Determining whether a supply is a going concern is important in a range of transactions such as business or property sales. If a supply is deemed a GST-free supply of a going concern GST will not be payable, which can be beneficial to both parties in a transaction.
To determine whether a supply is a going concern, regard must be had to Section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (Cth).
A going concern requires two elements:
- The supplier (vendor) supplies to the recipient (purchaser) all things necessary for the continued operation of an enterprise; and
- The supplier (vendor) carries on, or will carry on, the enterprise until the day of the supply (the date on which effective control and possession of the enterprise transfer to the recipient – usually settlement), whether or not as part of a larger enterprise carried on by the supplier.
Additionally, for the supply of a going concern to be GST-free, three elements must be satisfied:
- The supply is for consideration (e.g. the business or property is being sold and purchase monies will be received);
- The recipient (purchaser) is registered or required to be registered for GST; and
- The supplier (vendor) and recipient (purchaser) have agreed in writing that the supply is of a going concern (this is usually specified in the Contract).
Therefore, for a Contract to be marked as a GST-free supply of a going concern, all five elements must be satisfied.
In considering whether these elements have been satisfied, it is important to consider what amounts to an ‘enterprise’. Section 9-20 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) sets out that an enterprise includes leasing, licensing, trading operations, among other things.
It is also important to note that ‘all things necessary for the continued operation of an enterprise’ means those things without which the enterprise could not function, not necessarily absolutely everything in the enterprise. For example, if a company car does not form part of the sale of business, this may not mean that the sale is not a GST-free supply of a going concern if the business can function without the car. Generally, the things necessary for the continued operation of an enterprise include necessary assets such as the premises, plant and equipment and goodwill, and the operating structure such as IP and systems. Therefore, if a business is being sold and the business leases the premises, it will likely need to be assigned to the purchaser of the business.
If you are having difficulty determining whether the supply is a going concern, reference should be had to GSTR 2002/5.
Some of the benefits of the supply being a GST-free supply of a going concern include avoiding delays in claiming input tax credits, a lesser purchase price, and cash flow advantages.
The risk ultimately lies with the vendor as they are required to remit the GST to the ATO. It is recommended that the vendor seeks an indemnity from the purchaser for any GST and penalties payable if the transaction is deemed not to be a GST-free supply of a going concern.
Please note that this is a general explanation only, and the specific circumstances of a business or property sale may affect whether it can be considered a going concern. It is always recommended to obtain the advice of a solicitor and accountant where GST is involved.
