4 October 2023
Written by Sarah Olley, Lawyer
GST stands for Goods and Services Tax, which is a 10% tax on most goods, services, and other items sold or consumed in Australia. GST is regulated by the Australian Tax Office (ATO).
GST is an aspect of a transaction that can be overlooked in the process of negotiating either the sale or purchase of a business or commercial property. However, in many instances GST is in fact payable on the sale price for the business or commercial property transactions.
It is important that you are aware of the different GST implications applicable to your particular transaction, and that it may be the case that your transaction could potentially be GST free where the business or commercial property can be bought or sold as a supply of a ‘going concern.’
If a transaction includes GST buyers will be entitled to claim back the GST, component if paid through a 10% input tax credit, but they will not get this credit until after Completion. Additionally, if stamp duty is payable this is calculated on the purchase price plus any GST amount due. That GST portion of stamp duty is not refundable.
Conversely, the sale of a GST free going concern property or business benefits both buyers and sellers alike. The benefits of the supply of a going concern include enabling a degree of certainty surrounding the finances required to purchase the business and the total amount a seller will receive at Completion. Following Completion, the parties will also avoid the additional process of transferring and receiving the GST amounts and dealing with the ATO accordingly, although credits on expenses relating to the sale or purchase can still be claimed, for example, the GST included in solicitor’s fees.
Throughout this article, we break down the conditions you need to meet to qualify for the supply of a going concern for both sales of businesses and commercial property.
Going concern in relation to sale of business
In legal terms, a “going concern” is an exemption enacted by the ATO which permits a sale of business to be GST free as per section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth).
Subdivision 38-J (section 38.325) requires that:
It is noted that in most business transactions the first three elements are generally satisfied. The buyer paying money as the consideration for the transfer of the business, a buyer is generally already registered for GST and if not, this will be required prior to Completion, and the parties’ solicitors will likely advise their client to insert a clause in the special conditions that clearly states that the sale will be a supply of going concern. It is the last two elements that require more attention.
Seller to provide everything necessary for the continued operation
The published ruling of GSTR 2002/05 states that there are two fundamental concepts that are vital to satisfy ‘continued operation.’
It is important to note that the term ‘everything necessary’ does not refer to every conceivable item which was used by the previous owner. Ultimately, a thing is necessary if the business could not functionally be operated by the purchaser in the absence of that thing. These items may be distinguished from where goodwill stems from the personality, reputation, skills or attributes of an individual, which is not in itself transferable as such.
Seller to carry on business until the date of supply
The date of supply is deemed when the buyer assumes the effective control and possession of the business carried on by the seller. It is absolutely essential for a seller to continue trading until the date of Completion, with any business closures potentially nullifying the going concern exemption unless a seller is forced to temporarily cease trading for a short period of time. This obligation to continue trading may well be included as a pre-settlement obligation in a Business Sale Agreement, and failing to fulfil this may potentially lead to not only GST becoming payable, but consequences for a breach of contract. Whilst employees are not ‘things’ as defined in section 195-1 and therefore not falling under the sense of necessary discussed above, continuity of an existing workforce is a relevant consideration in ensuring the business has continued to operate until the date of supply.
Parties to a transaction may intend the sale to be a supply of going concern, however, if any of the above is not in order, the ATO will not hesitate to reject the exemption. If this eventuates, a seller will be liable for GST payable despite any attempts to pass on liability to the buyer. Therefore, it is strongly recommended GST recovery clauses be included in the contract that passes on all GST liability to the buyer in any instance where a GST free supply of a going concern is utilised.
Going concern in relation to commercial property
In the case of commercial properties and vacant land, the buyer will typically need to pay GST to the seller in addition to the purchase price. This can be calculated either at the standard GST rate of 10%, or otherwise if the property is being sold under the margin scheme, the GST payable will be calculated on the sale margin rather than the sale price. However, if the buyer is GST-registered and plans to utilise the property for business purposes, they may be eligible to claim that the property is to be sold as a going concern and therefore GST free.
If your commercial property is being leased prior to when you intend to sell, you may be able to utilise the going concern exemption. In which, all elements where the property including its contents are sold as an enterprise, as per the conditions discussed above, must be met.
Property that can form part of a sale of a going concern includes:
In summary, the laws and regulations surrounding GST can be quite complex and are particular to each individual transaction depending on the specific circumstances. Before you include a clause in your next contract for the sale or purchase of a business or commercial property to be sold as a GST free supply of a going concern, remember that this is only applicable in certain circumstances. In the absence of professional legal advice you may suffer significant litigious, tax and financial problems for yourself and the other party to your transaction. A failure to meticulously consider the requirements for a going concern sale may result in the Australian Taxation Office declining the exemption and consequently GST payments will be assessed for payment. To ensure you are taking full advantage of the benefits of the going concern exemption, please seek individualised advice from a tax accountant and JHK Legal. We have extensive experience in assisting clients with their sale or purchase of business and/or commercial property and are equipped to best determine whether GST is payable on your transaction to achieve your objectives in an efficient and thorough manner.
If you would like to have a discussion on how we can assist you, please do not hesitate to contact our office for more information.