If you are selling your business, it’s crucial to understand how you may be hit by a nasty surprise and GST on the sale.

The taxman has complicated legislation concerning the sale of a business. The problem is, you may sell the business thinking you have sold it as a going concern and thus have not charged GST, only to find out later than it didn’t meet the definition of ‘a going concern’ and have to surrender part of the sale proceeds to the ATO.

It won’t seem fair to give up 1/11th of your sale proceeds because of a technicality so make sure it doesn’t happen to you.

The key points of the ATO rules (GST Ruling (GSTR) 2002/5), (‘the ruling’), state that

“You are selling a ‘going concern’ if:

  • the sale includes everything that is necessary for the continued operation of the business
  • the business is carried on by you until the day of sale.”

It should be straightforward to identify whether you are carrying on the business until the date of sale.

The pertinent question is thus, does the sale includes everything that is necessary for the continued operation of the business, so we need to look at how this is defined.

The ruling states that “A ‘thing’ is necessary for the continued operation of an ‘identified enterprise’ if the enterprise could not be operated by the recipient in the absence of the thing.” (paragraph 73)

It states “The term ‘necessary’ incorporates every attribute of an enterprise that is essential for the continued operation of the ‘identified enterprise’. The things that are ‘necessary’ will depend on the nature of the enterprise carried on and the core attributes of that enterprise. The term ‘all of the things that are necessary’ does not refer to every conceivable thing which might be used in the ‘identified enterprise’.”

It now gets tricky, as what happens if you are selling an office-based business, but the purchaser wants to use his own office to run the business. In this case, you are not providing the lease of the premises so are you providing ‘all things necessary’ to operate the business’?

The ATO give some examples to help clarify the ruling. The first example is the sale of a clairvoyant’s business in which the clairvoyant operates a telephone service from home and sells a client list and various assets to run the business such as tarot cards. The use of an office is not an essential part of the business, so the sale need not incorporate the sale of the home to be a sale of a going concern.

The second example is of a pharmacy which sells its business to a third-party that wants to run the pharmacy from a different location. The sale will be of a going concern only if the vendor enters into a tripartite agreement with the purchaser and the landlord of the new premises, such that the sale is dependent on the new lease being granted. The granting of the new lease “is a condition precedent to the sale of the pharmacy business”, meaning the vendor “has supplied a right to occupy suitable premises”. The sale will be of a going concern and can be GST free (assuming other conditions are met).

The third example has a vendor and purchaser working with the existing landlord to renegotiate the existing lease, so that the purchaser enters into a new lease upon settlement. In this case, the lease is part of supplying all of the things necessary for the continued operation of the enterprise and the sale can be of a going concern and GST free.

In our example, the vendor is not able to enter into an agreement with the purchaser’s landlord at the alternative premises as the purchaser already has a lease in place. It also won’t be able to enter into an agreement with the vendor’s existing landlord as the purchaser has no intention of moving to these premises. The vendor, therefore, may be considered to not be supplying all things necessary for the continued operation of the business and GST will be applicable.

The key point to note is that if you are selling a business ‘as a going concern’, particularly if it involves leases of premises and possible moves to the vendor’s premises, get advice on whether the sale includes ‘everything necessary for the continued operation’ or read the tax ruling.

In our example, the vendor has fortunately been made aware of the rules and is thus in a position to include GST in the sale contract, rather than find after the fact that it should have been included and have to cough up 1/11th of the sale proceeds.

If you want tax advice on the sale of your business to ensure you don’t get hit by tax shock, please contact me.