What makes a sale GST-free.
GST law treats the price of a business sale as including GST unless an exemption applies, and the most common exemption is the supply of a going concern. It is GST-free where the sale is for consideration, the buyer is registered or required to be registered for GST, both parties agree in writing that the supply is of a going concern, the seller supplies everything necessary for the continued operation of the enterprise, and the seller carries on the enterprise until the day of supply. The rules are in section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999, and the ATO explains them in ruling GSTR 2002/5.
The conditions are read strictly.
The phrases do real work. “Everything necessary” means the buyer must be put in a position to carry on the business, and problems arise where something the business needs cannot be handed over, for example a licence that must be reissued rather than transferred, or premises that cannot be assigned, although the ruling accepts that surrendering a lease can satisfy the requirement in some cases. If the buyer lines up its own premises, that can suggest the seller's premises were not necessary. The exemption can also fail if the enterprise has to be supplied by more than one entity, which sometimes forces a group to restructure first. “Carried on until the day of supply” means a business that has already shut down and is being sold for parts will not qualify, even if the buyer is handed everything to start it up again. The day of supply is when the buyer assumes effective control, which need not be settlement.
The risk sits with the seller.
The seller is liable to the ATO and has no automatic right to pass GST on, so a recovery clause is used to claim it from the buyer if the treatment fails. That clause does not remove the risk, because the buyer may be insolvent or simply refuse to pay. Having the treatment confirmed before settlement is the protection, and we deal with it through our business sale and purchase service.
If a licence or the premises cannot actually be supplied to the buyer, or the business has stopped trading before the day of supply, the going concern exemption can fail even when everyone assumed it applied, and a recovery clause will not save the seller from an insolvent buyer.
Law referenced: A New Tax System (Goods and Services Tax) Act 1999 s 38-325; GSTR 2002/5.