component – resulting in a higher assessment than would otherwise be payable.
It is arguable, however, that any GST liability is that of the purchaser under a reverse charge arrangement and no liability is therefore assumed.
If you have any concerns about the impact of GST or transfer duty on a future transaction you should immediately seek professional advice.
It will be critical to ensure that the GST clauses of any agreement affected by the proposed changes are appropriately drawn. If, for example, the ATO forms the view that the reverse charge was incorrectly applied or that the parties were ineligible to apply the mechanism in the first place the vendor may instead became liable for the GST plus any penalties and interest.
It is difficult at this stage to determine exactly how the reverse charge mechanism will interact with other limbs of the GST framework (e.g. the Margin Scheme), although more detail is expected to be released by the Government in the coming months.
If you would like to receive more information about the proposed reverse charge mechanism for going concerns and farmland or you require guidance on a particular taxation issue please phone our office on (07) 3223 6100.