Even though the Goods and Services Tax
('GST') was introduced over 10 years ago,
the 'going concern' exemption still causes some confusion
amongst parties in a sale of a business transaction.
In this article, we will briefly explain the going concern
exemption and the criteria that need to be met to qualify for the
exemption, as well as the tax benefits that accompany the sale of a
What is the going concern exemption?
A 'going concern' refers to an entity's ability to
continue functioning as a business. If a business is deemed to be a
going concern, then the sale of the business is GST exempt.
The purpose to seeking the going concern exemption is so that
the purchaser of a going concern business does not have to provide
the additional funds to cover the GST and therefore pay less up
front for the business.
If GST applies, the purchaser will generally be required to pay
an additional 10% of the purchase price at completion of the
transaction to cover the GST. Although the purchaser will be
entitled to get the GST back through the input tax credit system,
the purchaser will not get the 10% back until well after
completion. Additionally, while the ATO will eventually refund the
GST to the purchaser, if stamp duty is payable on the sale of the
business, it will be calculated on the total purchase
price which includes the amount for GST.
However, if the business is sold as a "going concern",
the sale transaction will be exempt from GST and cost less at the
time, plus no additional stamp duty will be payable.
What are the requirements for a going concern exemption?
From our point of view, clients are generally aware of going
concern exemption and that the transaction will qualify if
"all that is necessary" to operate the business is
transferred to the purchaser. However, in some circumstances, there
is a lack of appreciation of the ATO's interpretation of the
going concern exemption. This can lead to a surprise for clients
when they learn that GST must be paid on what they had presumed was
a "going concern".
Apart from the general definition of a "going concern"
as mentioned above, the GST Act provides that the "supply of a
going concern" is GST-free where each of the following is
The sale is for consideration.
The purchaser is registered or required to be registered for
The parties have agreed in writing that the supply is
of a going concern.
A written agreement, commonly known as a "sale of business
contract", must be entered into on or before the transfer of
the going concern business. This means that a written agreement
cannot be entered into after the business has been transferred to
Normally, the written agreement would specify that the supply (i.e.
the business) is a going concern before the contracts are
exchanged.This is an important aspect because it shows that all
concerned parties expressly acknowledge that the business is indeed
a going concern.
The vendor supplies all of the things that are
necessary for the continued operation of an enterprise. This
requirement does not mean absolutely everything in the business,
but refers to those things without which the business could not
function. Generally, this includes the necessary assets such as
premises, plant and equipment and customer contracts, as well as
the operating structure and processes such as ongoing
However, it should be noted that what the parties consider to be
necessary does not necessarily mean that the ATO will have the same
The vendor carries on the business until the day of the
supply. The supply is transferred on the date on which
effective control and possession of the business is transferred to
the purchaser. This date generally refers to the settlement date,
however on occasion it may occur before or after the settlement
Regardless of whether you are a purchaser or vendor in a sale of
business transaction, it pays to have a clear understanding of your
legal rights and responsibilities from the outset.
Notwithstanding the advantages a purchaser gains in terms of
cash flow and stamp duty savings from the going concern exemption,
the risk that the ATO may not view the transaction as a supply of a
going concern ultimately lies with the vendor because even if the
sale of business contract provides that the purchaser is liable for
any GST it is the vendor that is required to remit the GST to the
For the above reason, a vendor should include a carefully
constructed indemnity clause in the sale of business contract
requiring the purchaser to indemnify the vendor for any GST that
may be payable in the event that the ATO does not view the sale
transaction as a GST free going concern.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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