The Goods and Services Tax (GST) element in selling a business is often overlooked. There are a number of considerations involving GST when selling a business. This is set out in A New Tax System (Goods and Services Tax) Act 1999 (Cth). However, there is a host of associated legislation governing the administration of the tax. At the time of this article, the rate of tax is 10% of the value of all taxable supplies.
Definition of GST
The Goods and Services Tax is:
- a tax on most goods, services or any other ‘supply’;
- intended to be ultimately borne by the final consumer of the supply, but is collected by business suppliers; and
- imposed at each stage of the chain of production of any good or service.
Although GST is imposed at each stage of production, a system of tax credits prevents the GST from being a cascading tax. There are instances where GST is not charged, being ‘GST-free supplies’. This includes most basic foods, some medical and healthcare services, childcare, certain utilities and supply of an enterprise as a going concern. A business tax lawyer can assist whether or not you are selling GST-free supplies.
Supply of a Going Concern
As noted in the paragraph above, the supply of a “going concern” is a GST-free supply. When an entity or business that has been carrying on an enterprise decides to sell its business or a part of its business, it will be necessary to determine whether or not the supply of the business is subject to GST. In selling a business, the vendor or seller will wish to set the selling price with regard to the anticipated GST expense. A carefully drafted Sale of Business Agreement will take into account whether GST is included or not. If GST is to be included, a purchaser will also need to ensure financing is taken care of to account for the GST inclusive price of the business. Stamp duty may also increase because of the higher price paid.
Under the GST Act, a supply is a supply of a going concern in the following circumstances:
- the supplier supplies to the recipient all of the things that are necessary for the operation of the enterprise; and
- the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).
What GST considerations should vendors and purchasers look out for when selling and buying a business?
Primarily, GST adjusts the price of selling and buying a business, and is more of a cash flow concern for the purchaser. The purchaser may need to raise additional funds. However, vendors also need to look out for a number of pitfalls. A vendor does not want to sell a business for a price determined upon the basis that the sale is not subject to GST, only to find out later that the sale is subject to GST. If this occurs, the vendor is obliged to pay the Goods and Services Tax themselves and may not increase the price of the business.
LegalVision can assist you with any questions you may have about selling your business and understanding the GST implications. LegalVision has a team of excellent tax lawyers who can assist you in drafting the correct legal documentation in selling or buying a business. Please call our office on 1300 544 755 and our Client Care team will happily provide you with an obligation-free consultation and a fixed-fee quote.