Many clients looking to increase the size of their business look to make bolt on acquisitions.
Likewise, on retirement or in another phase of a career as a self-employed business owner others look to sell the business and build up a nest egg from the years of hard work.
One area often over looked is the GST impact from buying or selling a business.
In the excitement of negotiating a sale or purchase of a business, it is easy to overlook whether the price negotiated is inclusive or exclusive of GST.
Often both parties assume that business sales are GST-free without examining the ingredients of a GST-free transaction. It is obviously desirable for both parties to have a GST-free transaction as it provides certainty over the negotiated price and there is no need to ‘clawback’ GST from a subsequent BAS.
The Australian Taxation Office created an exemption for the sales of businesses to be exempt from GST as long as the business is a ‘going concern’.
What this means in reality is that the business is actually sold for a consideration, that it is operational up until the day of sale and that the sale includes everything necessary for the buyer to continue operations.
The essential aspects of a sale being “ruled” as a ‘going concern’ include:
- The sale is for consideration.
- Both parties must be registered for GST.
- The sale contract specifies that the business is being sold as a going concern.
- The seller must include everything that is required for the running of the business and any exclusions could mean that the sale fails the going concern test. This does not require that everything owned by the business must be included in the sale, only the things necessary for the business to function in the hands of the new owner. Generally this would include the premises (see below), plant and equipment, customer and other contracts such as ongoing advertising, etc.
- The premises from where the seller operates must be included in the sale (except for home-based or mobile businesses, both of which fall under strict ATO rules in these circumstances), therefore leased premises must be assigned or surrendered so that a new lease can start for the buyer.
- If the business closes in the lead up to the sale this will nullify going concern – something to watch for if there are plans to renovate on handover. The seller must trade up until the ‘day of sale’, generally meaning settlement date, however in some circumstances the deemed ‘day of sale’ can occur before or after settlement date.
- Sellers with different entities owning different parts of the business should investigate their ownership structure well before sales negotiations commence. These different entities may cause the sale to not satisfy the above rules.
A sale between two registered entities has a tax neutral outcome as the purchaser pays the 10% GST and receives it back from the Tax Office. The seller receives the 10% of the purchase price and remits in back to the ATO. From a cash flow point of view the purchaser is not going to want to have to find the additional money on top of the purchase price which they then have to wait to recoup with their next Business Activity Statement. The seller also does not want to receive less than the negotiated purchase price.
The purchase price should be negotiated and written into the sales contract as GST exclusive so both parties know exactly where they stand. Contracts that are silent are deemed to be GST inclusive. It is worth including a clause in the contract that if you are selling, if for any reason the Tax Office deems the sale to not be a going concern, then the seller can require the buyer to pay the GST.
If you have any concerns about selling or buying a business as a ‘going concern’ contact us today, we are here to help.