GST (Supply of a Going Concern) and Business Sales: A Deeper Look

The Benefit

Whether a sale is a “supply of a going concern” and therefore GST free impacts on every business sale. If so, the buyer will be saved from funding an additional 10% of the sale price. Depending on the sale price, this may be substantial.

The Elements

For the sale to be a “supply of a going concern”, Subdivision 38-J (section 38-325) of A New Tax System (Goods and Services Tax) Act 1999 requires that:

1. The supply is for consideration;
2. The recipient is registered or required to be registered;
3. The supplier and the recipient have agreed in writing that the supply is of a going concern;
4. The supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).
5. The supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise.
   

Let’s consider each of these elements when selling a business utilising the REIQ Business Sale Contract as an example.

The supply is for consideration:

“Consideration” is defined in section 9-15 and includes “any payment, or any act or forbearance, in connection with a supply of anything”. Under section 9-10, a supply is “any form of supply whatsoever”. Therefore, the sale of a business is a “supply”. Given most businesses sold require a payment, i.e. the sale price; the supply would be for consideration.

The recipient is registered or required to be registered:

The recipient (i.e. the buyer) is “registered” if they are registered for GST. The recipient can be registered if they are “carrying on” an enterprise (section 23-10). “Carrying on” an enterprise is defined to include doing anything in the course of commencement of the enterprise. Therefore, a newly established entity buying a business can be registered. Registration can be determined by doing an “ABN Lookup” which is a search through the business.gov.au website. A recipient is required to be registered if their GST turnover meets the registration turnover threshold (section 23-5). The threshold is set under section 23-15 and the regulations, and is currently $75,000. In most cases, the buyer’s ability to meet this clause is not difficult.

The supplier and the recipient have agreed in writing that the supply is of a going concern:

This is satisfied by the GST clause in the Contract (cl 3.3), which records that the parties contract on the basis that the supply is GST free and the price excludes GST.

The supplier carries on, or will carry on, the enterprise until the day of the supply:

Applying paragraphs 141 to 148 GSTR 2002/5, the “day of the supply” is the date of Completion under the Contract. Also, to carry on the business to that day, the business must be fully operational right up to that day by the seller. The only exception seems to be stated in paragraph 145 i.e. a temporarily ceasing some activities for cleaning and maintenance purposes.

The supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise:

Whether or not a “supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise” is the most difficult element to determine. Again, GSTR 2002/5 is helpful to determining whether this element is satisfied. It states:

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 that thing (paragraph 73).

Two elements are essential for the continued operation of an enterprise (paragraph 75):

1. the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and
2. the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

The intended and actual use by the recipient of all of the things supplied are not relevant in determining if there is a ‘supply of a going concern’. The enterprise may be continued as a different enterprise, as part of a larger enterprise, or may not be continued at all by the recipient (paragraph 81).

Certain things which are used in the enterprise as a matter of choice by the supplier conducting the enterprise are not necessary in circumstances where the enterprise could be carried on in the absence of those things, (that is, they are not essential). (paragraph 83).

Example of “things that are not necessary”(paragraphs 84 to 86):

• Bill is the proprietor of a medium sized insurance broking firm. He operates his business entirely from an inner city office building and all appointments with clients are conducted at these premises. He does not require a motor vehicle for business purposes.
• Bill enters into an agreement to sell his business to Jake. Under the arrangement, Bill supplies his client list, goodwill, office furniture and equipment, and assigns the lease over the premises.
• As a motor vehicle is not one of the things that is essential for the continued operation of Bill’s enterprise, it is not necessary for Bill to supply a motor vehicle to Jake as part of the arrangement. That is, it is not one of the things that must necessarily be supplied under the arrangement in order for the sale of Bill’s insurance broking firm to qualify as a ‘supply of a going concern’.

Example of “things that are necessary” (paragraphs 87 to 89):

• Ben conducts a mobile mechanic business. He has a specially fitted out van which carries all his tools and equipment. Ben travels widely throughout the metropolitan area and carries out repairs at clients’ premises. He does not have a workshop of his own where repairs can be performed.
• Ben enters into an agreement with Pistons Pty Ltd (‘Pistons’), a company that owns several motor repair workshops, to sell his business. Under the arrangement between Ben and Pistons, Ben supplies his client list, the mobile telephone number, goodwill and motor vehicle, together with all the equipment and tools.
• Ben’s motor vehicle is essential to the continued operation of his enterprise and is one of the things that must necessarily be supplied under the arrangement for the sale of his business to qualify as a ‘supply of a going concern’.

Conclusion

Parties to a business sale contract should seek advice from their tax advisor / accountant prior to entering into a business sale contract to determine the impact of GST on the transaction. Extra precaution should be taken in circumstances where the seller seeks to exclude items from the business sale.