When working with clients who are either buying or selling businesses, we’re often asked: ‘Will I have to pay GST?’
The short answer, according to the Australian Tax Office (ATO), is:
No GST is payable on the sale of a going concern if certain conditions are met. (A ‘going concern’ is a business that is operating and making a profit.) However, as the seller, you may be able to claim input tax credits for GST you paid on expenses relating to the sale.
Of course, it’s never as simple as one paragraph when it comes to tax, so we’ve asked one of our business analysts, who is also a CPA, to clarify those ‘certain conditions’ mentioned, and when you can and can’t claim input tax credits for GST paid on sale expenses.
Key concepts when selling a going concern
Firstly, below are some fundamental concepts for business owners to be aware of if you are thinking about selling your business as a going concern.
What is a going concern?
A going concern is a business that is operating and making a profit.
What is a sale of a going concern?
You are selling a ‘going concern’ if:
- the sale includes everything that is necessary for the continued operation of the business; and
- the business is carried on by you until the day of sale.
When is a sale of a business deemed not to be a going concern?
If any of the below circumstances occur, the ATO will treat the transaction as a sale of a business deemed not to be a going concern. This means you may not be eligible for GST exemption and you will need to pay the ATO 10% of your sale proceeds:
- There is no written agreement between the seller and the purchaser to state that the sale is of a going concern.
- The sale is not for consideration or payment.
- The seller does not supply all things necessary for the continued operation of the business. This does not mean everything that is owned by the business. It does, however, mean those things without which the enterprise could not function. Generally, this includes the necessary assets such as premises, plant and equipment, and customer contracts. It can also include business arrangements such as ongoing advertising.
- The seller does not stay in possession of the business and its premises and ensure the business continues to run as a going concern prior to the settlement date.
- The seller does not carry on the business until the day of sale.
- The purchaser runs the business under a different name and from different premises.
- The purchaser is not registered or not required to be registered for GST.
Asset or share sale?
In the sale or purchase of a business, a purchaser can either choose to acquire shares of the company that owns the business (i.e. share sale) or acquire assets directly from a seller (i.e. asset sale).
Depending on types of assets sold and assessment criteria for sale of a going concern, as discussed above, an asset sale may or may not be eligible for ‘going concern’ exemption for GST. We will not cover this in depth in this blog, due to the legal and commercial complexities in assessing asset sales as a going concern.
Instead, we will focus our discussion on sale of a going concern business (that is a company) using shares on and after 1 July 2012.
Sale of a business as a going concern
Before we discuss GST implications, we’ll introduce some further useful concepts to help you understand the GST regulations:
Financial supply: In this case, you make a ‘financial supply’ when you sell your company as a going concern using shares.
Financial acquisition: An acquisition that relates to the making of a financial supply (e.g. acquisition or disposal of an interest in shares).
Financial acquisitions threshold*: The ‘financial acquisitions threshold’ allows entities that make a relatively small amount of financial supplies – compared to their taxable supplies/sales or GST-free supplies/sales – to claim full input tax credits relating to those financial acquisitions.
If you do not exceed the financial acquisitions threshold, you may be entitled to full GST credits (i.e. credits for goods or services used to make sales) for your acquisitions relating to financial supplies. For specific circumstances, and to determine whether or not you exceed the threshold, we suggest you seek advice from your accountant or taxation advisor.
*A detailed explanation of the financial acquisitions threshold and relevant working examples can be accessed via the useful links at the end of this blog.
What are the GST implications when buying or selling a going-concern business using shares?
The GST implications are the same for both sellers and purchasers involved in the share acquisition process of a going-concern business.
This sale is a financial supply and this type of business acquisition is a financial acquisition. No GST will be charged on the sale price of the shares (i.e. neither a seller nor a purchaser is required to pay GST).
What about claiming GST credits on expenses relating to the sale?
If you do not exceed the financial acquisitions threshold, the sale is treated as if it was GST-free and you may be entitled to full GST credits on some expenses, such as legal and accounting advice.
If you exceed the financial acquisitions threshold you cannot claim input tax credits for GST expenses relating to the sale.
Are there any other exceptions for claiming a GST credit?
Apart from not exceeding the financial acquisitions threshold, there are three other exceptions to claim a GST credit, as summarised below:
- You use the purchase to buy or sell company shares (i.e. make a financial supply) through a business or a part of a business that you carry on outside Australia.
- Your purchase relates to a borrowing (e.g. bond, debenture, discounted security etc.) you make, if certain conditions are met.
- If you use brokerage services or make other certain special types of purchases* to buy or sell company shares and you exceed the financial acquisitions threshold, you can claim a partial GST credit on these items.
*These types of purchases, listed in the GST regulations, are called ‘reduced credit acquisitions’.
Is GST paid if you sell stock as part of a going concern?
It depends on the condition of the stock.
If the stock sold as part of a going concern is necessary for the continued operation of the business, then the answer is ‘no’, you don’t have to pay GST on it.
If there is any old or obsolete stock identified during the business inspection, you need to reach an agreement with your purchaser on how to deal with this. You may choose to sell your old or obsolete stock at reduced value, or disregard this altogether when calculating the value of your stock.
Seek taxation advice
The information in this blog is general in nature and not intended to be actionable for an actual transaction.
As each individual sale transaction is different, we strongly suggest business sellers and purchasers seek their own taxation advice relating to their specific circumstances.
Useful links for business sellers and purchasers
1. Follow this link to see common considerations for sale of going-concern businesses:2. Follow this link to work out whether the sale of a business meets the requirements of a ‘supply of a going concern’:
https://www.ato.gov.au/law/view/document?Docid=GST/GSTR20025/NAT/ATO/00001&PiT=99991231235958
3. Follow the link below if you are interested in learning more from the GST ruling to work out whether you exceed the financial acquisitions threshold. In short, you exceed the financial acquisitions threshold for a particular month if the GST credits you could claim for current or future financial acquisitions are more than either of the following:- $50,000 (before 1 July 2012) or $150,000 (on and after 1 July 2012) in the relevant 12-month period
- 10% of the total amount of GST credits you could claim for all your purchases (including financial acquisitions) during the relevant 12-month period.
https://www.ato.gov.au/law/view/document?Docid=GST/GSTR20039/NAT/ATO/00001&PiT=99991231235958#P12
4. Follow this link to see detailed working examples to assess when a financial supply exceeds the financial acquisitions threshold:5. Follow this link to view detailed discussions on four exceptions to claim a GST credit:
6. Follow this link to check useful supporting information that the ATO usually requires if you want to request a private ruling or objection about the GST consequences:
https://www.ato.gov.au/General/ATO-advice-and-guidance/In-detail/Private-rulings/Supporting-documents/GST/Sale-of-a-business-as-a-going-concern/
If you would like support with any aspect of buying or selling a business, contact the team at JPAbusiness on 02 6360 0360 or 02 9893 1803 for a confidential, initial discussion.
James Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.