The way you structure the sale of your business matters. Selling your business as a going concern, for example, can come with significant tax benefits since GST is not usually payable on the sale of a going concern. In this article, we’ll outline what you need to consider before selling your business to take advantage of this GST exemption.
What is a Going Concern?
The Australian Tax Office (ATO) considers the sale of a business to be the sale of a going concern if:
- It includes everything necessary for the continued operation of the business. That is, the sale terms make it such that the previous owner can walk out and the new owner walks in with everything in place to continue operations; and
- The previous owner carries on operations until the day the business is sold.
If you own a cafe, for example, you may sell it on the basis that everything remains the same and it’s essentially ‘under new management’ when the new owners take over operations. This would (generally) be considered the sale of a going concern.
The Going Concern exemption may apply even in circumstances where a business is not sold in the exact circumstances described above. For instance, a business may be sold as a going concern even if it moves premises following the sale and relocates the tools, equipment, and employees. However, it is more complicated to apply the exemption in these cases and it’s (even more) essential you seek tax advice.
How To Sell a Business as a Going Concern
Generally, a business can be sold GST-free as a going concern if:
- The sale is for payment;
- The purchaser is registered for GST or required to be registered for GST;
- Both the seller and purchaser have agreed that the sale is of a going concern and that agreement is in writing;
- The seller includes everything the purchaser needs to carry on operations in the agreement for the sale; and
- The seller continues operating the business until the sale of the business is complete.
The Sale of Property as a Going Concern
If a business premises is sold as part of the sale of a going concern, generally, the sale of the property will be GST-free too.
Additionally, you may be eligible for GST credits on the expenses associated with the sale of the property – such as the GST included in your conveyancing fees. The purchaser may also be eligible for these credits.
What To Do Before You Sell A Business As a Going Concern
You must be able to demonstrate to the ATO that the sale falls under the going concern GST exemption. This involves gathering the documents and information the ATO needs to make their assessment.
An essential part of this is being able to show the ATO that the purchaser of the business receives everything they need to continue operating the business. To do this, you must show that you’re providing:
The assets required to continue business operations.
Equipment, tool, and the premises all fall under this umbrella, but so do employees and intangible assets like goodwill, licences, and contracts.
Before selling your business, you should put contracts in place with key customers and all employees and independent contractors. These contracts should address intellectual property (IP) ownership since the ATO will consider the transfer of IP when it determines if the sale is of a going concern.
The operating structure and processes.
The seller must also be able to show that the purchaser has what they need to carry on the commercial or economic activity of the business. This includes passing on the technical know-how, systems, and operations manuals required to run the business.
To do this, you should formalise and document processes in the business. This should include contact details for key suppliers, as well as information about standard operating procedures. It also includes documenting the business’ marketing assets and ensuring that ongoing advertising continues to run through the sale.
If you’re considering selling your business, you should seek tax advice as early as possible. We can help you confirm your tax obligations and which structure will provide the best outcome for you. From there, we work with you to meet the ATO’s requirements to take advantage of any GST exemptions or other tax minimisation strategies.