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Lecture 11

Lecture 11 - GST Selected Issues

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Queensland University of Technology

LECTURE 11 – GST: SELECTED ISSUES SALE OF A GOING CONCERN Introduction  Where certain conditions are satisfied, the sale of a business as a “going concern” to a registered or required- to-be registered acquirer will be GST free  The main advantage offered by the legislation is that the buyer does not need to finance the GST component of the transaction. o If the transaction was taxable, the buyer would still be able to claim an ITC for the GST on the purchase price; therefore the advantage is mainly a cash flow advantage for the buyer. o However, there is still a real benefit because the GST free treatment will result in a reduced sale price and consequently the stamp duty (calculated on the GST inclusive price) will be lower. Conditions for GST-Free Treatment Conditions for the sale of a going concern to be GST free (S 38-325(1)): 1. The supply is for consideration AND 2. The recipient is registered or required to be registered AND 3. The supplier and the recipient have agreed in writing that the sale is of a going concern Agreement in Writing  Requirement is designed to stop the purchaser from claiming an ITC when the vendor believes it is GST free.  The agreement that the supply is of a going concern must be explicit and should be expressed in unequivocal terms.  The Commissioner takes the view that the agreement must be made on or before the date on which the supply is made  The “going concern” agreement does not have to be part of the contract of sale. o However, where different components of the sale are covered by different contracts, care must be taken to ensure that the agreement applies to all contracts Registration Requirement  The requirement that the recipient must be registered or required to be registered must be satisfied on and from the date of the supply (GSTR 2002/5).  If the seller is not registered, the sale of the business will not be subject to GST in any event. What is the Supply of a Going Concern?  The supply of a going concern a supply where: (s 38-325 (2)) o The supplier supplies to the recipient all the things that are necessary for the continued operation of an enterprise AND o The supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier)  “Enterprise” = It is possible to sell a going concern that consists of an enterprise which is part of a larger enterprise (s 9-20) Supply Must Be All Things Necessary  Something is necessary to the business if the business cannot be operated without it o Conversely, if something that is not necessary for the continued operation of the business, it would be potentially taxed as a separate taxable supply. o What is “necessary” will vary according to the specific circumstances of the business. Enterprise Must be Carried on Until Day of Supply  Under the arrangement, the seller must carry on business until the day of the supply to the purchaser. o This requirement will be satisfied even where some activities of the business are ceased for a short period to facilitate the sale (e.g. stock take or maintenance).  The “day of the supply” is the date on which the recipient assumes effective control and possession of the enterprise even though the economic risk and benefit may be deemed by the contract to have passed at an earlier date (GSTR 2002/5) GST Adjustments for Supplies of Going Concerns  The recipient of a supply of a going concern will be liable for an increasing GST adjustment if he or she intends to make input taxed or private supplies through that enterprise (s 135-5).  The adjustment is calculated as: th 1/10 x purchase price x proportion of non-creditable use  The proportion of input taxed supplies is worked out on the basis of the prices of the input taxed supplies (or private supplies) compared to all supplies made by the enterprise.  If the recipient changes its business purposes and the proportion of input taxed supplies (or private supplies) are different from those intended, an adjustment should be made under the rules set out in Div 129 (s 135-10). o Division 129 provides that when there is a change in the intended use of a thing acquired and this change has an effect on the creditable purpose of the thing, a GST adjustment must be made. Sale of a Business Owned by a Company  There are three ways that a business operated by a company can be disposed of: 1. Sale of the separate assets owned by the business 2. Sale of the business as a going concern 3. Sale of the shares in the company that owns the business o The supplier is not the company carrying on the business but the shareholder and consequently the “going concern” exemption is not relevant. Instead, the sale of shares is treated as a financial supply which is input taxed; i.e. no GST is payable but the seller will not be able to claim input tax credit for costs such as legal advice or accountant advice in relation to the sale. o The purchaser of the shares will inherit the operating company’s tax and financial history; this will include the company’s GST status and liabilities. It is important for the acquirer to check that the company has complied with its GST obligations and that has correctly categorised its supplies, monitored its thresholds and maintained an effective accounting system.  The sale of the separate assets would probably be a taxable supply if the requirement of “all things necessary“ is not satisfied.  The sale of the business as a going concern will be GST free if the requirements in Subdiv 38J are satisfied. GST AND FINANCIAL SUPPLIES Introduction  Supplies that are classed as “financial supplies”, including loans, share trading and life insurance and related transactions are input taxed (s 40-5). o This means that while the supply is not taxable, the supplier cannot obtain an ITC for the GST paid on the things acquired to make the supply.  Not every supply made by a financial supply provider (e.g. a financial institution) is treated as a “financial supply”. For instance, general insurance, general leases and broking services are taxable supplies.  Not every financial supply will be made by a financial institution. For example, retailers who provide credit to their customers are making financial supplies that will be potentially input taxed. Meaning of ‘Financial Supply  The definition of “financial supply” is provided in the GST regulations (Reg 40-5.09)  For a supply to be a financial supply, 1. There must be a provision, acquisition or disposal of an “interest” in specific items 2. The provision, acquisition or disposal must be for consideration 3. It must be in the course of an enterprise 4. It must be connected to Australia 5. The entity that provides, disposes or acquires the interest must be a “ financial supply provider” 6. The financial provider is registered for GST or required to be registered for GST Interest  “Interest” is defined by Reg 40-5.02 as any form of property.  It includes: o A debt or right to credit o A right under a contract of insurance o An interest conferred under a o A right to receive a payment under a superannuation scheme derivative o A mortgage over land or premises o A right to future property Provision, acquisition or disposal  A “provision” includes the allotment, creation, grant or issue of an interest (Reg 40-5.03).  An “acquisition” includes acceptance and receipt of the interest (Reg 40-5.05).  A “disposal” includes assigning, cancelling, redeeming, transferring or surrendering the interest (Reg 40-5.04).  An “Acquisition-Supply” includes the acquisition of financial interests. Consideration  The term “consideration” has the same meaning as s 9-15. In the course of an enterprise ...  This means that an occasional share trade by a private individual is not a financial supply “Connected with Australia”  A mortgage over land or goods situated in Australia will be connected to Australia.  The supply will be connected to Australia if it is made through a business located in Australia. “Financial Supply Provider”  The terminology covers the entity that is the owner of the interest immediately before its supply, or the entity that creates or acquires the interest (Reg. 40-5.06). o For example in a situation where shares are sold, both the seller and the acquirer are financial supply providers. o However where shares are sold through an agent, the agent is only a financial supply facilitator (Reg 40- 5.07). Specific Items of Financial Supplies The most common types of financial supplies include:  Services provided to bank account holders (e.g  Provision of guarantees and indemnities ( cash collection, ATM, supply of EFTPOS card…) except warranty of goods)  Loans, debt and credit arrangements, including  Hire purchase only where the credit component supply of credit cards is charged separately from the goods  Mortgages and charges  Currency transactions  Interests in a regulated superannuation fund  Issuing of securities (shares, bonds etc…)  Life insurance  Forward contracts and other derivatives Incidental Financial Supplies  Supplies incidental to financial supplies are treated as financial supplies (Reg 40-5.10).  Incidental supplies are supplies that are made as the same time as the main financial supply, but with no separate consideration, and the supplier and recipient are the same as for the main financial supply o For a supply to be an incidental supply, it must be normal practice for it to be supplied with the main financial supply Things that are NOT Financial Supplies  Reg 40-5.12 provides a lengthy list of things that are not financial supplies including: o Ancillary services eg debt collection, forms non-standard cheque books and agency services (brokerage) o Professional services such as Provision of advice or facilitation services (e.g. access to a payment system such as an EFTPOS system supplied to a business). Reduced Input Tax Credits  As financial supplies are input taxed, the supplier cannot normally claim input tax credits for acquisitions related to those supplies. o However, a reduced input tax credit (RITC) is available for certain types of services (reduced credit acquisitions) acquired by financial supply providers (s70-5).  The percentage of the input tax credit for reduced credit acquisitions is 75 % (Reg. 70-5.03).  The list of reduced credit acquisitions (RITC eligible services) is provided by Reg 70-5.02. Each type of financial business (credit unions, mortgage finance, etc) has its own list of RITC eligible services. Financial Acquisition Threshold (De Minimis test)  Another exception to the general rule that you do not acquire a thing for a creditable purpose if you are making an input taxed supplies is provided by s 11-15(4).  Under this provision, an acquisition is not treated as relating to input taxed supplies if: o The acquisition relates to financial supplies, and o The entity that makes the acquisition does not exceed the financial acquisition threshold.  It is designed to ensure that entities making financial supplies that are not part of their principal activities are not denied an input tax credit. Calculating the Threshold  The Financial Acquisition Threshold (FAT) test has two components a current year component (s189-5): and a future year component ( s 189-10); both components must be satisfied. o The current year component requires the entity to calculate the financial acquisitions made or likely to be made during the current month and the previous 11 months.  The entity must then work out the input tax credits that would normally apply to these acquisitions. o In a similar way, the projected year component requires the entity to calculate the financial acquisitions and the amount of input tax credits that it is likely to make during the current month and the next 11 months.  If the total of the credits available under both test is less than either: 1. $50,000, or 2. 10% of the total input tax credits the entity is entitled to, then, all input tax credits can be claimed. If either threshold is breached, then none of the credits can be claimed Meaning of ‘Financial Acquisition”  An acquisition that relates to the making of a financial supply.  Must be used or intended to be used for the making of a financial supply  Acquisitions exclude importations and those that relate to borrowing  It is necessary to allocate overheads to financial acquisitions to the extent that they relate to financial supplies. (s 11-15 and Div 189) Interaction of Financial Acquisitions Threshold and RITC  When calculating the amount of input tax credit for the purpose of the threshold, the ATO requires that 100 % of the input tax credit on reduced credit acquisitions ( i.e acquisitions which can benefit from the RITC) count towards the financial acquisition threshold (GSTR 2003/9). o If the total amount breaches the financial acquisition threshold, any GST that is claimable as an RITC can be reclaimed at 75% of the GST incurred. Accounting Issues: Attribution of GST  Where a finance service provider makes input taxed supplies as well as taxable supplies and GST free supplies, it is necessary to attribute the GST that has been incurred between the different categories of supplies.  While it is often possible to trace direct acquisitions that relate specific supplies, the problem comes when determining which portion of overhead relates to GST free, taxable or input taxed supplies. GST incurred GST on acquisitions GST on acquisitions GST on relating to GST Free overhead relating to input and taxable supplies expenses taxed supplies Apportion Creditable GST Non-creditable GST Is the total more than the Financial acquisition threshold ? Yes No All GST is GST is not creditable creditable GST AND SALE OF REAL PROPERTY Overview of the GST Rules on the Sale of Real Property Summary of GST Rules on Sales of Real Property The rules applying to the different types of sales of real property are as follows: Type of premises Example GST treatment New residential premises New house Taxable supply Commercial residential premises Hotel Taxable supply Other residential premises Existing house Input taxed supply Non-residential premises Office building Taxable supply Part of a going concern Part a business; e.g. hotel GST free Farm land Sale to intending farmer GST free Vacant land by registered supplier Taxable supply Private sale Not taxable Meaning of “Real Property”  The definition s in the GST Act defines real property as including: o An interestinorrightover land o A personal rightto be grantedsuchrights(e.g.options) o A licence to occupy the land or any contractual right exercisable in relation to the land, for example a restrictivecovenant. Meaningof“ResidentialPremises”  According to s195-1, “residential premises“ means land or a building, o Occupied asresidenceor for residentialaccommodation o Intendedto beoccupiedand capableto beoccupied asa residence or for residential accommodation Sale of “New” Residential Premises  The sale of “new” residential premises is treated as follows: o If the premises were used for residential accommodation before 2 December 1998, the sale will be input taxed o Inothercases,thesalewillbesubjectto GST(s40-65).  Note that GST will only be payable if the seller is carrying on an enterprise and is registered or required to be registered. Meaning of “New” Residential Premises
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