The introduction of the Goods and Services Tax (GST) in Australia has a profound impact on many organizations, and these organizations, from governmental departments, commercial enterprises to non-profit organizations, have to understand and operate within the complexities of this taxation system. Therefore, the intent of this article is to give a brief introduction of GST and undertake a case study to emphasize some essential terms underlying GST. It would first examine the background to the introduction of GST and some fundamental concepts within the system. Then highlight two GST principals: Forfeited Deposits and Sale of a Going Concern, and applies them to the relevant facts in the settlement of Zoe and Melissa. After the whole analysis, it can be suggested that as the taxation not only influences the day-to-day operation, but the whole industry and social economy as a whole, the contracting parties, both suppliers and recipients, should understand the rulings and regulations related to their business domain to facilitate performance and to simplify taxation procedures.
2.0 From Concepts to Application
2.1 General Concepts
As part of fundamental tax reform in Australia, GST was passed into law in July 1999 and took effect from 1 July 2000. It is generally described as an indirect, broad-based consumption tax at the rate of 10%.
Ÿ Indirect – charged on goods, services and related activities, rather than directly on personal income;
Ÿ Broad-based – applied to a wide range of transaction, with only limited exceptions;
Ÿ Consumption – finally assumed by consumers, other than suppliers or producers.
Moreover, GST is interchangeable with Value Added Tax (VAT) utilized in European countries, signifying GST is imposed at each stage of production chain.
2.1.2 GST Terminology
In the GST system, there are some characteristics must be addressed:
Ÿ Supply – Section 9-10 defines a supply as “any form of supply whatsoever”, no matter whether the acts constituting the supply are legal or not. Besides, the meaning of supply is not just limited to sales, as the real estate can be granted, assigned or surrendered.
Ÿ Taxable supply – it is a supply that connected with Australia for consideration, in the course of furtherance of an enterprise carried on by a registered person. Contrarily, a supply would be nontaxable if it is GST-free.
Ÿ Input tax credits – they can be claimed by registered persons to offset GST payable on business inputs.
Ÿ Consideration – it includes anything given for value. It can be the payment for a supply or for the inducement of a supply.
The GST is incorporated in the price a customer pays to a supplier, and the supplier must deliver this amount to the Australian Taxation Office. If the supplier acquires goods or services as business inputs, they can claim a credit for GST that has been included in the price. Then the ultimate burden of GST falls on end-users, and the businesses in the production chain just transmit, other than bearing it. For example, a dairy farmer sells raw milk to milk processors for $0.4 (including $0.04 GST). The milk processor manufactures dairy products and then sells to a retailer for $0.7 (including $0.07 GST). Then a consumer could buy the dairy product at the price of $1 (including $0.1 GST). The dairy farmer pays $0.04 GST directly to ATO; the milk processor claims a credit for the $0.04 GST included in the price paid to the dairy farmer and pays $0.03 GST to ATO; so does the retailer, and finally the consumer bears the $0.1 GST included in the price. That is to say, the total GST ATO receives is all from end-users.
2.2 Forfeited deposits
In accordance with the standpoint of ATO (2007), security deposit refers to the money paid as security to assure the recipient performs obligations to which the deposit relates.
There are implications for security deposit:
Ÿ Forfeitable if the payer defaults on the agreement;
Ÿ Not be unreasonably large (generally no greater than 10% of the total purchase price);
Ÿ Not be treated as payment for a supply unless it is forfeited for failing to perform an obligation or applied towards the consideration for a supply.
The relationship between Security deposit and GST can be (Explanatory Memorandum, 1998):
1. Security deposit is usually refunded to payers when they meet the obligations, and it is pointless to charge GST on the deposit, as it will be refunded along with deposit;
2. Sometimes, the deposit would be incorporated to offset against in the consideration for a taxable supply, and GST should be charged on such deposits.
3. Also, GST is payable on the forfeited deposit for failure to proceed with the agreement. In the subsequent two scenarios, the payable GST on security deposits is attributed to the tax period.
In Zoe’s contract, she held the deposit for her benefit to secure Melissa’s performance to complete the contract and pay the contracted purchase price. The sales contract stated a 10% deposit, which is a customary ratio and considered to be equally reasonable for the purposes of Division 99; and required the balance was to be paid on the day of settlement, which implied the amount ceased to a security deposit to turn into part of consideration of the taxable supply. It also stipulated the amount is forfeitable upon a breach of contract by Melissa, which is supposed to be a mutual intention by the contracting parties. At the same time, the 10% deposit paid by Melissa would be considered as the consideration of the supply, even though it is at risk of being forfeited.
2.3 Sale of a going concern
According to Australian Taxation Office, sales are referring to the GST term Supplies, while supplies are not just sales.
Generally speaking, GST is charged for the sale of a business, as such taxable supply is associated with considerations. However, the sale of a business can be GST-free, as long as it is of a going concern. There is a collection of requirements that must be satisfied:
Ÿ The supplier supplies to the recipient all of the things are necessary for the continued operation of an enterprise;
Ÿ The supplier carries on, or will carry on, the enterprise until the day of the supply;
Ÿ The supply is for consideration;
Ÿ The recipient is registered or required to be registered; and
Ÿ The supplier and the recipient have agreed in writing that the supply is a going concern.
Considering the complication of sales of a going concern, ATO has indicated that the sales are GST-free only when all of the conditions are strictly adhered to. What is the most significant is that business must be sold as a whole.