The legal and tax steps in buying or selling a business

A business sale moves a lot more than the keys: a lease, staff, licences, tax obligations and sometimes debts secured over equipment. This guide sets out the main legal and tax steps for buyers and sellers, so you know what to raise with your solicitor and accountant. It is general information, and the rules on leases, duty and licences differ between states and territories.

The contract of sale

The contract records the deal and the protections for both sides. It usually covers:

• the price, the deposit and when the balance is paid
• exactly what is included and excluded: goodwill, equipment, stock, the business name, phone numbers, websites and records
• how stock will be counted and valued at settlement
• conditions the sale depends on, such as finance, due diligence, the landlord's consent to the lease assignment and licence transfers
• the seller's warranties about the business, for example that the financial records are accurate
• a restraint of trade on the seller
• a training or handover period
• the settlement date and what each side must deliver on that day.

Standard form contracts for the sale of a business exist in some states and are used by many brokers and solicitors, but they still need to be completed and adjusted for each sale. Have your own solicitor review the contract before you sign. Sellers should also remember that what they say about the business must be accurate: misleading a buyer can lead to claims after settlement.

The lease

Most small businesses operate from leased premises, and a buyer usually needs the lease assigned to them or a new lease granted. Leases typically require the landlord's consent to an assignment, and the landlord will usually want to assess the buyer's finances and experience.

Retail leases are governed by retail tenancy laws in each state and territory, which set rules on matters such as disclosure, rent reviews and assignment. business.gov.au notes that lease transfers can take a long time and that the seller remains responsible until the transfer is complete, so start early. Sellers should also check whether they will remain liable under a personal guarantee after the assignment. See assigning a commercial lease.

Employees

When a business's assets are sold, the seller's employees do not automatically become the buyer's employees. Employment with the seller ends, and the buyer can offer employment to some or all of the staff. If the buyer is instead buying the company that employs the staff, ask your solicitor how these rules apply.

If an employee starts work with the buyer within three months, doing the same or nearly the same work, and the employers are connected through the sale, the Fair Work rules on transfer of business apply. Generally, the new employer must recognise the employee's service with the old employer for most entitlements. A new employer that is not associated with the old one can, in some cases, choose not to recognise earlier service for entitlements such as annual leave and redundancy, and the old employer may then need to pay them out. Employment records must also transfer.

Agree in the contract who is responsible for which entitlements, and get advice early, because the cost can be significant. See employees when a business is sold.

GST

The sale of a business can be GST-free as the sale of a going concern if all of the ATO's conditions are met:

• the buyer and seller agree in writing, before the sale, that it is the sale of a going concern
• the buyer is registered, or required to be registered, for GST
• the seller supplies everything necessary for the business to keep operating
• the seller carries on the business until the day of the sale
• the sale is for payment.

If any condition is not met, GST may apply to the sale. This is one of the most important details to get right in the contract. See GST and the sale of a going concern.

Duty

Some states and territories charge duty on the transfer of business assets such as goodwill, and others charge duty only on land or not at all. If the sale includes real property, duty on that property will generally apply. Check with your state or territory revenue office, or your solicitor, before you budget.

ABN, business name and registrations

An ABN belongs to its holder and cannot be transferred. The buyer uses their own ABN, and the seller cancels theirs once they have finished trading and lodged their final returns. The business name can be transferred to the buyer through ASIC, or cancelled by the seller and registered by the buyer. Other registrations, such as GST and payroll registrations, are the buyer's to arrange.

Licences and permits

Many businesses need licences or permits to trade, for example for food, liquor, transport, trades or health services. Some can be transferred and some must be applied for fresh by the buyer, and approval can take time. The Australian Business Licence and Information Service (ABLIS) on business.gov.au lists licences by industry and location. Make the sale conditional on the licences the buyer needs.

Security interests over assets

Equipment, vehicles and stock can be subject to security interests, for example where they were bought on finance. A search of the Personal Property Securities Register shows registered interests. The buyer's solicitor will want them released at or before settlement so the assets transfer free of debt.

Tax after the sale

For sellers, the sale can trigger capital gains tax on goodwill and other assets. Small business owners may be eligible for one or more of the ATO's small business CGT concessions, which can reduce, defer or disregard a capital gain, but each concession has eligibility conditions. For buyers, how the price is allocated between goodwill, equipment and stock can affect tax later. Both sides should get advice on the structure before the contract is signed, not after.