Many people attempting to sell their business without competent professional help would be shocked to discover they may have to hand one-eleventh of the purchase price over to the Australian Tax Office.
Yet, unfortunately, this is a potential outcome for vendors who use a poorly drafted sale contract, or fail to use a contract at all.
GST was meant to be a simple tax, but six years on that has proven not to be the case. Indeed, GST has introduced a greater level of complexity to sale of business transactions than we have ever seen before.
The ATO tax ruling on “when is a ‘supply of a going concern’ GST-free?” runs to some 30 pages. The ruling is highly prescriptive, and it is common to find that the circumstances of a particular business sale will not entitle it to be GST-free, as first expected.
For example, it is a common for a vendor who owns both a business and the freehold from which it operates, to be selling to a purchaser who wishes to buy the freehold in his or her personal name, but the business in a company or trust. Such structuring is prudent for the purchaser, from an asset protection perspective.
However, according to the tax ruling, this is not the ‘supply of a going concern’, and GST would be payable.
Further, under the tax legislation it is actually the vendor, not the purchaser, who is liable to pay GST.
Thus, a well drafted sale contract will contain a “clawback clause”, enabling the vendor to recover back from the purchaser, any GST which the vendor is required to pay, together with any penalties and interest.
Another common scenario is where a company or trust vendor sells a business, but a licence required to operate (eg, a travel agent’s licence) is actually held in the name of an individual associated with the business. Again – GST may be payable.
These are only two of many more sets of circumstances which one might assume would qualify a business sale to be GST-free, but due to a technicality do not.
There are solutions for guarding against this – in the first example, by settling the freehold and business components of the sale on two consecutive days, the sale can retain its GST-free status.
In any case, it is critical to use a well-drafted sale contract to ensure that, if GST is ultimately payable, the vendor will not be left unexpectedly out of pocket.
If you are thinking about selling your business, please feel free to call us to discuss GST and any other issues you may have.