How to think about the GST puzzle

This article provides a brief overview of GST and how the different types of supply are treated for GST purposes. Individuals, property developers and entities operating in the small and medium enterprises (SME) sector will find this article useful as an overview of how GST may affect your business.

Overview

GST is a broad-based transaction tax of 10% levied on most goods, services and other items sold or consumed in Australia.

When working out the GST consequences of entities registered[1] for GST, it is always necessary to determine what kind of supply (e.g. taxable, input taxed or GST-free) the entity is making. The type of supply determines the amount of GST the supplier must charge its customer as well as the amount of GST input tax credits the supplier may claim back. Needless to say, if you are not required to be registered for GST or do not voluntarily register for GST, you may not charge GST or claim back any input tax credits.

The trick with GST is to determine which kind of supply is being made and then work out the GST consequences.

Types of GST supplies

A simple example of a toy shop owned by Geppetto (registered for GST purposes) and selling Pinocchio dolls that were originally manufactured in a  factory, can be used to illustrate the different GST consequences depending on what type of supply is made for GST purposes.

Taxable supply when toy store sells Pinocchio dolls to customers

Each sale by the toy shop of a Pinocchio doll to a customer will be a taxable supply. This means that the toy shop will include GST in the price of the sales to customers, and in turn the toy shop may claim input tax credits for GST paid on purchases made to enable the making of the taxable supply (e.g. the GST charged by the factory when it sold the dolls to the toy shop).

If the toy shop uses the cash basis of accounting for GST, they may claim  the input tax credits  when they pay the factory for the Pinocchio dolls.  The toy shop can only claim input tax credits to the extent of the consideration provided – that is, if they pay for 50% of the dolls then they can only claim 50% of the input tax credits. The balance of the input tax credits can be claimed when the balance of the payment is made.

Alternatively, if they use the accruals basis, they may claim the input tax credits when the factory issued them with an invoice for the Pinocchio doll, or a payment (of any amount)  is made (whichever is earlier).

This means that the toy shop will therefore be liable to pay a net amount of GST (i.e. the difference between the GST on the sale price and the GST on the purchase price) to the ATO as worked out in their business activity statement (BAS). Where the input tax credits exceed the GST payable the toy shop will be entitled to a refund of GST from the ATO.

GST-free supply when Geppetto sells the toy store as a going concern

If Geppetto was selling the toy store business as a going concern, such a sale will be a GST-free supply provided:

  1. there is a written agreement that the sale is of a going concern (usually satisfied by inserting such a clause into the sale contract);
  2. the toy store carries on the enterprise until settlement day (i.e. so that the buyer can basically start trading on the day of settlement); and
  3. the toy store supplies all things necessary for the continued operation of the enterprise (e.g. transfers all the Pinocchio dolls as trading stock to the buyer, the premises of the toy store, the benefits of any contracts, etc).

The consequences of such a sale are that although the seller will not have to include GST in the sale price, the seller will still be able to claim input tax credits (e.g. the GST on acquisitions relating to the sale).

Conversely, for the purchaser there will be a reduction in stamp duty (where applicable) on the purchase given the lower consideration (as the seller cannot charge GST).

If at a later time, it turns out that one of the going concern conditions mentioned above were not satisfied (e.g. the toy store actually ceased business after it signed the contract and did not carry on business until the day of settlement), the sale will not be that of a going concern and the seller will be liable for GST.

It is therefore recommended that, whenever selling a business as a going concern, the seller includes an indemnity / clawback clause in the sale contract to ensure the buyer indemnify the seller for GST if it turns out that the disposal is not the sale of a going concern.

Input taxed supply if Geppetto becomes a property developer and leases out a new house

Since the toy store has been sold, Geppetto uses the proceeds of the sale to start his new enterprise as a property developer, registers for GST and buys land, subdivides it and constructs new residential premises.

However, Geppetto is not able to sell the new residential premises immediately and therefore leases them out. Leasing out the new residential premises will constitute an input taxed supply (i.e. no GST on the lease proceeds and Geppetto can’t claim input tax credits for GST paid on acquisitions relating to the lease).

GST and property developers

Working out the GST on property transactions can be a very daunting task – especially because the GST consequences depends on what kind of property you are dealing with (as determined by case law and legislation) and whether you supply the property by way of sale or lease.

In brief, the GST consequences attaching to each type of supply of property is set out in the table below:


Taxable supply
  • Sale of new residential premises[1]
  • Sale/lease of commercial residential premises[2]
  • Sale/lease of commercial premises
Input taxed supply
  • Lease of  residential premises
  • Sale  of residential premises (not new)
GST-free supply
  • Sale of a building as a going concern
  • Sale of farmland

Furthermore, property developers may also use the margin scheme[3] (a concession whereby GST is not worked out on the full sale price[4] and therefore less GST will be paid on the transaction) when making a taxable supply of property.

There is also currently a case (MBI Properties[5]) before the High Court dealing with the supply of property as a going concern and whether adjustments to GST are necessary when the buyer makes input taxed supplies afterwards.  This case can have far-reaching consequences for developers selling new residential premises or commercial residential premises subject to an existing lease.

Need more help?

GST can be very complex (especially when dealing with property). Please get in touch with us if you are unsure of the GST consequences attaching to your transaction.


[1] Enterprises with a GST turnover of $75,000 or more are required to be registered ($150,000 for not-for-profit entities).

[2] Residential premises are premises capable of being used and are in fact used predominantly for residential accommodation. New residential premises are residential premises that have not been used as residential premises before (e.g. newly constructed residential premises or substantial renovations to buildings to create new residential premises)

[3] Examples of commercial residential premises include a hotel, motel, hostel or anything similar to that.

[4] Specific rules apply to stop certain supplies of property being able to be made subject to the margin scheme. For my details please contact your Nexia advisor.

[5] Broadly, under the margin scheme, GST is only worked out on the difference between the sale price and the purchase price or the value of the property as at 1 July 2000.

[6] MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCAFC 112

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