“Going concern” status is always highly desirable to both buyer and seller in a sale of business – because buying or selling anything commercial with no GST sounds great! However it is easy to forget that GST in a sale between two registered entities is a tax neutral outcome, because the purchaser pays 10% GST and gets it back from the taxman and the seller collects the additional 10% and hands it over to the taxman. Each ends up in (virtually) the same position PROVIDED you correctly negotiate the price on a GST exclusive basis in the first place.
For the Buyer, however, it is a question of cashflow. It is preferable to avoid fronting the extra dough which you must then wait to recoup on your next business activity statement.
Some of the essential aspects of a going concern sale are:
1. Both seller and buyer must be registered for GST.
2. The sale contract must expressly record that the sale is a going concern.
3. Always negotiate price as GST EXCLUSIVE so that both parties know where they stand – and if GST is payable, the seller still pockets the agreed price. A contract that is silent will be GST inclusive, which will always be bad for a seller.
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4. The seller must sell everything that is necessary for the continued operation of the business. Any exclusions mean that it is not a going concern.
5. Selling everything includes the premises from which the business operates – it is not enough to sell everything and then say “go and source your own premises” (unless you are a mobile business or operate from your home, but there are strict ATO rules on this). If the business premises is leased, there must be an assignment of lease OR surrender of the existing lease together with a new lease to the buyer.
6. It may come undone where the seller’s ownership is hotch-potch – meaning different legal entities own different parts of the business. A seller should get this checked by a lawyer well in advance of a sale.
7. The business must trade up until the settlement date. Any business closure in the lead up to the sale will nullify going concern – so beware if you plan a closure to paint or renovate.
And for a seller, there should always be a clause in your contract stating that if the tax office deems your sale NOT to be a going concern, then you can call on the buyer at any time to pay the GST.
There’s no need to be concerned if you get it right, with the right advice.