Planning the succession of your business may involve the structure of the ownership of all assets used and consideration of the tax effect on sale. When you are involved in a commercial property or business sale you must carefully consider if the “GST sale as a going concern” ruling applies as a simple way to save the cashflow effect of paying GST in addition to the Purchase price in their transaction. You need to obtain advice from your accountant and legal advisor to be absolutely certain the “going concern” exemption applies to your specific circumstances, as it is a complicated ruling. If you assume that the going concern ruling applies to all transactions it might be a costly mistake, subject to the burden of paying the GST under the contract. Perhaps it is best to provide an overview of the requirements of when a sale transaction is a “going concern” and in what circumstances it will be GST-free.
Part 1: When is a transaction a “going concern”
Under the A New Tax System (Goods And Services Tax) Act 1999 (“The GST Act”), a supply of a going concern is defined as an arrangement under which:
- a seller supplies to the buyer “all of the things” that are necessary for the continued operation of an enterprise; [emphasis added] and;
- “the seller carries on” or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier)
For the purpose of a commercial property, an enterprise is defined in the GST Act and it includes the provision of a lease, licence, or other grant of rights in a property. As this activity must be on a regular or continuous basis, the lease arrangement must be in writing, in the form of a Lease or a Commercial Tenancy Agreement. The lease document should be entered into on or before the date of the supply, in this case, the Contract for sale.
The requirement that the enterprise “carries on” means that the seller, being the lessor, ensures that the lease continues at least until the settlement date and preferably for a period after that.
The purchaser must be able to demonstrate a present right to possession of the premises as a necessary thing for the operation of the enterprise.
Part 2: When are such transactions GST-free?
The GST Act provides that a supply of a going concern is GST-free when:
- the supply is for consideration; and
- the seller is registered or required to be registered for GST; and
- the supplier and the recipient have agreed in writing that the supply is of a going concern.
It is important to ensure that the above requirements are fulfilled prior to signing a sale contract. Every commercial sale contract should be reviewed by the parties’ lawyers and accountants, before being signed. Evidence that both of the parties are registered for GST should be provided.
Lastly, it is recommended to have a fallback clause, to ensure that if the transaction is not GST-free, there is an agreed party which is responsible for the payment of GST. Generally, this will be the buyer, unless the seller has failed to provide or fulfil the requirements in order to be eligible under the GST Act.
Often there are issues that arise which can cause the sale to fall outside of the exemption including:
- failure to achieve registration for GST prior to the date of settlement (for example where settlement is brought forward);
- failing to document and sign a formal lease agreement;
- failing to supply “all of the things necessary” for continued carrying on of an enterprise (this might be an item of key equipment or fixture required to operate);
- incorrectly stating the entity that owns the property to be sold where ownership is recorded differently;
- having the same entity as buyer and assignee of a lease (you cannot lease to yourself).
The rulings are complicated and worthy of careful consideration. Make sure you consider other exemptions that apply such as rural farm land and always seek advice before you sign the contract.
If you have any questions about “going concern” or require any advice on a commercial property contract, please contact Jake Cho at firstname.lastname@example.org or Tony.Crilly@Perspectivelaw.com or give us a call on 07 3830 7555.