Selling a business as a going concern: how GST works

When a GST-registered business sells its assets, GST would ordinarily apply to the price. On a sale of several hundred thousand dollars or more, that is a significant amount of cash for the buyer to find at settlement, even if they can later claim it back. The going concern rules allow many business sales to be GST-free instead. But the conditions are specific, and a deal that fails them can leave someone with an unexpected GST bill.

The basic idea

A supply of a going concern is a sale of a business that is up and running, with everything the buyer needs to keep it running, from one GST-registered party to another. Because the buyer would normally be entitled to claim back any GST charged, the law lets the sale be GST-free rather than requiring GST to be paid and then refunded.

This generally matters only for an asset sale. A sale of shares in a company is treated differently for GST. See asset sale vs share sale for the wider differences between the two structures.

The conditions

For the sale to be a GST-free supply of a going concern, all of the following must be met:

1. The sale is for consideration. There is a price paid for the business.
2. The buyer is registered, or required to be registered, for GST. Check the buyer's registration on the Australian Business Register rather than relying on assurances.
3. The seller is registered for GST. If the seller is not registered, there is no GST to remove in the first place.
4. Both parties agree in writing that the sale is of a going concern. This is normally done in the sale contract and must be in place before or at the time of the supply.
5. The seller supplies everything necessary for the continued operation of the business. This is the condition that most often causes problems.
6. The seller carries on the business until the day of the supply. The business must still be trading when it changes hands.

All of the conditions must be satisfied. Meeting most of them is not enough.

Everything necessary for continued operation

This test asks whether the buyer receives all the things needed to keep the business running as it was. What that means depends on the business. It might include:

• the premises, or the right to occupy them through a lease assignment or a new lease;
• plant, equipment, fit-out and tools;
• stock, where stock is part of how the business operates;
• goodwill, the business name and intellectual property;
• the benefit of key contracts with customers and suppliers;
• licences, permits and systems needed to trade.

Some assets can be left out without breaking the going concern if they are not essential to continued operation. Debtors and cash, for example, are commonly excluded. But excluding something central, such as the premises a café trades from, or a key piece of equipment without which the business cannot operate, can mean the sale is not a going concern.

Where the business operates from property the seller owns and the property is not being sold, careful structuring is needed. A new lease from the seller to the buyer may be enough, but this needs advice.

Carrying on until the day of supply

The seller must keep the business operating up to settlement. A business that has closed its doors, stopped trading for a period, or sold off key assets before settlement may not qualify. This matters most where a sale has dragged on or where the seller has already started winding down. If trading has stopped, raise it with your advisers before settlement.

What happens if the conditions are not met

If the sale does not qualify, it is generally a taxable supply. GST of 10% applies on top of, or within, the price, depending on what the contract says. As an illustration, on a $1.1 million sale that turns out to be taxable, roughly $100,000 of GST may be involved, depending on how the price was expressed.

That raises two questions every contract should answer:

• Is the price inclusive or exclusive of GST? If the contract is silent and the sale turns out to be taxable, the seller may have to pay GST out of the price they expected to keep.
• Who bears the cost if the going concern treatment fails? Well-drafted contracts usually allow the seller to recover GST from the buyer if the going concern treatment fails because of something on the buyer's side, such as not being registered.

Your lawyer should make sure the contract deals with both.

Points for buyers

If you are buying, also consider:

• you will need to be registered for GST, or required to be, by settlement;
• if you intend to use the business for a purpose that would not normally allow you to claim GST credits, such as making input-taxed supplies, the going concern treatment can lead to an adjustment that leaves you paying an amount to the ATO;
• your financier may want to know the GST position, because a taxable sale changes how much cash is needed on the day.

Points for sellers

• confirm the buyer's GST registration close to settlement, not just at the start;
• make sure the contract clearly states the sale is of a going concern and deals with the consequences if it is not;
• keep trading normally until settlement;
• talk to your advisers before excluding any significant asset from the sale.

GST-free going concern treatment is valuable, but it relies on every condition being met on the day of supply, and the contract should say what happens if one is not.

Property and other complications

Where the sale includes real property, other GST rules, such as the margin scheme, can be relevant and interact with the going concern rules. Sales involving partial transfers, multiple entities or a business that operates across several sites need particular care. In these cases, get specific advice before the contract is signed.

How we can help

Kainos reviews the GST position on business sales for both sellers and buyers, checks that the going concern conditions can be met, and raises the points your lawyer should cover in the contract. We advise and represent clients through the process, working alongside their lawyer. To talk about your sale or purchase, contact us or read about our business sales and purchases service.

This article is general information only and does not take into account your circumstances. Speak to a qualified adviser before acting on it.