Buying A Business: Is it A Going Concern? Should Price be GST inclusive?
If you treat a transaction as a going concern and do not remit GST on the sale and it does not meet the required criteria for a going concern sale, it may be the case that you are later required to remit the GST, together with any penalties and interest from the transaction.
Selling your business is a big decision to make with many different factors coming into play in the decision. One of the items that will need to be considered, preferably prior to entering into a contract for the sale is the issue of the treatment of GST in the contract documents.
If you are selling a continuing business, it may be the case that you are eligible to sell the business as a going concern and therefore sell the property without remittance of GST.
A basic example of selling a business is a going concern is simply that you walk out on the day of settlement and you give the Purchaser everything so that they may walk in the next morning with the keys and continue to operate the business seamlessly.
This can be an attractive manner in which to sell your business, as it may make a significant difference in terms of cash flow from the sale proceeds. This is a matter we recommend you discuss with one of the Ascendia Accounting Principals.
However, this is also a very particular area of GST law and therefore, there are very specific criteria that must be met in order to qualify for a sale of a going concern.
When you sell a business as part of a going concern, there are certain criteria that must be met in order for the supply to be GST free, including:
- Ensure that the Purchaser is registered for GST;
- Agree in writing with the Purchaser on or before the settlement date (preferably in the contract and prior to contract) that the sale of the enterprise is a going concern;
- Supply all the things necessary for the continued operation of the enterprise for the Purchaser; and
- Continue to carry on your enterprise in the same manner up until the date of settlement of the sale.
Your professional advisors should bring these items to your attention prior to entering into the Contract. If you choose not to engage your professional advisors until after the formation of the contract, some of the essential elements may not be met in the contract and you may be ineligible to sell as a going concern. Therefore, it is best to obtain the early advice to save rectification costs later or the imposition of GST on the sale.
You may be selling more than just the business and the right to occupy the premises.
Certain things and property may form part of the sale of a going concern including:
- The premises when sold together with the assets of the business and operating structure of the enterprise;
- A fully tenanted building where the property and all leases, agreements and covenants are included in the sale.
Generally, any of the items listed in Item 1 directly above cannot be sold individually as a going concern. When sold together or in a combination together, they may qualify. For your particular scenario, you should contact your professional legal advisor or Ascendia Lawyers Legal Principal for clear advice.
If you treat a transaction as a going concern and do not remit GST on the sale and it does not meet the required criteria for a going concern sale, it may be the case that you are later required to remit the GST, together with any penalties and interest from the transaction.
This may mean that the cost of the business is significantly higher than you bargained on, especially if there is a long intervening period between the sale date and the date upon which the Australian Taxation Office makes their determination that GST was payable on the transaction.
In order to avoid these potential costs, our simple advice is to obtain early advice and to invest in obtaining both legal and financial advice prior to selling your business. Compared to the cost of rectifying the problem or later paying penalties, it is a wise investment to ensure that your business sale proceeds in the most efficient and smooth manner possible.
Please contact our office and ask to speak with our Legal Practitioner Director at Ascendia Lawyers in order to discuss your pending sale and any concerns that you may have in relation to these types of transactions.