The new contract for sale e-conveyancing & other issues A I C N S W W E B I N A R N O V E M B E R T O N Y C A H I L L

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1 The new contract for sale e-conveyancing & other issues 1 A I C N S W W E B I N A R N O V E M B E R T O N Y C A H I L L

2 Progress towards a new contract 2 Approved by PL Committee July Law Society Council and REI Board approval August It is expected that a new edition of the contract will be available for purchase in early November The key issues which have delayed issue of the new edition are: The move toward electronic conveyancing, and identifying the changes required for the contract to be econveyancing friendly. The GST treatment of farm land and going concerns Discussions about the most effective way of delivering the contract, especially with the increasing use of electronic documents.

3 Key concepts in electronic conveyancing The Registrars in each jurisdiction as guardians of the integrity of the system via the Australian Registrars' National Electronic Conveyancing Council (ARNECC). Initially, there will be one Electronic Lodgment Network (ELN) administered by a single operator (ELNO). There is the potential for (and some interest in) others later. 3 The initial ELNO: National E-Conveyancing Development Ltd (NECDL) has changed its name to PEXA (Property Exchange Australia Ltd) - current PEXA shareholders are founding State Governments and major lenders and other corporates.

4 Key concepts in electronic conveyancing 2 Registrar in each jurisdiction will impose conditions on an approval of an ELNO, including compliance with operating requirements and participation rules. ELNO will enter into participation agreements with subscribers (typically solicitors, conveyancers and financial institutions). The participation rules will deal, inter alia, with client authorities, digital signing, document retention and the need to comply with the operating requirements and participation rules. Non-electronic conveyancing will be available for those unwilling or unable to move to the e way. 4

5 Electronic conveyancing to do list Refining the technology framework in particular, PEXA Releases. Finalising the terms of the Model Operating Agreement and Model Participation Rules ongoing consultation between ARNECC and stakeholders regarding e.g. the client authorisation form. Latest version of MPR for NSW October Determining the fate of the CT a discussion paper was issued by LPI in late Currently, ADIs who are PEXA subscribers can elect not to have a paper CT those parties hold the Control of the Right to Deal (CORD) and lodge a consent through PEXA when a dealing is to take place see LPI Circular 2014/03. More detail about the financial nuts and bolts e.g. timing of funds movement, practitioners without a trust account, timing of payout figures from lenders? Release of the PEXA fee structures from PEXA sponsors. Redrafting standard forms in common use (e.g. contract for sale and purchase of land) to make them e-ready see later slides. 5

6 Electronic conveyancing work in progress 6 Limited range of transactions brought into scope as from June 2013 Release 1 deployment limited to mortgages, discharges of mortgage and refinances. Initially one bank (CBA) and one land registry (Victoria) had access to PEXA. Big four banks and LPI were in scope by end of 2013; three second-tiers in May Release 2 of PEXA will open up the scope to multi-party transactions, and therefore to matters directly involving solicitors and conveyancers. Release 2 will be able to accommodate transfers, settlements, caveats and notices [presumably e.g. a priority notice (Qld) or settlement notice (Tas)]. Expected to be operational in NSW by early November 2014 as a selective rollout; available to all interested by early 2015.

7 Is PEXA for this little black duck *? 1. Can I ignore PEXA totally and keep my practice PEXA-free and paper-pumping? 2. Should I adopt e-conveyancing in my practice? 3. If I propose to use e-conveyancing, do I prefer to deal directly with PEXA or will I work with one or more of the four PEXA Sponsors? (InfoTrack, GlobalX Information, SAI Global Property and Veda) 4. Is this specific transaction able to proceed electronically (and even if it can, should it)? 5. How might the contract for sale regulate the parties once PEXA is open for transfers? * All due credit to Warner Brothers cartoons, both Merrie Melodies and Looney Tunes. 7

8 PEXA Practitioner Preparation 1 1. Can I ignore PEXA totally and keep my conveyancing practice PEXA-free? In theory a practitioner could choose to continue their practice without moving away from the existing paperbased system, since e-conveyancing is optional and will remain so for the foreseeable future. However, some paper-based procedures have already changed (ect is now in place) and others will probably change over next 12 months because of e-conveyancing. Lenders and market forces may bring pressure to bear suggesting adoption. 8

9 PEXA Practitioner Preparation 2 2. Should I adopt e-conveyancing in my practice? Practitioners will need to undertake an internal costbenefit analysis. Adopting e-conveyancing will have costs associated with training, compliance obligations and in some cases perhaps the need for technology upgrades. A practice which undertakes only the occasional conveyance, or which has unreliable internet speed and connectivity, or where the practitioner is constantly on the road without support staff (sadly there is no smartphone app available yet for e-conveyancing) may find adoption problematic. 9

10 PEXA Practitioner Preparation If I propose to use e-conveyancing, do I prefer to deal directly with PEXA or will I work with one or more of the four PEXA Sponsors? The sponsors are InfoTrack, GlobalX Information, SAI Global Property and Veda. A sponsor will assist with product support and training, and is likely to provide a familiar, and to some extent integrated, interface for users of an existing product. Some sponsors will add value in other ways (e.g. if a proposed PEXA settlement falls back to paper the sponsor might facilitate an old-school physical settlement). Once PEXA and Sponsor pricing are released it will be possible for practitioners to make an informed decision.

11 PEXA Practitioner Preparation 4 4. Is this specific transaction able to proceed electronically? There are significant impediments to the universal application of electronic conveyancing. These include: As of November 2014, only mortgages, discharges, caveats, withdrawals of caveat and transfers will be PEXA-compatible in New South Wales. So a transaction which involves some other dealing being provided at settlement (e.g. a Notice of Death or a lease intended to be registered) will not be within scope. Certain types of transfer (e.g. a transfer granting easement, or mortgagee power of sale) cannot be processed electronically in Release 2. PEXA will initially be limited to handling a maximum of three (or perhaps four?) linked or chain settlements. No more than twenty titles per transaction. If one party in a transaction (or in a chain) prefers not to use PEXA the transaction will default to paper. 11

12 PEXA fee structure Details for Release 2 published mid-october Useful Q&A at Key price points where financial settlement occurs (ex GST; single / multiple titles): Discharge of mortgage: $35 / $44 (charged to DM) Transfer: $95 / $108 (charged to V and also to P) Mortgage: $47 / $60 (charged to IM) Caveat or withdrawal of caveat: $13 / $23 Notice of Sale or Consent (e.g. CoRD consent): $0

13 PEXA fee structure worked example 13 o From o Subscriber acting for purchaser; single title; three other parties in the workspace. PEXA site says: I know that I am creating a transfer document (I am using the Transfer Title PEXA Transaction). [The other 3 parties] will pay their own transaction fees. I don t need to pay PEXA fees for the mortgage. I pay $95 (excluding GST). o Registration fees are NOT included in the PEXA fees.

14 Transition from 2005 to 2014 edition Unlike some previous editions (1988; 2000) no imperative to change to new edition as from specific date. Pad-based and electronic 2005 editions expected to be available until late Electronic version of the 2014 edition to be available until next revision (which can be expected prior to 2023) edition preferable if proposed that transaction will proceed electronically, or if vendor contemplating a deposit bond or guarantee. 14

15 The 2014 edition from the top Retitled contract for the sale and purchase of land Key driver was introduction of unfair contract terms provisions in the Australian Consumer Law. The printed form is almost inevitably a standard form contract within the meaning of the UCT provisions. Some, but not all, standard form contracts are covered by the UCT provisions. 15

16 How do the UCT provisions of the ACL operate? The UCT provisions apply to: A standard form contract Which is a consumer contract Unless an exemption applies A consumer contract is a contract for: (a) a supply of goods or services; or (b) a sale or grant of an interest in land; to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption. Supplies, sales or grants to a corporation cannot be a consumer contract. 16

17 Key operative provision s23 23 Unfair terms of consumer contracts 17 (1) A term of a consumer contract is void if: (a) (b) the term is unfair; and the contract is a standard form contract. (2) The contract continues to bind the parties if it is capable of operating without the unfair term.

18 24 Meaning of unfair What is unfair s24 (1) A term of a consumer contract is unfair if: 18 (a) it would cause a significant imbalance in the parties rights and obligations arising under the contract; and (b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and (c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on. The contract as a whole must be taken into account, plus the extent to which the term is transparent (as defined). Further discussion (if time permits) on concluding slides.

19 Section 26: Some exemptions from UCT (1) Section 23 does not apply to a term of a consumer contract to the extent, but only to the extent, that the term: or (a) (b) contract; or 19 defines the main subject matter of the contract; sets the upfront price payable under the (c) is a term required, or expressly permitted, by a law of the Commonwealth, a State or a Territory.

20 UCT (cont d): types of terms which may be unfair (s25) 20 (a) a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract; (b) a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract; (c) a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract; (d) a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;

21 Examples: types of terms which may be unfair s25 21 (e) a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract; (f) a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract; (g) a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;

22 Examples: types of terms which may be unfair s25 (h) a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning; (i) a term that limits, or has the effect of limiting, one party s vicarious liability for its agents; 22 (j) a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party s consent;

23 Examples: types of terms which may be unfair s25 (k) a term that limits, or has the effect of limiting, one party s right to sue another party; (l) a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract; (m) a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract; The list can be extended by regulation. 23

24 Might terms in the standard contract be unfair? Clause 2 (Deposits and other payments before completion) only a purchaser pays a deposit to secure performance obligations; 24 Clause 5 (limiting the manner in which, and the time within which, a purchaser can make a requisition) Clause 6.3 (limiting the right to claim compensation to the extent the purchaser knows the true position ) Clause 7.1 (allowing a vendor to rescind in the purchaser makes an unwelcome claim) Clause and (limits on the rights of a purchaser under the arbitration regime)

25 Might terms in the standard contract be unfair? 2 25 Clause 8 (allowing a vendor to rescind if confronted with an unwelcome requisition query whether such a term is expressly permitted by section 56 of the Conveyancing Act 1919 and so within ACL Sch 2 s 26(1)(c)). Clause 9 (only operational if a purchaser defaults; no corresponding regime for vendor defaults) Clause 10 (restrictions on rights of purchaser) Clause 18 (obligations imposed on purchasers if in early possession)

26 Might terms in the standard contract be unfair? 3 Clause 20.1 (deeming items to be attached, and thereby imposing an evidential burden) 26 Clause 22 (FATA Act clause the right of vendor to terminate for breach) Clause 23.8 (restrictions on the purchaser s right to rescind) Clause 28.2 (vendor s right to make minor alterations to an unregistered plan)

27 Reconsidering terms in the standard contract. Arguably, each of these terms is reasonably necessary to protect the legitimate interests of the vendor (e.g. payment of a deposit). Query whether a term mandated by the vendor s financier (for instance, in an off the plan context) would be held to be reasonably necessary (if the term were not there, perhaps the development and the sale would not proceed). It proved to be relatively easy to develop a counterbalancing clause for one clause (e.g. cl 9 counterbalanced by a new clause 8.2). More difficult for other clauses (e.g. cl 2) in the absence of judicial guidance on interpreting UCT. 27

28 New clause If the vendor does not comply with this contract (or a notice under or relating to it) in an essential respect, the purchaser can terminate by serving a notice. After the termination the purchaser can recover the deposit and any other money paid by the purchaser under this contract; the purchaser can sue the vendor to recover damages for breach of contract; and if the purchaser has been in possession a party can claim for a reasonable adjustment.

29 Formatting changes in the 2014 edition Can more white space be made available on pages 1 and 2? Probably yes, subject to final formatting arrangements. Variable items will spill over onto page 2 (black box, signature block and GST broken line box will stay on page 1; choices re tax and other topics likely to lead off page 2). Some new or amended items in the list of documents currently on page 2, so that rectangle will be longer. 29

30 Other changes to variable information 30 Reference to completion date changed to date for completion attempt to remove inherent ambiguity of previous phrase. Corresponding changes to several printed provisions. Additional improvement storage space. Additional pre-printed inclusion solar panels. Designed to prompt questions about ownership; any supporting contracts (e.g. to put power back into grid); adjustments to the price. Two new pick-a-box choices: use of a deposit-bond and proposed electronic transaction.

31 Changes to the list of documents The new edition will update legislative references (e.g. Swimming Pools and Home Building amendments; clause 18 re statutory rate of interest). In the meantime the existing references in the standard form do not have to be updated (see cl 20.11) New option of attaching form of requisitions (discussed in more detail below) 31

32 Swimming Pools Amendment Act Four key dates Assent, extension of Act to wider class of premises (including backpackers, B&B, farm stay, serviced apartments), narrowing of exemptions (in fact concessions NOT exemptions) for old pools, some existing pools (on small, large or waterfront properties) Swimming pools register, more comprehensive (and expensive) inspection regime, section 22D certificate of compliance Conveyancing and leasing disclosure changes legislated to commence month postponement of 29/4/14 key date.

33 Pool disclosure requirements on sale or lease 33 Amendment to Conv (Sale of Land) Regulation Sch 1. If the contract relates to land on which a swimming pool covered by the Act is located, either: A certificate of compliance; or A relevant occupation certificate plus evidence that the pool is registered. Certificate of compliance and occupation certificate must be less than 3 years old. Residential Tenancies Regulation will require landlord to ensure registration and provide C of C or occupation certificate to tenant.

34 Pool disclosure requirements queries What will be the arrangements if the pool is located on common property in a strata scheme (or association, precinct or community land under community title legislation) and a lot is being sold or leased? Will the disclosure obligations apply? Apparently yes. Will a lot owner have ready access to evidence obtained by an owners corporation (and what will be the mechanics and cost)? Alternatively, will each lot owner have to obtain own certificate (with the attendant cost and inefficiency)? Any traps if selling off the plan? What will be the fate of the current prescribed notice? 34

35 Pool disclosure practical problems High rate of non-compliance for existing pools SMH report 5/4/14 indicates Ku-ring-gai 99% failure rate; Sutherland sample 96% failure initially, 76% failed second inspection. Shortage of qualified inspectors, certifiers and tradespeople. Data on pool register while substantial majority of pools apparently registered, privacy restrictions on confirming registration via the Register unless certificate of compliance has issued.. Lot owners obtaining information about (and forcing compliance of) common property pools. Pools may comply when installed, but now no longer compliant (e.g. neighbour puts structure at boundary). 35

36 Home Building Amendment Act 2014 Assent 5 June 2014; not yet commenced (perhaps but probably not 1/12/14). Key changes relevant to conveyancing practice: Definitions from both Act and Regulation consolidated into a comprehensive Dictionary (Sch 1) Home warranty insurance renamed as insurance under the Home Building Compensation Fund Completion date defined where new building in a strata scheme (new section 3C) Distinction between structural and non-structural defects replaced with concepts of major defects and major elements of a building (s 18E(3) and (4)) 36

37 Home Building Amendment Act Existing section 95 replaced: Abolishes statutory cover for owner-builder work (s 95(1)) Disclosure by way of a conspicuous note of details of the owner-builder permit and the absence of ownerbuilder insurance (s 95(2)) 37 Section does not apply where sale occurs more than 7 years and 6 months after date of the permit (s 95(3)) Consumer warning requirement applies not only to the owner-builder but to successors in title (s 95(4))

38 Home Building Amendment Act New section 96B(1) : A contract for the sale of land comprising a house or unit excluded from the definition of dwelling because it was designed, constructed or adapted for commercial use as tourist, holiday or overnight accommodation must contain the warning required by this section if work has been done on the land in the previous 6 years that would have been residential building work had the property not been excluded from the definition of dwelling. Warning is a prominent statement to the effect that the property does not have protection under the Act. Prohibition on entering into the contract unless statement attached; contract voidable if no statement in contract. Savings and transitional provisions affect ss 95, 96B.

39 Naming agents on page 1 39 Long-standing distinction between vendor s agent and what is currently described as co-agent. Role for vendor s agent (e.g. clauses 2 and 7) No role for co-agent in the printed form space to identify because of popular additional provision by which a purchaser might be liable for commission payable to any agent not named in the contract. Dramatic growth in numbers and activity of buyers agents named on page 1 and depositholder of last resort (in theory) in clause 1.

40 Other areas for change in the 2014 edition 40 Deposits, bonds and guarantees Increased focus on attempts to stagger the deposit with a top-up additional provision. Such clauses have had limited success, and have been held to be unsuccessful at appellate level. Luong Dinh Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40 (clause ineffective); Australian Land Co Pty Limited v Tumut Festival Centre Pty Limited [2006] NSWSC 828 (clause upheld; Sovereign Developments distinguished); Iannello v Sharpe (2006) NSW ConvR , [2006] NSWSC 713; (2007) 69 NSWLR 452, 12 BPR 23,887, NSW ConvR , [2007] NSWCA 61 (provision attempting to provide for a top-up found at first instance to be effective; Court of Appeal held that the clause was ineffective; considering the contract as a whole the deposit was in fact only 5%, despite the amendment to page 1 of the printed form); Cloud Top Pty Limited & Anor v Toma Services Pty Limited & Anor [2008] NSWSC 568: BC (clause held to be effective); Boyarsky v Taylor [2008] NSWSC 1415 (clause ineffective); Rana v Dalla Costa [2014] NSWSC 1113 (clause effective).

41 Bonds and guarantees Developing body of law on bonds and guarantees: Reliance Developments (NSW) Pty Limited v Lumley General Insurance Limited [2008] NSWSC 172 failure to comply strictly with terms for claiming bond invalidated the claim. Detmold v Oldtex Pty Ltd [2005] NSWSC 1197 vendor claims bond, purchaser disputes purported termination by vendor (and ultimately succeeds on that issue) what is the position of the bond issuer regarding payment out of funds? 41 Signorelli v M G South Pty Ltd [2012] NSWSC 1606 exchange supervised by estate agent; purchaser provided faxed deposit bond promising to forward original but never did; vendor ultimately issued notice to complete and terminated. Held vendor could have terminated without prior N/C by analogy with clause 2.

42 Clause 3 of the 2014 edition 42 What topics were considered when thinking about bonds and will be included in the new clause 3? Not every deposit-bond will be acceptable to a vendor (e.g. the amount of the bond; the bond issuer; is there an acceptable expiry date?) If the deposit-bond has a time limit for its operation will the time limit be sufficient? Arrangements for substituting a deposit-bond. Consequences if bond is dodgy or not supplied? Arrangements for physically holding the deposit-bond before settlement, after settlement. Dealing with the bond when termination is disputed. Practice tip: The banking of a cheque tests its validity; what corresponding steps might be taken for verifying a bond?

43 Amended clause 4 beyond the transfer 43 In addition to submitting the transfer, the purchaser must now serve on the vendor particulars required to register any mortgage or other dealing to be lodged with the transfer by the purchaser or the purchaser's mortgagee. Essential under current LPI practice where there is an ect. Discharging mortgagee has holder of the Control of the Right to Deal must consent (via PEXA) to the entire lodgment case not only to its DM, but also to the transfer to P and the mortgage to Incoming Lender. Prudent purchaser (and vendors and purchaser s mortgagees) will make a CT inquiry prior to settlement to confirm CoRD consent lodged in a timely manner. LPI practice under review to minimise clunkiness.

44 Requisitions clause unamended aspects 44 Features common to both the 2005 and 2014 editions The contract does not attempting to codify what requisitions the purchaser can make. The contract instead speaks in terms of dealing with those requisitions a purchaser is or becomes entitled to make. The threshold question of entitlement must always be considered. The contract is silent as to the vendor s obligation to reply (implicit if the purchaser is entitled to make a requisition, the purchaser is entitled to a reply). Nor is there express mention of when replies must be sent (the general law position replies within a reasonable time is preserved; also see cl 21.1 about the general obligation under the contract to do things within a reasonable time).

45 Requisitions the amendment 45 Increasingly vendors are including a special condition requiring purchasers to raise requisitions by use of a particular form on inquiries (and sometimes attaching replies to the contract). To the extent that vendors and their advisers are thinking about requisitions prior to formation of contract, that development is arguably welcome. Where the practice becomes objectionable I suggest is in those special conditions which go on to say that the purchaser cannot raise any requisition other than those on the attached form. Clause 5 will facilitate (not mandate) attaching a form of requisitions, but preserve the right of a purchaser to make any other requisition (not covered by an attached question). For cases considering the law of requisitions, see Adolfson v Jengedor Pty Ltd (1995) 6 BPR 14,147; (1996) NSW ConvR , Australian Mortgage v Baclon [2001] NSWSC 774, and Crowe v Rindock Pty Ltd and anor [2005] NSWSC 375.

46 Replies to requisitions Some forms of standard requisitions include preprinted replies. What are the advantages to a vendor (and a purchaser) in doing so? Do the advantages coincide?? Are there any dangers in pre-printing the replies in an attachment to the contract? The 2014 edition has no reference in the printed provisions to replies (and definitely not to attaching replies!). 46

47 The e-conveyancing provision (clause 30) 47 The clause is the most detailed in the contract. It is thought that a detailed, prescriptive provision will be necessary in the early days of a novel system, and will assist in educating users of the contract about some of the important issues and potential traps in electronic conveyancing. As a first step, the vendor will need to indicate whether it proposes that the transaction should proceed electronically. That would involve a choice at the front of the contract. The default choice (the one in BLOCK LETTERS) is NO.

48 The e-conveyancing provision (clause 30) 2 48 Once a purchaser is found, the purchaser will need to advise whether it wishes to proceed electronically within a specified time (*14 days). In default of the purchaser advising that it wishes the transaction to proceed electronically, the transaction will default to paper. A party will need to be able to opt out of the PEXA environment during the transaction because, for example, it may become impossible to proceed electronically if the chain of settlements becomes too long or a party in the chain does not wish to proceed electronically. The clause addresses any fee or disbursement consequences which flow.

49 The e-conveyancing provision (clause 30) 3 49 Depending on the PEXA fee structure (NB: not yet fully released), there may also need to be an adjustment of those fees (and associated LPI fees) as between vendor and purchaser if the transaction proceeds to settlement. Any party to a PEXA transaction can create a workspace. The contract envisages the vendor will do so (*within 7 days of purchaser s consent to proceeding electronically), but provides that the purchaser can if the vendor has not. The clause details happens timeframes for action and response (including invitations to those not party to the contract for sale the discharging and incoming mortgagee) the usual next step time is *within 7 days). The contract will then take users through the key steps needed to populate the workspace and digitally sign and certify.

50 The e-conveyancing provision (clause 30) 4 The clause stipulates timing for submission of adjustment figures (*2 business days before date for completion) and payment directions (*1 business day before date for completion). There are provisions about how documents outside the workspace but important to the settlement process (order on agent, letter of attornment, original survey, paper certificate of title etc) are to be dealt with. Parties agree to comply with the participation rules and the ECNL. Catastrophe scenarios (e.g. LPI, PEXA or RBA computers down at the critical time). There is a lengthy, concluding definitions subclause. 50

51 No PPS clause in the contract for sale? 51 A significant proportion of property transactions will be unaffected by the operation of the PPS Act as the transaction will not involve an interest in personal property. For example, if the subject matter of a transaction were vacant land, or improved land with all improvements being fixtures, or a Water Access Licence, section 8 of the Act will remove the transaction from the reach of PPS law. On the other hand, transactions involving interests in items which are not indisputably fixtures, or items of property not mentioned in section 8, will potentially be affected by the introduction of the PPS Act (unless some other carve-out applies for example, a taking free provision such as section 47). Sales or leases of commercial premises, and sales of business, will almost inevitably be impacted. Where PPS is relevant, use an additional provision.

52 Changes to going concerns and farmland May 2009 Federal Treasury Discussion Paper Ch 2.6 Reverse charge mechanism, GST free farm land supplied for farming. The proposal was, in essence, that the GST law be amended to remove the GST free concessions for the supply of going concerns and farm land supplied for farming, and replace the concessions with a reverse charge mechanism (if the parties agree). 52 The reverse charge mechanism will also be available for a wider range of supplies of going concerns (by broadening and clarifying the concept of a going concern).

53 Changes to going concerns and farmland Under a reverse charge mechanism, the recipient of a supply is responsible for remitting GST that would otherwise be remitted by the supplier. The recipient is also entitled to claim input tax credits where it has made a creditable acquisition. Thus at the time of acquisition the recipient will be liable to remit the GST and will be entitled to claim input tax credits to the extent it has made a creditable acquisition. The two amounts, generally, would offset one another, whilst maintaining the normal GST revenue result. The reverse charge for the supply of a going concern and farm land would operate similarly to section 83-5 of the GST Act The amount of GST charged is 10 per cent of that part of the price of the supply that relates to the taxable component of the supply because using the basic GST rules (broadly 1/11th of the price) would not result in the correct amount of GST.

54 Proposal in a nutshell Remove the GST-free treatment of going concerns and farmland supplied for farming. Make both a taxable supply. BUT allow the vendor and purchaser to agree to use a reverse charge mechanism. If used, GST payable by the purchaser not the vendor. 54

55 Example 55 Old MacDonald has a farm. Used for farming for at least five years. Wants to sell to Brown who intends the land to be used for farming. MacDonald wants $1m in the hand.

56 Current position 56 Contract price $1 million. MacDonald pays no GST. GST revenue: NIL

57 Reverse charge available and used usual case Contract price $1m GST payable by vendor NIL GST payable by purchaser (ignoring possible use of margin scheme) via BAS: GST on supply $100K LESS ITC $100K GST to ATO NIL 57

58 Reverse charge NOT used 58 Contract price $1.1 million Vendor remits GST of $100K Purchaser claims ITC (to extent allowed) of between NIL and $100K * The potential interplay between reverse charging and the margin scheme is unclear.

59 Timetable for implementation May 2009 paper: To take effect 1/7/10 May 2010: Postponed to commence 1/7/11 May 2011: Postponed to a date after the relevant amending legislation has been passed December 2013: To be implemented with amending legislation expected sometime during When change is implemented, will almost inevitably lead to changes to clause 13 and to GST choices on page 1 of the joint copyright contract no changes possible until full details of legsislation available. 59

60 60 Any questions?