GST – A Going Concern

Posted on May 27, 2021 by Liam Tobin   |   Categories: Commercial & Business Law

What’s in a name? Quite a bit if it saves you tax when selling a business. 

In any matter in our lives, it is hard to deny that the potential to avoid paying tax is usually pretty desirable.

GST on a business purchase 

For a person looking to purchase a business, the purchaser may avoid an additional 10% on the price in the form of GST, where the business is agreed to be sold for payment to a purchaser registered for GST, and is sold as a going concern.

What is a Going Concern?

In its Goods and Services Tax Ruling “GSTR 2002/5”, the ATO has found that a sale of business shall be considered to be GST-free on the basis that it is a supply of a going concern, where:-

  1. the sale includes everything that’s necessary for the continued operation of the business; and
  2. the business is carried on by vendor until the day of sale.

The things that are ‘necessary’ will depend on the nature of the business carried on and the core attributes of that business, but may include:-

  • premises
  • plant and equipment
  • licences, permits, quotas or similar statutory authorisations
  • goodwill
  • restrictive covenants
  • intellectual property including copyright, patents, designs and trade names
  • franchises
  • employee skills and knowledge
  • technical know-how, systems and operations manuals and business names
  • trading stock
  • work in progress
  • client/customer lists
  • advertising material
  • fixed assets
  • suppliers; or
  • rights under contracts – such as lease contracts, contracts of supply to the enterprise, customer contracts

Issues may arise where an element of the business is not readily sold or transferred, or in circumstances where the vendor does not wish to part with an asset long term.

This may arise, for example, where a business has operated from premises also owned by the vendor of the business who may not wish to sell the premises as part of the business, in which case a lease for the premises may be part of the conditions of the contract for the purchase of the business.

Securing the Business Name

Another element that can be overlooked is the business name for the business being purchased. In the excitement of the purchaser to take on the new business and add their own personal touches, it is important not to overlook the business name, and to consider whether a hasty rebrand may inadvertently result in GST being added to the purchase price as the business name has not been transferred with the business sale.

In circumstances where the business name is the same as the registered name of the vendor company or other circumstances where the vendor sell the business name to the purchaser, the ATO stated in its Interpretative Decision 2002/237 that while the business name is a crucial part of the business, a short term licence to the purchaser for a specified period of time commencing on settlement shall satisfy the going concern requirement to allow for a GST free purchase.

Saving 10% on the purchase price but one of many reasons why it is important to make sure that you get legal advice before entering into a contract to purchase a business. For further assistance contact Baker Love Lawyers.