Avoiding GST in a Sale of Business

gst goods and services tax

To avoid having to pay GST on the purchase price in a sale of business, the sale must satisfy the ‘going concern’ exemption.

‘Going Concern’ Exemption

The relevant legislation provides that a sale of a going concern is GST free if:

  1. the sale is for consideration,
  2. the purchaser is registered, or required to be registered, for GST,
  3. the parties have agreed in writing that the sale is of a going concern,
  4. the vendor supplies to the purchaser all of the things that are necessary for the continued operation of the business, and
  5. the vendor carries on, or will carry on, the business until the day of completion of the sale, whether or not as part of a larger enterprise carried on by the vendor.

Additionally, a single purchasing entity and a single selling entity are required for the GST going concern exemption to apply. Advice should therefore be obtained if related entities own different parts of the business being sold as the sale may not qualify for the going concern exemption.

1. The sale is for consideration

Meaning that the purchaser is paying some value for the business.

2. The Purchaser is Registered for GST

Notwithstanding sale of business contracts generally provide that the purchaser is liable for any GST payable, it is the vendor that is required to remit the GST to the tax office and therefore, has the burden of the risk that a transaction may not be viewed as the supply of a going concern. The vendor’s solicitor should, therefore, ensure the purchaser is registered for GST.

3. The parties have agreed in writing that the sale is of a going concern

The requirement for a written agreement between the parties needs to be satisfied prior to the completion of the sale. While it is possible to record a transfer after the fact, for example if a business has been restructured to a related entity the parties may look to document the transfer at a later date, such a transfer would not satisfy the ‘going concern’ exemption. As such, prior to any restructure, you should always seek advice from your accountant and lawyer so that taxation and asset protection matters can be properly considered and dealt with prior to a transfer completing.

4. The Vendor Supplies to the Purchaser all the things that are necessary for the continued operation of the business

All things necessary for the continued operation of the business does not mean that absolutely everything in the business must be transferred, but refers to those things which make the business function in its normal course. Each business will require different things for its continued operation, but typically the following should be included in the sale of business:

  1. the tangible assets such as the plant and equipment,
  2. the intangible assets such as goodwill, intellectual property and critical contracts,
  3. premises for the operation of the business, and
  4. the operating structure and processes of the business.

Of note, the above provisions relate to the transfer of activities that may not traditionally be thought of as a business, including leasing, licensing, trading operations or charitable activities.

5. The vendor carries on, or will carry on, the business until the day of completion of the sale, whether or not as part of a larger enterprise carried on by the vendor.

If the business being sold is part of a bigger enterprise, it is critical that the vendor and purchaser make sure the business being sold is capable of operating independently from the main enterprise, and namely that all things necessary for the continued operation of the business are transferred in the sale. In order for this to occur, there may well need to be additional documentation and agreements that come into effect at the time of completion, such as a new lease or a license agreement.

How We Help

It is best to consult your Accountant and Lawyer before entering into any contract for sale of business, whether you are the vendor or purchaser, to make sure the criteria for the Going Concern exemption is satisfied. We offer a Free Case Evaluation for all new enquiries.