DESPITE an Australian Tax Office draft ruling to clarify the Sale of a Going Concern provision in the GST Act making the sale of a business GST free, some advisors recommend business buyers keep enough cash aside to cover unforseen GST.
While the draft ruling gives examples of how the provision applies in real situations, it does not offer hard and fast rules for specific industries.
Under the Act, the sale of a going concern is GST free providing the vendor gives the purchaser all things necessary for the continued operation of an enterprise and the vendor carries on the enterprise until the day the business changes hands.
Both parties must also be registered for GST and sign a written agreement that the business being transferred is a going concern.
Without this provision in the Act, a business sale would attract GST.
The purchaser would have to pay an extra 10 per cent and claim it as an input tax credit. The vendor would have to remit the 10 per cent to the tax office.
Deacons partner Colin Munro said the ruling was helpful in determining whether the sale of a business constituted the sale of a “going concern” for GST purposes but questions still remained.
Mr Munro said the requirement that the recipient be supplied “all of the things necessary to continue the operation of an enterprise” had raised potentially conflicting interpretations.
“Does the recipient have to be capable of operating precisely the same type of business as the supplier, or does the recipient merely have to operate a similar enterprise?” he asked.
Hayes Knight GTO tax partner John Miniello said the sale involving a Going Concern provision was great for the buyer but bad for the seller.
“Results in New Zealand have been that if the parties get the sale wrong, it hits the seller,” Mr Miniello said.
“What will help is the Government changing the legislation to focus on the buyer rather than the seller.
“If things don’t go to plan, the buyer can claim the GST back.
“If they get it wrong, all of a sudden the transaction is subject to GST and the seller has to remit one eleventh to the tax office.
“He then has to go to the purchaser to get the GST. Then suddenly it’s six months later and the seller is still out of pocket.
“Also, if the business is audited at a later date it can be found the sale didn’t meet the requirements of the provision and the seller gets hit for the GST.”
