GST + Family Law
We get it that tax is just one of the issues that need to be dealt with during relationship breakdown, and that Family Law advisers mostly don’t want to become experts in tax law or accounting.
Our experience also tells us that because tax is so complicated, sometimes no one takes ownership of the tax issues that could spell disaster down the track. In some circumstances working through the tax detail could allow for a better business, financial or family entity arrangements after relationship breakdown.
GST is just one of those tax issues, however it is also an area where the Tax Office approach seems at odds with common sense (at least in my view) and may not be well understood by every professional adviser.
This article looks at the basics of GST so that we can understand the examples we look at later in this article. These examples help illustrate how the Tax Office position on GST works in relationship breakdowns where there is a transfer of a business asset (eg a work truck) from a business entity (eg the family partnership) to a party to the relationship.
GST is payable to the Tax Office (by a supplier) where a “taxable supply” is made in the course or furtherance of an enterprise. Broadly, a “private” supply that doesn’t have a commercial flavour (such as a sale of the family home) isn’t in the GST net.
Not every supply by a business is subject to GST in the same way – things like dealings in shares, sale of farmland and the supply of a business as a going concern may not trigger a GST cost at the transaction time.
When a business acquires something for business use, the general rule is that the amount of GST included in the cost (the GST the supplier pays to the Tax Office) is paid back to the acquirer as an Input Tax Credit (ITC).
For example, if Bill buys a new truck to use in his plumbing business the dealer pays GST to the Tax Office on the sale. If Bill uses the truck 100% for business and is registered for GST he will get all the GST imbedded in the price back from the Tax Office.
This reflects the policy that GST is not a cost on business inputs. The GST cost Bill pays and the ITCs Bill gets back net themselves out.
If Bill bought the truck for 100% private use he is not entitled to credit for the GST he paid, and GST becomes a “real” cost for him.
Sometimes, a business may acquire an asset for 100% business purposes and at some point start using that asset for “private” things. For example, if Bill buys the truck for business purposes and then gives it to one of his daughters for her trip around Australia that may be a change of “purpose” and Bill may have to pay back the Tax Office some (or all) of the ITCs they paid to Bill calculated on 100% business use.
For our current purposes:
- GST is only payable on supplies made in the course of an enterprise (not private transactions).
- Businesses that acquire things for business use get a credit back from the Tax Office for GST imbedded in the price they pay. If there is no GST in the price (for whatever reason) then there is no credit.
- If a business buys something for business use and then applies it to private purposes the business may have to pay back some (or all) of the GST credits they had previously claimed.
I’m a family lawyer- why should I care about any of this stuff?
The good news is that no one is going to force you personally to understand all the potential tax issues when you are advising clients going through a relationship breakdown.
The not so good news is that pretty much every transaction that involves changing ownership of any form of property involves tax considerations. Being pro-active about tax issues can often produce better overall financial outcomes for clients and may also help avoid unpleasant surprises.
Let’s look at a simple example:
- The partnership of Bill and Ben buy a truck for their flowerpot business
- The cost is $55,000 including GST
- The partnership intends to use the truck 100% for business and got a credit of $5,000 from the Tax Office for GST embedded in the cost
- Bill and Ben’s relationship breaks down immediately after the truck was purchased and they engage family lawyers to provide advice, and
- The parties have agreed that Ben will receive the truck which he will use 100% for business purposes.
What are the GST considerations if the truck is transferred to Ben?
On the face of it we might think that because the truck is 100% a business asset and will only be used 100% for business purposes there should not be any GST costs at the transfer time.
After all, if Ben purchased the truck directly from the dealer his net cost would be $50,000 ($55,000 GST inclusive price less $5,000 credit back from the Tax Office).
Tax Office Position
Unfortunately for us, the Tax Commissioner sees different GST outcomes.
Without wanting to spoil the ending, the following Tax Office examples (which we have edited) explain the impact of the Commissioner’s view that a Family Law transfer of property is not made in the course or furtherance of a business.
If the Commissioner’s view is correct (and that is another question) Input Tax Credits previously claimed by the transferring business may need to be paid back, and the recipient of the property won’t be able to claim Input Tax Credits, even if the property has been and will be used 100% for business purposes by everyone involved.
Paying back Input Tax Credits
GST Ruling GSTR 2003/6 gives the following (edited) examples of how the Commissioner’s view may work in real life:
67. As part of a property settlement under an matrimonial property distribution, a partnership asset (a car) is provided to L. The car was purchased … on 1/7/2000 …and $4,000 in input tax credits was claimed.
… the partnership disposed of the car to Lil on 31/12/2002.
The (transfer) of the car is a private application by the partnership.
(T)he (amount the partnership must pay back to the Tax Office)…in respect of the private application (disposal) of the car is $2,750.
Claiming Input Tax Credits
85. L receives a car under an matrimonial property distribution from the former partnership.
The partnership previously had an increasing adjustment of $2,750 (see the example above).
L now uses the car 100% in her new business.
Although L had a prior interest in an entity that had (to pay back input tax credits it had claimed) in relation to the car, the car was not supplied to her in a taxable supply.
There was no GST on the supply of the car to her.
As the supply to her was not a taxable supply L has not made a creditable acquisition of the car. She cannot claim any input tax credits in relation to the car.
Two years later L sells the car to an unrelated party. This subsequent supply … will be a taxable supply if all the tests in section 9-5 are met. (emphasis added)
Applying the Tax Office reasoning to Bill and Ben, the end result could be (in the worst case) the partnership will have to pay the Tax Office $5,000, so the overall net cost of the truck to the partnership becomes $55,000.
This is the outcome even though Ben would only have been out of pocket $50,000 if he had purchased the truck directly from the dealer. Ben will likely also have to pay GST when he eventually sells the truck.
These simple examples show us that if we have the wrong understanding of how GST works (or how the Commissioner says it works) then we may overlook what can be significant GST costs.
In the greater scheme of GST this looks like a very strange outcome that imposes a private use consumption tax on business activities.
As with most things to do with tax, there is no substitute for working through the detail – how long the property has been held and used by the transferring entity, how much GST was paid on acquisition, how the property will be transferred to and used by the receiving party, the potential GST exposure in dollar terms and of course all the other tax considerations that come with changing ownership of property.
If you have any questions or wish to discuss how to manage GST costs that may arise with Family Law property settlements please get in touch.
Solicitor & Principal
Chartered Tax Adviser
tax + law
16 March 2020
Liability limited by a scheme approved under Professional Standards Legislation
Disclaimer: The material in this publication is a general commentary on complex legal and commercial issues. It cannot be relied on as professional advice or otherwise.
© Copyright D O’Connor 2020