Be careful when acquiring property as GST-free going concerns

This article is  intended to prompt members to seek appropriate taxation advice before deciding to purchase any property for the purposes of operating a caravan park or a manufactured home estate business.

It is common for parties to a contract for the sale of commercial property to apply the GST exemption for the supply of a going concern (Going Concern Exemption). The vendor is not liable for GST on the sale of the property if the Going Concern Exemption is applied as the transaction is treated as ‘GST-free’.

However, if the purchaser does not later use the property for making GST taxable supplies, then increasing GST adjustments can be imposed on the purchaser based on the purchase price of the property. This problem will arise if the purchaser decides to run a caravan park or manufactured home estate business on the property, but chooses not to remit any GST on long-term accommodation in accordance with the GST law. There are other instances where increasing adjustments can apply under the GST law.

The following example illustrates this GST issue:

Company A agrees to sell its caravan park business to Company B for $2 million. The parties are registered for GST, and they agree in the contract of sale that the transaction is a ‘GST-free’ supply of a going concern.

After settlement, Company B decides to run the caravan park business on the property solely for providing long-term accommodation (i.e. all tenants must stay longer than 28 days), and Company B chooses not to remit any GST on rents or any other fees collected from tenants.

Company B will have an increasing GST adjustment of $200,000 (10% x $2 million) because it is not using the property for making GST taxable supplies.
The GST burden has effectively shifted from Company A (the vendor) to Company B (the purchaser) in these circumstances.
It is important that members obtain proper GST advice prior to entering any agreement or contract to purchase real property. The GST consequences may impact on the feasibility or financial viability of the transaction.

Disclaimer: This article does not constitute legal or taxation advice and should not to be relied upon by members for managing their own tax affairs. All members are strongly encouraged to seek Independent tax advice from qualified experts.

In this regard, members may contact the following solicitors at HWL Ebsworth Lawyers for GST advice, or guidance on any other taxation matters:
Ari Schachna (Partner)
HWL Ebsworth Lawyers
+61 3 8644 3590

Content provided by  CCIA NSW.