Sellers and purchasers of business are often confused about whether the sale or purchase of a business will attract GST. Generally, for a business sale, the transaction will meet the criteria for what is known as a ‘going concern’, which will mean that an exemption from GST will apply. The sale is therefore neither GST inclusive, nor exclusive.
The criteria to be met for the going concern exemption to apply includes:
- that the purchaser is registered for GST;
- that the parties agree in writing that the sale is of a ‘going concern’;
- consideration (i.e. payment) is made for the sale;
- the seller supplies all things necessary for the continued operation of the business; and
- the seller carries on operation of the business until the settlement date (handover to the buyer).
The first 3 of the above criteria are quite clear and generally easy to achieve.
Sometimes however, criteria 4 and 5 can cause confusion amongst buyers and sellers.
Whether a seller is supplying “all things necessary for the continued operation of the business” will depend on the type of business and whether the business can continue to operate using the assets which are being transferred. This will usually include plant and equipment, stock in trade, the lease for the premises within which the business operates, intellectual property (business names, websites, logos and trade marks) and other assets such as employees, customer contracts etc. However, there are circumstances where not all of these things must be transferred to continue the operation of the business. For example, a gym may be transferred without the seller’s lease if the buyer intends to operate the business from home, or if the business is mobile (where there would be no lease at all).
For a seller to continue operating a business until the settlement date, they must do just that. The business should not close during any hours the business would normally operate, at any point prior to settlement. Often, we see buyers who wish to close down the business immediately following settlement for renovations before re-opening. This is generally acceptable, on the basis that the business does not close before settlement.
The best approach for any party to a business sale, is to seek legal and accounting advice at the earliest possible opportunity. The Small Business Lawyer acts for buyers and sellers of businesses everyday and can assist in determining if a business sale or purchase will meet the going concern criteria, and be exempt from GST. If you are thinking of buying or selling a business, please book in a book a free 20 minute consult with one of our highly skilled small business lawyers.