In the excitement of negotiating a sale or purchase of a business it is easy to overlook whether the price negotiated is inclusive or exclusive of GST. Often both parties assume that business sales are GST-free without examining the ingredients of a GST-free transaction. It is obviously desirable for both parties to have a GST-free transaction as it provides certainty over the negotiated price and there is no need to ‘clawback’ GST from a subsequent BAS.
The Australian Taxation Office created an exemption for the sales of businesses to be exempt from GST as long as the business is being sold as a ‘going concern’. Broadly speaking, this requires the business is actually sold for consideration, that it is operational up until the day of sale and that the sale includes everything necessary for the buyer to continue operations.
The essential aspects of a sale being ruled as a ‘going concern’ include:
A sale between two registered entities has a tax neutral outcome as the purchaser pays the 10% GST and receives it back from the Tax Office. The seller receives the 10% of the purchase price and remits in back to the ATO. From a cash flow point of view the purchaser is not going to want to have to find the additional money on top of the purchase price which they then have to wait to recoup with their next Business Activity Statement. The seller also does not want to receive less than the negotiated purchase price.
The purchase price should be negotiated and written into the sales contract as GST exclusive so both parties know exactly where they stand. Contracts that are silent are deemed to be GST inclusive. It is worth including a clause in the contract that if you are selling, if for any reason the Tax Office deems the sale to not be a going concern, then the seller can require the buyer to pay the GST.
If you have any concerns about selling or buying a business as a ‘going concern’ contact us today.
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