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 "Going Concern"?

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 required?

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.