Publications and News

Tax stings and GST tales of woe

10 March 2017

This article was published in this month's edition of the Law Society Journal of NSW. Three lawyers walk into a bar. Allan, Barry and Charlie. It’s Friday, they’re good mates, they’ve all had a bad week, and they want to share the pain.Allan goes first.

Allan’s story

 I acted for this couple – Alex and Allie – on the sale of the building they’d used for their shoe shop business. In 2012 they’d bought the building and business GST free as a going concern from a family that had run it since well before 2000.

They couldn’t use the going concern exemption on the sale because the buyer didn’t want the business. And we couldn’t treat as a normal taxable supply because the buyer wasn’t registered for GST – and refused to register – and we couldn’t agree on a GST inclusive price. So eventually they agreed to use the margin scheme.

But hang on a minute says Barry – you can’t use the margin scheme if you acquired the property as a going concern can you? To which Allan replied well, yes, you can apparently, if the seller to you bought the property before 2000.

So Alex and Allie were OK with this – they worked out the margin between 2012 and now was $100,000 so 1/11th of this at a little over $9,000 was OK.

Allan’s sting

Allan’s right in that A New Tax System (Goods and Services Tax) Act 1999, s 75-5(e) ('the Act') doesn’t prohibit use of the margin scheme on the sale of a property acquired GST free as a going concern from a seller who had owned the building since before 1 July 2000 when GST was introduced. That’s the good bit.

But the bad bit is that the margin on which GST is payable in such a case is the difference between the value on 1 July 2000 and the sale price - (s 75-11(5)).

Alex and Allie were horrified and angry when they worked out the margin since July 2000 was $500,000!

Barry’s story

My story, Barry says, is that I acted for Brian and Beatrice on the sale of a vacant lot to the local council. It was an amalgamation of two lots, one of which was bought under the margin scheme but the other was bought under a normal taxable supply on which Brian and Beatrice had received an input tax credit of $100,000.

It was agreed to use the margin scheme, which was covered by an appropriate clause in the contract. I always though, said Barry, include a top up clause for GST just in case.

Barry’s sting

Section 75-5(2) of the Act prevents use of the margin scheme where purchase of the entire interest being sold was 'ineligible for the margin scheme', such as where GST was paid without using the margin scheme (sub-s (3)(a)) - so that normally the buyer gets an input tax credit of the amount paid. But that doesn’t apply to a mixed supply as with Brian and Beatrice.

That’s good but the sting is that if you do there is an increasing adjustment to pay under s 75-22(1) equal to the input tax credit you received on the purchase.

Brian and Beatrice were not happy about this, but I said – don’t worry – it was all covered in the contract. If you have to pay GST on the sale then the buyer has to top-up the price to cover this.

But when I rang up the council’s solicitor the response was – too late mate – have a look at the decision in McEwans Case (McEwans Australia Pty Ltd v Brisbane City Council [2016] QDC 347), which I did only to find that, at least according to the Queensland District Court, the normal GST top-up clause, which covers things between buyer and seller, does not cover increasing adjustments, which are essentially between the seller and another party.

Brian and Beatrice were not impressed.

Charlie’s story

Well, Charlie says, I think my story tops both of yours. My clients, Chloe and Chris recently bought a couple of residential properties from a developer subject to existing leases. There was a lot of argy-bargy about the price but eventually they shook hands on $1.5 million. But neither of them were thinking GST at the time.

GST was an issue though because the premises had only recently been built, and as new residential premises the sale of them was not input taxed. So after much argy bargy it was agreed to make the sale GST free as a going concern. To make it work Chloe and Chris had to register for GST but everything then seemed fine.

Charlie’s sting

Section 135-5 of the Act allows a person carrying on an 'enterprise' to register for GST whether or not the turnover is above the threshold. Leasing property is an 'enterprise' regardless of whether the rent is input taxed (s 9 -20(1)9c)). Section 135-5 provides that where someone acquires a property GST free as a going concern which is to be used wholly making supplies that are neither subject to GST nor GST free, they must pay an increasing adjustment equal to 1/10th of the purchase price. And residential rent is input taxed (s 40-35).

Chloe and Chris were outraged by this. What?, they said, does this mean we have to pay $150,000 - that the seller would have paid if you hadn’t agreed to the GST free deal?

It was not a happy conversation.

Much later -

they all went home – in taxis.

Takeaway points

1. Be very careful using the margin scheme.

2. Be very careful using the going concern exemption.

3. There are multiple different GST scenarios requiring separate analysis.

By Jim Main

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

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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