GST and the sale of a going concern: when a business sale is GST-free

A business sold as a going concern is GST-free if every condition the ATO sets is met. If one is missed, GST may apply. This guide explains each condition in plain English, the traps the ATO's ruling describes, and the GST steps for buyers and sellers. For the wider picture, see the legal and tax steps in a business sale. This is general information, not tax advice.

Why it matters

The ATO's ruling, GSTR 2002/5, says that when the going concern rules apply, the buyer need not find extra funds for the GST that would otherwise be included in the price.

• When the sale is GST-free. No GST is payable on the sale.
• When it is not. A registered buyer can generally claim a GST credit, through the BAS and with a tax invoice, for GST in the price of things used in the business, unless the purchase relates to making input-taxed supplies. The credit comes later, so the buyer funds the GST in the meantime. Allow for it in your finance plan.

The conditions, as the ATO lists them

The ATO says the sale of a business as a going concern is GST-free if all of the following apply:

• Before the sale, the buyer and seller agree in writing that the sale is of a going concern. The ruling says no particular form is required, but the writing must clearly show that both parties agree. A clause in the contract can do this.
• The buyer is registered or required to be registered for GST. The timing matters (see below).
• Everything necessary for the business to continue operation is supplied to the buyer. The ruling says this means the things without which the business could not be operated: the assets, and the "operating structure and process" for running it, so the buyer can carry it on if it chooses.
• The seller carries on the business until the day it is sold (date of settlement). The ruling says all the activities must be active and operating on that day.
• Payment is made for the sale. The business is sold, not given away.

The ruling adds that a written agreement alone is not enough: if another condition is not met, the sale is not GST-free, whatever the contract says.

What "everything necessary" can include

This varies with the business. The ruling's examples include:

• Premises. If the business needs premises, the seller must supply them or the right to occupy them, such as by assigning the lease, or surrendering it so the landlord leases the same premises to the buyer by the day of the supply. In the ruling's delicatessen example, the seller kept its premises and the buyer planned to trade from its own, so the sale was not a going concern. See assigning a commercial lease.
• Licences and permits. A licence, permit or quota the business must hold has to be supplied. Surrendering one that cannot be transferred, so it is reissued to the buyer, counts. If a new licence is not in fact issued, the sale is not a going concern.
• A franchise agreement. Its benefit is necessary. A surrender in the buyer's favour, followed by a new agreement between franchisor and buyer, counts.
• Key skills. Employees are not "things" that can be supplied. But where one person's unique skills are essential, the seller must take reasonable steps to pass them on, such as a new employment contract with the buyer or training manuals. See employees when a business is sold.
• Not every asset. Things the business could run without are not necessary. The ruling's example is a car that an office-based firm did not need.

Common traps in the ruling

• Trading stops before settlement. The ruling cites a New Zealand case where a motel had closed by settlement and was sold with vacant possession: not a going concern, even though all the assets were supplied. A short pause for cleaning or maintenance before handover is allowed, but a business selling off its assets after it has stopped is not operating.
• The premises go to someone else. If an owner sells the business to one buyer and the property to another, the business sale is not a going concern unless the business buyer is granted a lease by the day of the supply.
• The agreement is late or missing. The parties must agree on or before the day of the supply. With no written agreement, the sale is not GST-free.
• The buyer registers too late. Lodging an application is not enough: the registration must take effect on or before the day of the supply.
• The wrong date. The day of the supply is when the buyer takes effective control and possession, even if the contract deems the transfer to happen earlier.
• Selling shares instead. Selling only the shares in a company is not the supply of a going concern. The ATO treats a sale of shares, or of interests in a trust or partnership, as a financial supply.

If a condition is not met

GST may apply. Discussing licences, the ruling says the seller then has a liability to pay GST. Who bears the cost depends on the contract's GST clause, for example whether the price includes GST or the seller can add it. Ask your solicitor what your clause provides if the sale is not GST-free.

The buyer's later use

What the buyer does afterwards does not decide whether the sale is a going concern. But the ruling says a buyer who intends to make supplies that are neither taxable nor GST-free (input-taxed supplies) may have to make an increasing adjustment, with a further adjustment if that proportion changes. Its example is a buyer of residential flats who keeps leasing them for residential purposes. Ask your accountant whether this applies.

Other parts of the deal

• Things outside the going concern. Supplies not made under the going concern arrangement are not GST-free under these rules, and a supply partly inside and partly outside is apportioned. The ruling's examples are a mechanic's home next to the workshop and shares held as investments.
• Stock. The ruling lists stock among the assets a business may need, so it can form part of the going concern. See stock at valuation.
• The seller's selling costs. The ATO says the seller may be able to claim input tax credits for GST paid on expenses relating to the sale.

Registering for GST

The ATO says you must register, within 21 days, when your GST turnover is $75,000 or more, or when you start a new business and expect to reach that threshold in your first year. You need an ABN first, and the ATO confirms in writing the date your registration takes effect. The ATO lists other cases too; outside them, registering is optional.

The ruling says a buyer required to be registered from the day of the supply meets the condition, and a buyer who registers by choice must have the registration effective by that day. If you are buying through a new company or trust, it is that entity's registration that counts.

The seller's GST position after the sale

The ATO says you must cancel your GST registration within 21 days of selling or closing your business. The cancellation date should be the last day you want to be registered, and your lodgment and payment obligations continue. If you sold the business and are cancelling GST, you must also cancel your ABN within 28 days, although a company still registered with ASIC can choose to keep its ABN. If your entity runs another business, ask your accountant how this applies.

Questions for your accountant and solicitor

• Is the written going concern agreement signed on or before the day of the supply?
• Is the buying entity registered for GST, effective on or before settlement?
• Does the sale include everything the business needs to keep operating, such as premises and licences?
• What does the GST clause say happens if the sale is not GST-free?
• Is anything outside the going concern, and how is the price apportioned?
• Will the buyer make input-taxed supplies, and would an adjustment apply?