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The Abbott Government proposal to proceed with replacing the GST going concern exemption with a reverse charge mechanism has the potential to result in a 10% increase in stamp duty and could result in hundreds of millions of dollars of extra stamp duty being paid around the country in coming years.
Jones Lang LaSalle and Corrs Chambers Westgarth are concerned about the impact that the proposal may have on the real estate industry and Australian businesses and believe caution is required if the government proceeds with its implementation.
The Assistant Treasurer, Arthur Sinodinos, recently announced that the Abbott Government would proceed with the proposal of the previous Labor government to replace the GST going concern exemption with a reverse charge mechanism.
Currently the supply of the tenanted commercial property is GST-free as the supply of a going concern provided that the parties agree on this in writing and everything necessary for the continued operation of the leasing enterprise is supplied.
The proposed change follows a review by the Board of Taxation which identified complexity in the rules and suggested the move to a reverse charge mechanism. If the proposal is implemented, the supply of tenanted commercial premises will ordinarily be subject to GST unless the sale satisfies the going concern criteria and the parties agree that the reverse charge mechanism is to apply. Where the reverse charge mechanism applies, the GST liability shifts from the vendor to the purchaser.
Whether GST applies to the vendor or the purchaser should not affect the cash flows, assuming the purchaser can claim an input tax credit for any GST in the same period that it incurs the GST liability. However, it has the potential to increase the stamp duty payable if the purchaser pays the GST to the vendor, or the agreement to the reverse charge mechanism is seen as forming part of the "consideration" for the supply of the property. In the context of stamp duty, a High Court decision in 2005 clearly established that consideration is what "moves a transaction". That is, what payments and other promises motivate the vendor to sell. So, where a vendor only agrees to a transfer on the basis that the purchaser agrees to assume the GST liability, revenue offices may seek to argue that the consideration would include that promise (ie. add the GST).
On a sale of a tenanted commercial property in Victoria worth $30 million, the stamp duty payable in this scenario will increase from $1,650,000 to $1,815,000, or by 10%.
Jones Lang LaSalle Director Sales and Investments, James Kaufman said, "If you look at the bigger picture, the potential increase will have an impact on property valuation. Increased acquisition costs will lead to lower property values and subsequently the Federal Government will collect less in capital gains tax in the longer term."
"In the Melbourne CBD last year, Jones Lang LaSalle recorded $2.6 billion of office transactions, with a value in excess of $10million, which were subject to going concern relief. Under the current GST legislation, the State Government would have collected $143,000,000 in stamp duty on those transactions. With the new rule, stamp duty could potentially be assessed at $157,300,000 – an increase of $14,300,000 or 10%," Mr Kaufman said. "The change would potentially result in hundreds of millions of dollars of extra stamp duty being paid around the country in coming years."
Corrs Chambers Westgarth partner, Nathaniel Popelianski said "When GST was introduced, the concept that stamp duty was calculated based on the GST-inclusive price of real estate was heavily criticised as constituting a 'tax on a tax' and an unreasonable 'tax on business'. This burden is particularly heavy on sectors such as real estate where stamp duty of around 5.5% is payable on each sale transaction. The proposed changes expand this concept to sales of a going concern and impose an additional financial burden on the real estate industry. This has a flow on effect on rental prices, business overheads and the competitiveness of Australian business."
Reynah Tang, a tax partner from Corrs added "In the Treasury discussion paper on this proposal, it was noted the change would require the unanimous agreement of the States and Territories to change the GST base. So it is incumbent on the Abbott Government to show leadership and use this opportunity to get the States and Territories to clarify their laws to ensure that no additional duty is payable in these circumstances." Mr Tang added "We also think the government should proceed with the other changes recommended by the Board of Taxation to relax a number of the conditions for going concern treatment."
Director, Sales and Investments, VIC
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