Sale of a Going Concern
There are several different ways to sell a business. One of these is the sale of a going concern. The biggest advantage of selling and purchasing a business as a going concern is that it will attract a Goods and Services Tax (GST) exemption so that no GST will be payable on the sale. Generally, where this tax exemption does not apply, 10% GST will be payable by the purchaser upon the sale of the business.
The relevant legislation that applies to a sale of a business as a going concern is A New Tax System (Goods and Services Tax) Act 1999 (also known as the GST Act). There are several requirements that need to be met for a sale to be considered to be one as a going concern. These are:
- There must be consideration for the sale;
- The buyer is registered or is required to be registered for GST;
- There is an agreement in writing that the sale is as a going concern;
- The seller, in the sale, provides all things to the buyer that are necessary for the operation of the business;
- The seller continues to operate the business until the day of supply.
It is important to look at some of these requirements in a bit more detail.
The agreement must be in writing
The agreement that the sale of the business is as a going concern must be written and agreed between the two parties to the contract at a date prior to the date of supply, i.e. the date when the business is handed over to the purchaser. The date of supply is usually but does not have to be, the settlement date. It is when the “effective control” of the business passes to the purchaser. It is not necessarily when the risks and benefits of the business are passed on. The written agreement about the business being sold as a going concern does not have to form part of the sale contract and is not required to be in a prescribed form.
The seller provides all things to the buyer that are necessary for the operation of the business
Not everything relating to the business has to be provided to the purchaser as part of the sale. However, everything that is necessary for the business to continue to operate must be supplied. This generally is comprised of two parts:
- Parts of the business that are required for it to continue operating such as premises, assets and property of the company, such as equipment, contracts and goodwill; and
- Parts of the business relating to its operating structure and processes, such as its marketing and promotion processes.
Sometimes not everything can be supplied by the seller to the purchaser. The vendor may be limited in what contracts it can transfer. In such cases, a surrender or transfer of a right may be sufficient.
It should be noted that there must only be one vendor and one purchaser for the sale to be considered as a going concern. If different parts of the business are being sold by different vendors or to several different purchasers then the requirement that the seller provide all things to the buyer that are necessary for the operation of the business cannot be met.
The seller continues to operate the business until the day of supply
The seller must continue to operate the business up until the date of supply of the business to the purchaser. One example of how this may apply to a commercial leasing company is that if a space becomes vacant between the contract date and the date of supply, the vendor must advertise that space to find a new renter until the date of supply. To not do so may result in the purchase for sale being found not to meet the criteria for the exemption for GST.
Where going concern is claimed but is not accepted by the Tax Office
Sometimes the going concern exemption is claimed on a transaction but is rejected by the ATO. In these cases, it is the vendor that is liable to pay the GST owing on the transaction. For these reasons, sometimes a clause is added into the sale contract which transfers the liability to pay GST, along with any related penalties, to the purchaser if the exemption is not granted.
If you require legal advice or representation in any legal matter, please contact Armstrong Legal.