Main GST Act
farming ceased & wool classing became the main (then only) activity? Though not a common law entity in its own right, the partnership is able to register because the GST law specifically defines “entity” to include a partnership, at s 184 of the main GST Act. (For GST purposes, a partnership has the same meaning as it does for income tax purposes. ) An entity has to be registered only once for GST even if more than one business is operated. The registration covers both the businesses. There is no need for John & Mary to change the registration when they ceased the farming activity. 2.
Is the sale of old farmland made as part of the partnership carrying on an enterprise? Give arguments for and against. Which do you think is the better argument? As defined under the Goods and Services Act and Australian Business Number (ABN) legislation the term ‘enterprise’ includes “activities done in the form of a business or adventure or concern in the nature of trade. But it does not It does not include: • Activities carried on by individuals (other than trustees of charitable funds) or partnerships (in which all or most of the partners are
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” If this definition is followed then the sale of old farmland does not constitute an enterprise as the partnership is not in the business of either farming or in the property development and consequently the land is not sold with a profit expectation. In that case the sale of old farmland will not be forming part of an active business asset. Since it is not active business asset it can be claimed as input taxed or at best can be sold under the margin scheme which is beneficial to the business.
However it is also possible to interpret the farm land as an active asset since partners in the partnership are carrying on the business under the general law. In this case the farmland can be sold as such to the prospective buyer. But although farming business has been done for a period of 5 years the sale cannot be an input taxed sale as the buyer does not have any intention of carrying on the farming business. Hence it is better to go with the argument on the basis of the definition of the term ‘enterprise’ instead of ‘active asset’. 3. If it is sold as part of an enterprise, can it be
• Of residential premises? • A mixed supply of land & residential premises? If so, how would you apportion it? • GST-free as farmland? The sale of residential premises is input taxed under section 40-65 of the GST Act. The supply would be treated as input taxes only when the property is a residential premise used predominantly for residential accommodation. It is not input taxed if the sale is of a residential premise which is a new residential premise (other than those used for residential accommodation before 2 December 1998), or of commercial residential accommodation.
In this case it is a house occupied by John and Mary from the year 1990 and since they have been using it as a residential accommodation and also not a commercial residential accommodation. Hence the sale of the residential premise would be input taxed for the purpose of GST. The remaining part of the farmland if sold as part of an enterprise section 9-80 of the GST Act allows apportionment between taxable supplies that are partly GST-free or input taxed. “The basis of the apportionment is the value of that part of the taxable supply in proportion to the (whole of the) supply.
The extent of the use of the property for input-taxed purposes is the value of that part of the property attributable to the residential premises. ” “Section 38-480 of the GST Act allows a supply of a freehold interest in farmland to be GST-free if the land is land on which a farming business has been carried on for at least the period of five years preceding the supply, and the recipient of the supply intends that a farming business is to be carried on in respect of the land. If your purchaser does not intend to carry on the business of farming, this section will not apply and the supply will be a taxable supply”
In this case even if the activity carried on by John and Mary between the year 1990 and February 2002 be taken as farming business for the purpose of making the sale GST-free, since the purchaser does not have the intention of carrying on the business of farming the supply will be a taxable one. The sale of farmland in this case can not be a GST-free one as the sale of a going concern under section 38-325 of the GST Act since the farming activity has long since been stalled as the continuation of the enterprise till the date of the transfer or settlement is a prerequisite.
If the supply is a taxable supply, can the partnership apply scheme in calculating GST liability? What are the requirements? What are the factors for & against using the margin scheme that the purchaser would consider? The GST Law gives vendors the option to pay GST under the margin scheme rather than under the normal rules requiring 1/11th of the total consideration for the sale to be paid as GST. “The margin scheme is only available if a property has not previously been sold since 1 July 2000 or, if it has been sold since 1 July 2000, it has only been sold under the margin scheme or as part of a going concern.
Once a property is sold under the normal GST regime, the margin scheme will cease to be available for further sales of that property. If the margin scheme is available and the vendor elects to apply it, GST will be paid at the rate of 1/11th of the margin, calculated as the difference between the current GST inclusive sale price and: • the value of the property as at 1 July 2000 as determined by a qualified valuer, if there has been no settlement of a previous sale of the property on or after 1 July 2000; or
• the last GST inclusive sale price, if the property was last sold (or settled) after 1 July 2000 and the margin scheme was applied; or • the amount of the last sale price attributable to the property, if the property was last sold (or settled) after 1 July 2000 as part of a going concern. ” Vendors need to ensure they “gross up” the price to include GST under the margin scheme to ensure they receive the same net amount under the margin scheme as they would receive if the property was sold under the usual GST rules.
If properly applied, the margin scheme will make no real economic difference to vendors. However, the margin scheme will assist some vendors – those under contracts which predate the GST if they are unexpectedly caught with a GST liability after 30 June 2000 where the contract contains no price plus GST clause. For the cost of a valuation, a vendor might reduce or eliminate GST by applying the margin scheme. “Most purchasers will be disadvantaged by the margin scheme.
The margin scheme can result in much less GST being paid. However, purchasers will not be entitled to input tax credits if vendors apply the margin scheme. Purchasers with full input tax credits – for whom GST is not a real cost – should normally insist vendors do not apply the margin scheme. One qualification is needed here: the amount of stamp duty on the GST-inclusive price needs to be taken into account by purchasers entitled to full tax credits.
The margin scheme might still be cheaper if the cost of the valuation and GST on the margin is less than the additional stamp duty on the full 10% GST. Purchasers who are not entitled to input tax credits in respect of purchases will benefit if the margin scheme is available. For them, GST is a real economic cost and the margin scheme provides them with an opportunity to minimise the GST cost. Purchasers who are not entitled to full input tax credits should speak to their tax advisors and lawyers to find out if the margin scheme should be applied (if it is available).
But the margin scheme may benefit the developers who purchase commercial property to redevelop into residential apartments. The purchaser will be able to improve their profits in the future sales by adopting the scheme available in respect of the future sales. Note that the decision whether to apply the margin scheme (if it is available) is the vendor’s. Purchasers will need to negotiate with vendors to ensure it is applied – or not applied – by the vendor, depending on the purchaser’s particular requirements. ”