A “going concern” is an Australian Tax Office (“ATO”) intervention that allows the sale of a business to be a GST free transaction. It is always highly desirable to both the Buyer and the Seller in a sale of business transaction because it means no GST and it gives certainty to both parties as to what they are paying and what they are receiving. However, there are many rules and requirements for the sale to be a GST free going concern that need to be considered before you enter into a Sale Contract.
GST is often the last thing on anyone’s mind when negotiating the sale or purchase of a business, but it shouldn’t be. Whether the price you have negotiated is GST inclusive or exclusive can easily be overlooked in the excitement of the moment, or because both parties assumed the sale of the business will be GST free without thoughtfully considering whether all of the elements necessary for the sale of a going concern exist.
The essential aspects of a going concern sale are:-
- Both the Seller and Buyer must be registered for GST.
- The Sale Contract must expressly record that the sale is a going concern.
- The Seller must sell everything that is necessary for the continued operation of the business. Any exclusion can mean that this is not a going concern.
- Selling everything means you must provide the premises from which you operate (unless you are a mobile business or operate from your home, but there are strict ATO rules on this category of business). If the business premises is leased there must be an assignment of the Lease or surrender of the existing Lease and then a new Lease to the Buyer. In limited circumstances a new but similar premises can be found.
- It may come undone where the Seller has different entities owning different parts of the business. A Seller should investigate the ownership structure with their Lawyer well in advance of a sale.
- The business must trade up until the settlement date. Any business closure in the lead up to the sale will nullify a going concern, so beware if you plan to close or paint or renovate prior to handover.
If you are able to meet all of the above requirements, your sale should be a going concern and there will be no GST payable.
Some Handy Rules to Remember
Always negotiate a price as a GST exclusive price so that both parties know where they stand. Then if GST is payable, the Seller still gets the agreed price. A contract that is silent will be GST inclusive which will always be bad for the Seller if there is no consideration for GST.
Alternatively, for the Seller there should always be a clause in your Contract stating that if the Tax Office deems your sale not to be a going concern, then you can call on the Buyer at any time to pay the GST.
It is not always possible to meet the above requirements because the Seller may not always want to sell all of the business assets, or the existing structure of the Seller’s business may not allow it. It is easy to forget that GST in a sale between two registered entities is a tax neutral outcome because the Buyer pays 10% GST and then gets it back from the ATO and the Seller collects the additional 10% with the purchase price and then hands that over to the ATO. Each ends up in (virtually) the same position provided that the parties correctly negotiate the price on a GST exclusive basis in the first instance.
For the Buyer however, it is often a question of cashflow. It is preferable to avoid coming up with the extra money which the Buyer must then recoup from the ATO with their next Business Activity Statement. Sometimes the Buyer can’t find the additional money at all and they are already borrowing to their limit for the purchase price and other business start up costs.
The takeaway point is that if you are concerned about having a “going concern”, then you need to seek advice early in your negotiations.