We develop commercial solutions.
16/01/08
Subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 provides that a supply of a going concern is GST free if certain conditions are satisfied.
One of these conditions is contained in section 38-325(1)(b) of the Act which requires the recipient to be registered or required to be registered.
As the recipient does not have to be registered or required to be registered at the date the parties enter into a contract, it is easy to overlook section 38-325(1)(b) once the contract has been signed.
If the recipient is required to be registered in respect of the enterprise on and from the date of the supply (the settlement date), section 38-325(1)(b) will be fulfilled.
However, if the recipient is not required to be registered, but chooses to register to obtain the benefit of section 38-325(1)(b), the mere lodging of an application to be registered will not satisfy the requirements of this section. The effective date of registration of the recipient must be on or before the day of the supply.
Vendors should insist on proof of registration of GST from the purchaser before settlement occurs. Vendors who overlook this requirement and proceed to settlement on the basis that no GST is payable will be required to pay GST on the supply (and possibly penalties and interest) if the Australian Taxation Office subsequently determines that the supply is not a going concern.
Even if the contract contains a clause which obliges the purchaser to indemnify the vendor for any GST, penalties or interest, the vendor may still be exposed to unnecessary risk in that there is no incentive for the purchaser to pay promptly given that settlement has already occurred.
For further information regarding this issue, please see www.ato.gov.au or contact Peter Bazzani on 9670 0722 or pbazzani@bsblawyers.com.au.