A common exit strategy for business owners who wish to do something different (or even retire!) is to seek a buyer. The sale of a business allows the seller to unlock the value they have built over the years of operation. For the buyer its an opportunity to bypass the usual start-up struggle. They can purchase an established brand, existing clients and all the equipment they need to hit the ground running. In addition, if the sale covers the entire business and the business carries on after the sale the whole transaction could be GST Free…Winning all around!
A “going concern” is an Australian Tax Office (ATO) invention that allows the sale of a business to be a GST-free transaction. But, its not as simple as it sounds. We cannot just assume the sale is GST Free because the item being sold is a business. The parties need to clearly discuss GST during the negotiation process. They both need to take the necessary steps to ensure the going concern exemption is available in the first place.
Essential elements of a going concern sale
- Both seller and buyer must be registered for GST;
- The sale of the business must be for consideration (something needs to be ‘paid’ for the business);
- Your sale contract must expressly record that the sale is a going concern (in writing);
- The seller must sell everything that is necessary for the continued operation of the business. This includes any necessary premises as well as a contractual agreements signed by key members of staff. Any exclusion can mean that it is not a going concern;
- The business must continue to trade until the date of sale. Any business closure in the lead up to the sale will nullify the going concern status – so beware if you plan to close for renovations before the final handover.
- The business must continue to trade in the ‘normal’ manner after the sale has been finalised.
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. However, in the situation where the seller has different entities owning different parts of the business this could create an issue – the seller should investigate their ownership structure with their accountant when preparing for sale;
Some handy rules to remember when selling a going concern
1. Always negotiate the price in GST exclusive figures so that neither party is confused, or disappointed, by the result. You never want the contract to be silent in regard to GST. If the contract makes no mention of GST the price is assumed to be inclusive. This can result in the seller receiving far less for the business than they originally anticipated.
2. There should always be a clause in your contract stating that if the tax office deems your sale was not a going concern, that the buyer must pay the GST amount.
3. The seller will be liable for both penalties and interest on the amount of tax avoided in the event the ATO disagrees on the going concern treatment. You may wish to extend the clause mentioned in point 2 to cover these amounts;
4. The buyer should also seek professional advice around the going concern. Often the appeal of the exemption for buyers is that it allows them to buy a business they couldn’t otherwise afford. By applying the going concern exemption the total purchase price drops 10%. They simply cannot secure sufficient funding to carry them over until the next Business Activity Statement is lodged to claim the GST back. If you are in this situation a surprise GST bill could be crippling, so seek advice!
Can the going concern exemption apply to shares
The going concern exemption will not apply where the shares of a company operating the business are sold. In this case the supplier (shareholder) is not the same entity as the one carrying on the business (the company).
However, this does not mean that GST will be payable where a buyer purchases the shares in the company. The sale of a business by shares is a financial supply. This is because the shares themselves are considered to be financial supplies under GST law. Financial supplies are input taxed rather than GST Free. What does that mean to people who don’t spend all day reading the GST laws? Basically, no GST will be charge on the sale price of the shares but no GST credits can be claimed by the seller for GST paid on expenses relating to the sale (legal or accounting advice, for example).