- Whenever there are two or more contracts covering what is essentially one business deal, be aware that section 25 of the Duties Act 1997 (NSW) may apply.
- Always take great care when using the GST going concern exemption.
- Always liaise with your client’s accountant when dealing with tax and GST issues.
You are acting for Charlie on the purchase of a chocolate factory. Money is tight and Charlie has been watching all expenses, including your fees and stamp duty.
The building is owned by Freddo and the business by his family company. Charlie intends to buy the business in the name of his family company, but the property in his own name.
GST is one concern because in the meeting, when the deal was done, Freddo told Charlie the price of $1 million was ‘plus GST’, which to Charlie means another $100,000 even though, he acknowledges, he will get this back as an input tax credit.
Stamp duty is another, because Charlie looked online to see that stamp duty on $1.1 million is $45,990.
On the GST issue, you consult Charlie’s accountant, Lucy, who explains that under s 38.325 of the GST Act (A New Tax System (Goods and Services Tax) Act 1999) the purchase can potentially be GST-free on the basis of a going concern.
Lucy explains there are two separate things to establish to be GST-free. Firstly, whether Freddo’s company can supply to Charlie’s company all the things needed for the chocolate business to continue, including the right to occupy the premises. Secondly, whether Freddo can supply to Charlie all the things needed to continue the enterprise of leasing.
Lucy adds the necessity for Charlie and his company to be registered for GST, for Freddo to keep operating until completion, and for the contracts to specify it is a supply of a going concern.
You mention this to Freddo’s solicitor, who says he knows all about it and that the contracts will cover everything.
So far as duty is concerned, you explain to Charlie that the duty situation is better than he feared because, being GST-free, there is $100,000 less to pay duty on. And further on duty, because the agreed allocation of the price is $750,000 for the building at $250,000 for the business goodwill, that it will be $29,240 on the building purchase and $7240 on the business purchase, amounting to $36,480 in total.
The contracts duly arrive and, after some negotiations, they are exchanged.
Charlie is pleased that you have avoided the need for him to stump up $10,000 for GST and that there is a saving of $9510 in stamp duty.