GST and the Supply of a “Going Concern”

The sale of a business may be a supply of a going concern and therefore GST-free.  The concession can assist in providing cash-flow and stamp duty savings to purchasers of businesses.

The cash-flow benefit is the saving to the purchaser in not having to fund the GST payable on the purchase price of the business (although in most cases this GST would be recoverable as a GST input tax credit in a subsequent BAS). The stamp duty benefit of the concession is that duty is calculated on the sale price without GST.

The Government is currently considering changes to the going concern concession.  The proposal is that the current GST-free treatment would be removed and a “reverse charge” would be introduced whereby GST would be paid and claimed by the purchaser in the same BAS, resulting in no cash outlay for the purchaser (assuming the purchaser is entitled to a full GST input tax credit).

This shift to a reverse charge is a change that was originally suggested by the previous Labor Government and that the current Government has accepted.  Unfortunately however. there is no timeframe for implementation of the change other than “sometime in 2014.”

However, because the sale of the business may no longer be GST free, the State and Territory Governments may require stamp duty to be calculated on the GST inclusive price resulting in a greater stamp duty liability than when the current going concern concession applies.  At this point, because the change to the going concern concession has not been enacted by the Federal Government, the consequent approach by the State and Territory Governments is unknown.

Based on the information provided by the Government to date, the current requirements to satisfy the definition of a “going concern” are likely to remain. Therefore, buyers and sellers of a business and their legal advisors must be aware of the conditions which must continue to be satisfied to access this useful concession.

The concession’s current requirements are set out in section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (the GST Act). The first two conditions (paragraph 38-325(1)(a) and (b) respectively) are that the supply is for consideration and the recipient is registered or required to be registered for GST. These are generally uncontroversial and do not often cause issues in practice.

Paragraph 38-325(1)(c) requires that the “supplier and recipient have agreed in writing that the supply is of a going concern.” Most practitioners are aware of this requirement and regularly insert a clause into the sale contract to reflect the parties’ agreement that the supply is a going concern. The AAT has confirmed that the written agreement can be evidenced by other documents such as tax invoices[1], however, the agreement must be contemporaneous with the supply[2].

Also common, and recommended, is a GST “gross up” or reimbursement clause, which allows the seller to recover from the purchaser any GST payable if the supply subsequently becomes subject to GST. The inclusion of such a clause does not jeopardise the going concern concession.

While the “written agreement” requirement is usually satisfied, the ATO has challenged the sales of many businesses because the conditions in the definition of a going concern have not been satisfied.

Under those conditions, pursuant to paragraph 38-325(2)(a) the supplier must supply “all of the things that are necessary for the continued operation of the enterprise.” The relevant enterprise is that of the supplier, not the purchaser. This can cause issues because the purchaser will often already own assets used in their existing enterprise, and therefore is reluctant to pay for the seller’s identical or comparable asset; for example, a printing press in a printing business.  The ATO’s states at paragraph 41 of Taxation Ruling GSTR 2002/5 that:

“[t]he ability of the recipient to provide some of the things necessary for the continued operation of the enterprise is not a relevant consideration.”

Accordingly, the purchaser must take on all the assets required to operate the supplier’s enterprise, even where these are surplus to the purchaser’s requirements, to satisfy the going concern provisions.  However, the purchaser is then free to dispose of these assets immediately upon acquisition, without disturbing the GST-free treatment accorded by the going concern concession.

Practitioners should also consider the nature of the entity making the supply when considering accessing the concession. The going concern concession is not available where only shares in a company, that conducts an enterprise, are sold.  This arrangement does not satisfy paragraph 38-325(2)(b) because the supplier, being the shareholder, has not carried on the enterprise.  However, the supply of shares is likely to be an input-taxed financial supply, resulting in no GST payable. However, restrictions may apply on the recovery of GST on costs related to the purchase of the shares.

Further complications arise where a business has assets split between different entities and wishes to supply the entire enterprise of those entities to a single purchaser. For example, one entity may operate the enterprise, and lease the land on which the business is carried out from a related entity. Common sense would suggest that where the complete “bundle” is provided to a purchaser then the going concern law should be satisfied.

However, the ATO takes the view that both the business and the leasing need to be individual enterprises to access the concession for both enterprises. In the above example, a business that leases the commercial premises to its related entity should be viewed as carrying on an enterprise. Therefore, where both enterprises are sold on the same day, through interdependent contracts, the supplies should be GST-free under the going concern concession. However, this may not be the case where an entity takes a more passive role in the business; for example, an entity that licenses the goodwill and does not conduct an enterprise.

[1] SDI Group Pty Ltd and FCT [2012] AATA 763

[2] Brookdale Investments Pty Ltd and FCT [2013] AATA 154

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