GST Going Concern exemption in property sales
The treatment of GST in a property transaction can materially add to (or subtract from) the bottom line.
In a property transaction, there are two basic ways that GST may be treated. That is, GST can be included in the price, or excluded.
The GST inclusive sale where the property is a taxable supply is a sale where the Vendor pays the GST without any additional reimbursement from the Purchaser over and above the agreed purchase price.
A GST exclusive sale is a sale where the property is a taxable supply and it is a term of the Contract that the Purchaser is to reimburse the Vendor for the GST payable in respect of the sale in addition to the agreed purchase price. This situation also imposes an additional financial impost on the Purchaser in that the amount of the GST is added to the purchase price for the purpose of calculating stamp duty on the Contract for Sale.
An exemption for liability for GST in a property transactions arises where the sale is deemed to be a “going concern” for the purpose of Section 38-325 of the A New Tax System (Good and Services Tax Imposition – General) Act 1999.
In order for this exemption to apply the following criteria must be satisfied:
- The recipient of a supply (Purchaser of the property) must be registered for GST and hold an ABN on or before the day of the sale of the supply being made by the supplier (Vendor) to the Purchaser (completion date under the Contract).
- The supplier must supply to the recipient all things necessary for the continued operation of the enterprise. For example if an agreement was entered into for the sale of a commercial property as an investment “all things necessary” would include the Lease documents between the Vendor or Landlord and the Lessee and the appropriate direction to the Lessee to pay all future rents to the Purchaser together with the transfer to the Purchaser of the benefit of any bond or guarantee provided by the Tenant.
- The supplier must carry on the enterprise until the day of the supply, being the completion date for the Contract. The enterprise must be active up to and including the date of supply. In the case of an investment property the Lease is required to be on foot at the time of settlement. For the purchase of vacant commercial property as an investment that is conditional on a new tenant taking occupation the Lease must be signed and have a commencement date prior to the settlement date.
- The supply made by the supplier must be for consideration which in the case of a sale of real estate would be the purchase price contained in the Contract for Sale.
- The supplier and the purchaser must agree in writing that the supply is a going concern. This is a standard provision in the current New South Wales Contract for Sale of Land which can be adopted by ticking a box.
The most common forms of enterprise conducted on property which will attract the going concern GST exemption are (1) the carrying on of a business or (2) the leasing of the property. The exemption would apply where a business is carried on at the property and both the freehold title to the property is sold together with the goodwill, plant and equipment and stock of the business, in the one transaction.
The exemption for the purchase of a leased property will generally apply where the property is 100% leased at the time the of completion, or where the property is partly leased, if at least 10% of the property is leased at the time of completion and the balance of the floor space is available for lease and the vendor is actively trying to find tenants for the remaining area.
If you require further assistance in this area, please contact Tim Osborn.