A business is sold as a ‘going concern’ to a purchaser where everything needed for that purchaser to continue operating the business is included in the sale. It requires the seller to continue running the business up until the day of sale (the settlement date).
When is a Business Sold as a Going Concern Exempt from GST?
Usually when a business is sold and the Goods and Services Tax (GST) applies, the purchaser must pay an additional 10% of the purchase price at completion to cover the GST. The purchaser will be able to get the GST back as a 10% input tax credit, but not until after completion. Also, if stamp duty is payable on the sale it is calculated on the basis of the purchase price including GST, and the GST part of the stamp duty is not refundable.
However, if the business is sold as a ‘going concern’, the sale may be exempt from GST and no additional stamp duty will be payable. In practical terms, a going concern means a company’s ability to continue operating as a business. The A New Tax System (Goods and Services Tax) Act 1999 (‘the GST Act’) sets out the legal requirements for the exemption to apply, including:
- The sale is for consideration;
- The purchaser is registered or required to be registered for GST;
- The parties have agreed in writing that the supply is of a going concern;
- The seller supplies all of the things required for the continued operation of an enterprise; and
- The seller continues operating the enterprise until the day of the supply (the date on which control and ownership of the enterprise is transferred to the purchaser).
- Written Agreement
The written agreement between the seller and purchaser that the supply of the business is one of a going concern must be entered into on or before the day of the sale. Parties that fail to document the sale as a ‘going concern’ prior to the transaction cannot qualify for the GST exemption. There is no prescribed form for the agreement and no need for it to form part of the contract of sale, so it is relatively simple to meet this timing requirement.
- Day of Supply
The day of the supply refers to the date for effective control and ownership of the enterprise transferring to the purchaser. Most often it is the settlement date, but it could occur before or after the settlement date. It occurs when ‘effective control’ or the economic risks and benefits of the business have been passed on to the purchaser.
- What is the Enterprise?
An enterprise is the term used to describe leasing, licensing, trading operations or charitable activities under the GST Act. The enterprise sold from the seller to the purchaser may be part of a larger enterprise carried on by the vendor. In this situation, it is important that the enterprise being sold is capable of operating independently.
- Supply of all things necessary for continued operation of the enterprise
All things ‘necessary’ for the continued operation of the enterprise will vary based on the nature of the enterprise. Two key aspects are:
- The necessary assets for the enterprise’s continued operation, including premises, contracts, equipment etc; and
- The enterprise’s operating structure and process, such as advertising.
Also, it is important that a single purchaser and single seller are involved in the transaction for the GST exemption to apply.
It is worth verifying that the requirements to sell a business as a going concern are met. Otherwise, the ATO’s strict criteria may preclude you from obtaining the GST exemption. You can contact OpenLegal for assistance with the sale of your business on 1300 337 997 or by filling out the contact form on this page.