The family home or the family business are probably the most valuable assets a person can have. Because the government can take one-eleventh of the proceeds of sale of either in some circumstances, it would be unwise in the extreme to make any decision about selling them without consulting your professional advisers.
While it's clear from the budget papers presented last May that the government is disappointed with the quantum of revenue it has so far received for the GST, there is little doubt that it has increased the revenue of professional advisors. But, if my associates both in law and accounting are anything to go by, that increased revenue has come at a substantial cost in lifestyle.
The quarterly - or monthly - BAS is only one side of the equation. All of us have had to rewrite our administrative procedures and reassess what time might be needed to complete them. Just as importantly, there is a morass of GST Rulings changing the tax landscape monthly, which can impact upon just about everything we do in business.
Take the case of a client of mine, who came to me with a "done deal" on the sale of his restaurant. As you no doubt know, if you sell a business as a "going concern", the sale price is not subject to GST, as such a sale is specifically exempted by the GST legislation.
The problem is that the terms of the deal were negotiated by an agent who had little or no knowledge of some of the nuances of the GST legislation and the Rulings which are being issued regularly by the Australian Taxation Office.
We all know how important it is that a buyer be offered a substantial lease period if a business operates from rented premises. In my particular case, although the lease had two years to run, the agent went off and negotiated a new 5+5 year lease with the landlord and, it was only on that basis (the agent alleges) that the buyer was prepared to do the deal.
When I finally sat down with the seller, who was my client, his jaw made an indentation in my desk when I told him that the sale was not GST-free and that he would have to pay one-eleventh of the sale proceeds to the Tax Office in GST. To make matters worse, the purchaser would obtain a windfall tax credit of the same amount without having to shell out one cent!
The Taxation Office has recently issued a final Ruling which explains what the Commissioner's view is on the sale as a "going concern" exemption. To avoid any GST being incurred on the sale proceeds, any new lease which is part of the business sale arrangement must come about because the lease or some other circumstance won't allow for a transfer of the lease or the refusal by the landlord to agree to a transfer for whatever reason.
If a seller encourages a buyer to try and negotiate better terms with a landlord when the existing lease has some time to run, the Taxation Office will not regard that sale as one of a going concern, if a new lease is entered into as a matter of choice by one party or the other.
The lesson is, if you are negotiating a sale or a purchase, don't finalise the deal until you have spoken to your lawyer.
So much for businesses. What about the family home?
For the most part, the family home is exempt from GST, but many are still having a lot of trouble in understanding those exemptions.
Generally, the sale of the family home will be exempt from goods and services tax because the seller will not be carrying on an enterprise and, thus, the sale will not be a "taxable supply" because "it is not made in the course of or furtherance of an enterprise".
Even if the seller carries on an enterprise, there still won't be any GST payable on a family home unless it is new residential premises.
Generally, residential premises are only "new" if they:
- haven't previously been sold as residential premises or haven't previously been the subject of a long term lease;
- have been created through substantial renovations of a building;
- were built to replace demolished premises on the land in question; or
- haven't been leased for 5 years or more since construction.
"Residential premises" are defined in the GST Act as land or buildings that are occupied as a residence, or intended to be so occupied, and are capable of being occupied as such. While residences include floating homes, there is a range of properties which are problematic. Caravans are excluded, but what about premises built as residential, but currently used as a boarding house or backpacker accommodation? And there is always the issue of premises which are part residential and part commercial or industrial.
Whether you are buying or selling, there is a series of questions in the standard form contract in all States dealing with GST which, if not properly answered, could lead to one party or the other to the contract being financially disadvantaged.
The value of the assets involved are so great, and the financial penalties potentially so large, it is essential that the best professional advice be obtained in all circumstances, whether it be the family home or the business you're selling.
This is all the more important because of the introduction of the 50% CGT (Capital Gains Tax, not GST) discount and the generous small business CGT relief which is changing the face of the taxation of small businesses in Australia.
Watch this space for an article on just that.
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