A sale of business where all that is necessary to operate the business is transferred to the purchaser is known as the supply of a ‘going concern’. In simple terms, the business has the ability to continue to function, as was the case immediately prior to sale.
The revenue generated is GST-free if it is in exchange for money (or some other benefit), if the recipient is registered for GST (or required to be), and if the parties have agreed in writing that the business will continue to operate effectively.
There are two farm land concessions. The more common concession arises where:
There is a sale of land on which a farming business has been carried on for five years or more preceding the sale.
The purchaser intends that a farming business continues to be carried out on the
There is no defined time limit when it comes to the second criteria. However, there would be an adjustment if you tried to exit the GST system with the land or use it to make input taxed supplies.
A less commonly used concession is available where:
Potential residential land is subdivided from land on which a farming business has been carried on for at least five years.
The sale is made to an associate of the seller without consideration or for consideration below the GST-inclusive market value of the supply.
This concession allows potential residential land (land that it is permissible to use for residential purposes, but that does not contain any residential buildings) to be sold to a family member for development or for resale to a developer.
What does this all mean in real life situations?
If you intend to undertake a development in a business-like manner that constitutes an enterprise, you should consider becoming registered for GST as soon as the enterprise commences.
Consider the following example from the ATO of what it would consider activities organised in a business-like manner.
‘Tony is a carpenter. After reading the Investors Club News, he decides to purchase a property. He thoroughly researches the real estate market, attends investment seminars and records the information he has found.
The property Tony purchases is in a good location but he pays a reduced price because it needs extensive renovation. Using his knowledge and contacts within the building industry, Tony quickly completes the renovations.
He then sells the property and makes a generous profit.
Using the proceeds from the sale of the first property, Tony purchases two more houses that require renovation.
Tony sets up an office in one of the rooms in his house. He has a computer and access to the internet so he can monitor the property market. Tony’s objective is to identify properties that will increase in value over a short time once he has improved them. He leaves his job so he can spend more time on his research and renovations.
Tony’s activities show all the factors that would be expected from a person carrying on a business. His property renovating operation demonstrates a profit-making intention; there is repetition and regularity to his activities. Tony’s activities are organised in a business-like manner.
Therefore, Tony is regarded as being in the business of property renovation.
Identifying the commencement of your enterprise (in contrast to preparing to commence your enterprise) is a difficult task. The commencement of your enterprise usually coincides with the first significant expense incurred once your decision to proceed with a specific development has been made.
You are not required to be registered until sales are excess of the GST turnover threshold are made or are likely to be made. However, delaying registration in these circumstances is only going to inconvenience you and potentially enhance cash flow pressures. If you are likely to exceed the GST turnover threshold, you would be best advised to register from the beginning so you can claim any GST on your expenses, otherwise you could be faced with the scenario that the ATO would require you to be registered and therefore you would be out-of-pocket with GST payable on your sales, having not planned and managed your cash flow accordingly.
On the other hand, if you are undertaking a residential development and intend to hold the developed residential properties for rent, you should not apply to become registered. If you are already registered, you should consider applying for a cancellation or using a different entity to hold these properties.
With most property developments, the acquisitions and input tax credits typically precede the payment of GST arising from the sales. This timing difference usually sparks an interest and hence response from the ATO. You are advised to ensure that your input tax credit claims are creditable acquisitions and supported by tax invoices before making the credit claims.
If you fully understand the GST law or have someone working with you that does, you could save yourself thousands of dollars. This is where you would likely need your trusted tax adviser very close by your side.