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One business deal, multiple contracts: GST and stamp duty stings

14 May 2015

You are acting for Charlie on the purchase of a chocolate factory. Money is tight and Charlie has been watching all expenses including your fees and stamp duty. The building is owned by Freddo and the business by his family company. Charlie intends to buy the business in the name of his family company but the property in his own name.

GST is one concern because in the meeting when the deal was done, Freddo told Charlie the price of $1 million was “plus GST”, which to Charlie means another $100,000 even though, he acknowledges, he will get this back as an input tax credit.

Stamp duty is another because Charlie looked online to see that stamp duty on $1.1 million is $45,990.

On the GST issue, you consult Charlie’s accountant, Lucy, who explains that under section 38-325 of the GST Act (A New Tax System (Goods and Services Tax) Act 1999) the purchase can potentially be GST free on the basis of a going concern.

Lucy explains there are two separate things to establish to be GST free. Firstly whether Freddo’s company can supply to Charlie’s company all the things needed for the chocolate business to continue, including the right to occupy the premises, and secondly whether Freddo can supply to Charlie all the things needed to continue the enterprise of leasing.

Lucy adds the necessity for Charlie and his company to be registered for GST, for Freddo to keep operating until completion, and for the contracts to specify it is a supply of a going concern.

You mention this to Freddo’s solicitor who says he knows all about it and that the contracts will cover everything.

So far as duty is concerned, you explain to Charlie that the duty situation is better than he feared because, being GST free, there is $100,000 less to pay duty on. And further on duty, because the agreed allocation of the price is $750,000 for the building at $250,000 for the business goodwill, that it will be $29,240 on the building purchase and $7240 on the business purchase amounting to $36,480 in total.

The contracts duly arrive and, after some negotiations, exchanged.

Charlie is pleased that you have avoided the need for him to stump up $100,000 for GST and that there is a saving of $9,510 in stamp duty.

The stings

Firstly, the OSR claim that section 25 of the Duties Act applies so that the two transactions are aggregated - so that duty is payable on the total purchase price as if it was one transaction.

The OSR tell you that, according to ASIC, Freddo is the sole shareholder of his company and that Charlie is likewise the sole shareholder of his.

Under section 25, dutiable transactions relating to separate items of dutiable property are treated as a single transaction if (A) they occur within 12 months, and (B) the transferors are the same or “associated persons” and (C) the transferees are the same or “associated persons” and (D) there is, in essence, one arrangement for both transactions.

The definition of “associated persons” includes a natural person and a private company where the natural person is a majority shareholder.

You see all this fits and realise there is no argument that both contracts really achieve essentially one transaction.

Secondly, Freddo’s solicitor tells you that according to his client’s accountant neither sale can be GST free because there is no formal lease. So Charlie will have to pay the extra 10% as per the GST top up clause.

You tell Lucy who says: see if it’s a periodic lease – with rent paid from month to month or whatever because in paragraph 66 of GSTR 2002/5 the ATO says this can be the basis for a supply of a going concern.

You check but no – all the company pays for Freddo is the council rates on the building.

Getting frustrated you look up the ruling yourself and see in paragraph 64 the ATO’s view that because a tenancy at will can’t be assigned Freddo’s company can’t supply all the things Charlie’s company needs to carry on the business – so it’s not a GST free supply.

Then further, paragraph 70 seemingly makes it clear that a building owner cannot make a GST free supply of a going concern where the building is occupied under a tenancy at will.

You wonder a bit about this but then look at section 9-20 of the GST Act which requires for a landholder to conduct an “enterprise” there must be a “lease, licence or other grant of an interest in property…” which clearly doesn’t include a tenancy at will.

In all, not only does Charlie have to stump up with the $100,000 GST but also his stamp duty bill goes back to where he feared at $45,990. He is not impressed.

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

Author: Jim Main

 

Jim Main Business Lawyer / Director

Jim Main practices in business law generally with an emphasis on business succession, estate planning and tax. Jim has a Diploma in Law, is a.. Learn more about Jim Main

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