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Beware of Isolated Transactions and GST

12 September 2017

Your ex-partner, Antonio, contacts you late Wednesday afternoon asking you to act for him in relation to selling a shop down the main street of the small coastal town you live in. You are thrilled to receive the call. You parted on reasonably good terms but haven’t heard from him in a long time and you were always secretly hoping you might re-kindle the flame. Eager to please Antonio, you stay back late to draft the contract so it is ready for him to sign in the morning.

Antonio advises that he is not registered for GST. He has renovated the shop quite substantially but hasn’t got to the point of renting it out. It was pretty run-down when he bought it and his intention at the time was to renovate and sell with the hope of making a good profit.

He purchased the shop for $150,000, renovated at a cost of about $25,000, and is now selling for $300,000.

Because Antonio says he isn’t registered for GST, you confirm on the contract that the sale is not a taxable supply.

The contracts are quickly exchanged and settled.

Antonio is very pleased with the speed of your work and is in such a good mood about all the money he made from the sale, invites you for a drink at your favourite pub to celebrate. You leave work and head off to the pub with a hopeful spring in your step.

The sting

After a few blissful months of being back together with Antonio, he unexpectedly drops into your office and leaves a letter with your receptionist.

Expecting it to be something romantic, you are surprised when you open the envelope and see it is a letter from the ATO with red capital letters written across the top “FIX THIS”.

Your hands tremble as you read through the letter which basically says Antonio should have been registered for GST in relation to the sale of the shop and that he is liable to GST of $30,000.

You are completely thrown by the letter and do not understand how this could possibly be so after the advice you received from Antonio and his accountant.

As far as you know because Antonio wasn’t renting the shop, he wasn’t required to registered and the sale price should have nothing to do with it because, under s.188-25, when working out the GST turnover you can disregard, “any supply made, or likely to be made, by you by transfer of ownership of a capital asset of yours…"

You decide to give another law firm you deal with on more complex tax matters a call.

The solicitor there advises that Antonio could be liable for GST on the sale of the shop as an ‘isolated transaction’.

She directs you to paragraphs 35 and 46 of GSTR 2001/7 which confirms that Antonio would be viewed as ‘carrying on an enterprise’ because he bought the property with the intention of renovating it and selling at a profit:

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

The sale proceeds easily exceed the turnover threshold of $75,000 so, on the face of it, Antonio is liable to GST.

Oh god, you think, this cannot be happening. Not to Antonio, not now while things are going so well.

You ask a senior solicitor in your firm to deliver the news to Antonio. You just can’t face him now and you’re pretty sure the romance will be over.

Author: Amanda Tully

This article is general information only and should not be relied on without obtaining further specific information.

Amanda Tully Business Lawyer / Director

Amanda Tully is a business lawyer whom acts for clients on a wide range of business succession and other commercial matters. Amanda’s experi.. Learn more about Amanda Tully

Contact Amanda Tully by email or call +61 2 6942 1655.


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