Going Concern GST: Check a Business Sale

A going concern is GST-free when the seller supplies everything needed to continue the enterprise, operates it until supply and meets the payment, buyer-registration and written-agreement conditions. Check the actual transaction before applying that treatment to your client’s sale.

GST-Free Going Concerns

GST-free going-concern treatment applies to a qualifying supply of an operating enterprise. A contract calling the sale a going concern cannot make up for a missing condition.

Under section 38-325 of the GST Act, check each requirement separately:

1. Identify the enterprise the seller carries on and supplies to the buyer.
2. Establish that the seller supplies everything necessary for its continued operation under the arrangement.
3. Confirm that the seller carries on that enterprise until the day of supply.
4. Record the consideration for the supply.
5. Establish that the buyer is registered or required to be registered for GST.
6. Retain the parties’ written agreement that the supply is of a going concern.

The Australian Taxation Office (ATO) explains these requirements in GSTR 2002/5. An enterprise can be a business or a continuing leasing activity. It can also be a separately operating part of a larger enterprise.

Accounting going-concern assessments ask whether an entity can continue operating. This GST test concerns what the seller supplies and how the enterprise operates through the transfer. A favourable solvency assessment does not establish GST-free treatment.

Identify Everything Needed to Continue

Map what the buyer needs to continue the identified enterprise, including its operating arrangements. A list of assets alone can miss the rights that let the business use them.

For each item, record who owns it, how the seller supplies it and whether any consent remains outstanding. The relevant items depend on the enterprise:

• Premises or an enforceable right to occupy the required premises.
• Plant, equipment and stock needed for ongoing operations.
• Goodwill, customer records and forward orders where the business depends on them.
• Necessary contracts, licences and other operational rights.
• Operating information and arrangements that allow the buyer to continue the activity.

You do not need to transfer every asset the seller owns. Explain why anything retained is unnecessary to the enterprise being supplied.

Consider a fictional workshop sale. The seller transfers the equipment, stock, customer records and current jobs. It also assigns the workshop lease with the landlord’s consent. The business continues through handover. Those facts support the all-things-necessary test, subject to checking the other requirements.

Change one fact: the seller retains the premises and gives the buyer no right to occupy them. Assume those premises are necessary for this workshop’s operation. The sale now fails that test even though the equipment and customers transfer. A separate sale of a surplus machine also supplies an asset, without supplying the workshop enterprise.

Where different entities own the business and property, identify each supplier and each supply. Common ownership and simultaneous settlement do not combine their supplies into one. Examine the occupation rights and enterprise each seller actually supplies before reaching a conclusion.

Check Registration and Written Agreement

The buyer must be registered or required to be registered for GST when the supply occurs. Check the actual recipient, including its capacity, against the contract and registration evidence.

Keep the GST registration search and any confirmation of its effective date. If relying on compulsory registration, document why the buyer is required to register from the relevant time. An ABN alone does not establish GST registration.

For voluntary registration, a lodged application is insufficient. GSTR 2002/5 requires registration to take effect on or before the day of supply. Use the GST registration guide for the separate registration assessment and effective-date checks.

The seller and buyer must agree in writing, on or before supply, that the supply is of a going concern. The agreement can sit in the sale contract or a separate document. Retain the complete agreement and evidence that the correct parties agreed to it.

Check both the clause and the facts. A buyer’s promise to apply for registration does not establish the registration condition. A clause describing a GST-free sale does not establish that the seller supplied the operating enterprise.

Apply the Test to Commercial Property

A leased commercial-property sale can transfer the seller’s leasing enterprise when the property and necessary leasing arrangements continue through supply. Identify that enterprise separately from the tenant’s business.

In this fictional example, a company sells a warehouse subject to an existing commercial lease. The tenant remains in occupation and the lease continues after completion. The purchaser is GST-registered, consideration is payable and both parties agree in writing that the supply is of a going concern.

The accountant obtains the executed lease and variations, the sale contract, rent records and the documents transferring the landlord’s interest. The seller continues the leasing activity until supply. On these assumed facts, the transaction qualifies if all necessary arrangements pass to the purchaser.

Now assume the warehouse has never been leased. The seller advertises it for lease but completes the sale before anyone enters an agreement to lease or occupies it. Advertising alone does not establish an operating leasing enterprise in that situation.

Temporary vacancy after previous leasing has a different treatment. GSTR 2002/5 recognises continued leasing where the owner actively seeks a new tenant. It also addresses partly tenanted buildings and temporary repairs or refurbishment. Retain the prior lease, marketing instructions and relevant repair records to establish which facts apply.

A lease terminated before supply needs a fresh assessment of whether the leasing enterprise continues. Establish what happened after termination instead of treating either vacancy or a contract label as decisive. The ATO’s commercial-property guidance explains the relevant leasing arrangements.

Check the Position at Completion

Recheck the enterprise when effective control and possession pass to the buyer. The day of supply depends on the arrangement and actual handover, so it can differ from a date assigned to profits in the contract.

Before finalising treatment, obtain confirmation that operations continue and necessary rights pass. Match the completion documents to the original asset and rights schedule. Recheck registration and retain the written going-concern agreement, together with any contract variations.

Distinguish an enterprise that closes before handover from a short pause in some activities for cleaning or maintenance to facilitate the transfer. GSTR 2002/5 recognises the latter without treating it as cessation. Record what stopped, why it stopped and how the enterprise remained operating.

If a condition fails, reassess the supply under the ordinary GST rules and any other applicable treatment. Failure of the going-concern conditions does not automatically make every sale taxable. For an eligible taxable property sale, the GST margin scheme has its own requirements.

A buyer cannot claim a GST credit for GST absent from a GST-free purchase price. Credits for transaction expenses require their own assessment. Also review Division 135 if the buyer intends non-creditable use, such as input-taxed leasing. Monitor later changes in use for adjustments.

Prepare the Practitioner’s Decision Record

Your workpaper must connect each condition to evidence and a reviewed conclusion. Use a separate record for each supply where the transaction involves different suppliers or recipients.

For example, an unconfirmed lease assignment belongs against the necessary-rights condition. Record who must obtain the landlord’s consent and whether the buyer will have the required occupation right at supply. Resolve that fact before recording a favourable conclusion.

Seek transaction-specific GST advice where split ownership, mixed uses or disputed handover facts change the result. Consider an ATO private ruling where applying the law to the proposed arrangement remains uncertain. Give the adviser or ATO the complete arrangements and remaining facts before applying the conclusion to the BAS.