The going concern exemption to GST

In Australia an exception to the requirement to pay the broad based consumption tax known as the Goods and Services Tax may apply to the acquisition of business assets as part of a business sale.

What is the Goods and Services Tax?

The Goods and Services Tax (GST) is a general tax applied to most goods and services sold within Australia by the Commonwealth.  This tax is currently levied at 10%.

Who is required to register for GST in Australia?

Any business or enterprise with an annual turnover of more than $A75,000 must register for GST.  Non-for-profit organisation with a turnover more than $150,000 must also register.

Why is GST an important consideration in the sale of a business?

When buying or selling a business it is important to determine whether GST applies, as going concern exception may provide the Buyer with an exception to paying GST on the acquisition.  If the sale is not GST exempt it may result in a the Buyer having to pay GST on its acquisition.  The Seller may be required to repay the amount under section 105-50 Taxation Administration Act 1953 (Cth) (TAA).

The going concern exemption to GST – business acquisitions

The GST is a broad based consumption tax that is passed onto the end consumer of goods and services.  For this reason the supply of a going concern between businesses is generally GST-free if the supply relates to a “going concern”.  Section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) outlines that supply of a going concern is not subject to GST:

Future developments

In December 2013 the government announced future plans to replace the going concern exception with a reverse charge.  While the supply would no longer be GST-free, the benefit to the Purchaser would be retained through tax credit inputs.  We will watch this space closely.

Part 3-1, Division 38 of the GST Act contains other GST exemptions including in some circumstances supply of some farm land, transport, health and education.

What is a going concern?

All things substantially necessary for the continued operation of an enterprise

The supply of a going concern generally requires all things substantially necessary for the continued operation of an enterprise.  Whether this requirement is met will largely depend on the circumstances, activities and objectives of the enterprise itself.   As Justice Greenwood stated in Aurora Developments (2011) 192 FCR 519 at 572-3 “Until the content of the enterprise is isolated, it is not possible to say whether all of the things necessary for its continued operation have been supplied…”

The supply of a going concern could include:

• (i) The assignment of existing leases;
• (ii) Re-grant of a franchise;
• (iii) Transfer of non-personal goodwill;
• (iv) Transfer of paid chattel leases;
• (v) Transfer of equipment necessary for the continuation of a business;
• (vi) Transfer of all required permits, statutory licenses where authorised by law.

While certain employees may be essential to the continued operation of an enterprise, the supply of all the Seller’s employees is generally not necessary.  In Allen Yacht Charters Ltd v CIR (1994) 16 NZTC 11 the New Zealand High Court analysed a provision similar to section 38-325.  The Court held the sale of a charter boat was not a going concern, despite being crucial to the continuation of the business. The reason being the Buyer had not sought to transfer the yacht’s future bookings, did not examine the business’s financial viability and did not possess any specific knowledge of its activities.

The supplier carrying on the enterprise until the day of supply

As best practice, a warranty should be obtained that the Seller will provide all necessary items for the operation of the business and continue carrying on the business until the day of supply.

Threshold requirements

• Supply for consideration

The term ‘for consideration’ means the supply of the business must involve an exchange of promises or quid-pro-quo. The supply must not be gratuitous.

• Registered or required to be registered to pay GST

As discussed most businesses are registered or required to be registered to pay GST if their sales are over the statutory threshold.

• Supplier and the recipient have agreed in writing that the supply is of going concern

The agreement may be found in a combination of documents that evidence in writing that the supply was for a going concern.

For example, in SDI Group Pty Ltd v Commissioner of Taxation [2012] AATA 763 the Tribunal found at 42 that requirement that the supply be agreed writing could be satisfied through a combination of documents including a contract of sale, a tax invoice and statutory declaration.

• Going concerns in relation to the sale of land

The going concern exception may also apply to the sale of commercial leased premises. The focus is not necessarily occupation of the premises but rather on their availability for lease as consistent with the overall objectives of the enterprise itself.  A premises that has never been leased will generally not meet the requirements of this provision.

Links and further references

Legislation

• A New Tax System (Goods and Services Tax) Act 1999 (Cth)
• Taxation Administration Act 1953 (Cth)
• Goods and Services Tax Ruling GSTR 2002/5

Cases

Brookdale Investments Pty Ltd v Commissioner [2013] AATA 154 – The sale of various properties by a property developer was not found to be a supply of going concern and was not GST-free.  There was no evidence that the parties had agreed in writing prior to supply that the sale was for a going concern

Aurora Developments Pty Ltd v Commissioner of Taxation [2011] FCA 232 (Justice Greenwood)

Belton v CIR (1997) 18 NZTC 13 – The services of the vendor’s employees of the business are not necessary for the acquisition to be a ‘going concern’

Other links

Australian Taxation Office “Selling a business as a going concern” – Checklist

Further information

If you need further information to ensure that the business you buy is a ‘going concern’ please contact us for an obligation free and confidential discussion.

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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