You have been made an offer that is too good to refuse - so you
decide to sell your business, or maybe you have finally found that
business that you have been looking for, but will you be able to
sell or buy the business GST-free? Many people treat every sale or
purchase of a business as a GST-free supply of a "going
concern". However, not every sale or purchase of a business
will satisfy the requirements of a GST-free supply of a "going
concern" in the GST legislation.
What Are The Potential Difficulties With Supplying A
A number of potential difficulties can arise in relation to
supplying a "going concern". Some of these difficulties
include the following:
Excluded assets – in many sales of
businesses the vendor may not agree to sell, or the purchaser may
not want to acquire, all of the assets of the business. For
example, the purchaser may not want to acquire the premises because
it has suitable premises or the vendor will not sell the business
name because they want to use it in the future. The issue to be
determined is whether any of the assets that are not being supplied
by the vendor are "one of the things necessary for the
continued operation of the business". If it is, then the
supply of the business will not be a supply of a "going
concern". In each case, the enterprise that is being carried
on by the vendor will need to be identified and then the vendor
will need to supply all of the things that are
necessary for the continued operation of that enterprise. However,
there is no requirement for the purchaser to actually carry on that
enterprise after the day of the supply.
Enterprise ceased before the day of the supply - in
some cases after exchange of contracts the vendor may cease to
carry on the whole, or part, of the enterprise. For example, if the
vendor is supplying a hotel business, after the exchange of
contracts the vendor may cease to continue to market the business,
order stock, and take advance bookings for functions and
accommodation. In such a case, the supply of the business would not
be a supply of a "going concern".
Supply of part of an enterprise – in some
cases the vendor may be supplying only part of a larger enterprise.
For example, the vendor may be the owner of a number of hotels
which it carries on through a single company. In order for the
supply of one hotel to be a supply of a "going concern",
that hotel business must be a separately identifiable enterprise
(eg. separate management structure and accounts) that is capable of
being carried on in its own right.
Purchaser registered for GST - it is a requirement
that the purchaser is registered, or is required to be registered,
for GST at the time of the supply. But what if the purchaser is a
new entity that has not obtained its GST registration by the day of
the supply? In that case, the vendor may request the GST that would
be payable if the supply was taxable to be put into a trust account
until the purchaser obtains GST registration.
What Are The Consequences If The Parties Agree The Supply Is Of
A "Going Concern" But The Commissioner Of Taxation, A
Court Or A Tribunal Determines It Is Not?
It is easy for the parties to make a written agreement and seek
warranties from each other in relation to the various requirements
for a GST-free supply of a "going concern", but if at a
later date the Commissioner of Taxation, a Court or a Tribunal
determines that the supply is not a GST-free supply of a
"going concern", then the terms of the GST clause in the
contract become critical.
That is, does the vendor have the ability to recover GST, and
any interest and penalties, if the supply is not a GST-free supply
of a "going concern"? Is the fallback position to treat
the sale as fully taxable, or did the parties agree that the margin
scheme would apply in respect of the supply of that part of the
business that is a supply of real property? Also, will the
purchaser have the money to pay the GST at a later date if
As a result of the uncertainty that frequently arises in parties
agreeing that a supply is a GST-free supply of a "going
concern", and the higher risk of audit because the supply is
GST-free, some vendors and purchasers agree to jointly apply for a
GST private ruling. Provided that all of the relevant facts are
disclosed to the Commissioner of Taxation in the application, then
the GST private ruling will provide certainty as to the GST
treatment for the vendor and purchaser.
Deacons can assist vendors and purchasers of businesses with
determining whether a sale may be a GST-free supply of a
"going concern", drafting of appropriate warranties and
indemnities for inclusion in the contract and, if required, in
making an application for a GST private ruling.
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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