Selling your business as a going concern

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It may be that you have accepted an offer for the sale of your business or maybe you have found an opportunity to purchase your dream business and it’s too good to not make an offer. In any case, a question that often arises is how GST applies to the transaction. If the GST treatment is not addressed properly, it can leave you as the seller out of pocket.

Many businesses in NSW are bought and sold as a GST free supply of a ‘going concern’. Although the goods and services tax regime has been around since early 2000, the going concern exemption still troubles many people who are party to a sale of business transaction.

What is a supply of ‘going concern’?

The ‘going concern’ exemption is an invention from the Australian Tax Office which allows a sale of business to be GST-free. If a business is sold as a ‘going concern’, then the sale will be exempt from GST by virtue of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (“the GST Act”).

The essential elements:

For the sale to be deemed a ‘supply of a going concern’, Subdivision 38-J (section 38.325) of the GST Act requires that:

  1. The supply is for consideration
  2. The recipient (buyer) is registered or required to be registered for GST
  3. The supplier (seller) and the recipient have agreed in writing that the supply is of a going concern
  4. The supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and
  5. The supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier).

What does this all mean?

In most business sales transactions, the first 3 elements are usually satisfied. Firstly, the purchaser is paying money or some other consideration for the business. Secondly, the purchaser is typically registered for GST or will be required to be registered on completion of the sale and thirdly, the parties’ lawyers usually advise their client to include a special condition in the contract that expressly states that the sale will be a supply of going concern. This highlights that the parties to the sale acknowledge the transfer is a supply of going concern.

That leaves the final two elements. The issue of whether a sale of business will be deemed GST free will come down to:

  1. whether the seller has provided the buyer with everything necessary for the continued operation of the business from settlement; and
  2. whether the seller carries on, or will carry on, the enterprise until the day of supply.

One of the most difficult elements to determine is whether the seller has provided the buyer with all things necessary for the continued operation of the business. The ATO has published a ruling (GSTR 2002/05) that identifies that there are two fundamentals which are essential for the ‘continued operation’:

  1. ‘the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas’; and
  2. ‘the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion’.

The final element states that ‘the vendor must carry on the enterprise until the day of the supply’. The concept of day of the supply’ is one that causes a lot of confusion between parties. Essentially, it is when the buyer ‘assumes effective control and possession of the enterprise carried on by the seller’.

It is prudent for the seller to trade up until the “day of the supply”, being the date of completion or settlement of the sale. Any business closure in the lead up to settlement could nullify the going concern exemption and the ATO may determine that GST is payable. The only exception to this is if the seller temporarily ceases trade for a short period of time such as maintenance and cleaning purposes.  

What happens if the ATO determines the sale is not a supply of going concern?

Its easy for parties to a transaction to agree that the sale will be a supply of going concern and do what they think is necessary to satisfy all elements under the GST Act. However, even if the parties have done everything necessary to satisfy the elements, sometime the exemption is rejected by the ATO.

If this is the case, then it is the vendor that will be liable to pay GST on the transaction. For these reasons, it is common to see a GST clause included in the contract which operates to pass off the liability to pay GST and any other penalties to the purchaser, if the ATO ever assess that GST is payable.

Even though it’s been around for 2 decades, the impact of GST is still an issue that is overlooked in many transactions. Particularly if you are a seller, it’s important to properly understand how GST might apply to your sale and how you can minimize the risks of an unintended (and unwanted) tax bill.