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LPLC: Risky business

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Cite as: (2007) 81(3) LIJ, p. 80


Practitioners need to understand when a sale of business is the supply of a going concern.

For a sale of business to be the supply of a going concern and GST-free under s38-325 of A New Tax System (Goods and Services Tax) Act 1999:

  • the supply must be for consideration;
  • the purchaser must be registered or required to be registered for GST;
  • the vendor and the purchaser must have agreed in writing that the supply is of a going concern;
  • the vendor must supply to the purchaser all of the things that are necessary for the continued operation of the enterprise; and
  • the vendor must carry on the enterprise until the day of supply.
  • Although this area is notoriously technical, the mistakes solicitors have made to date have been surprisingly simple. The two most common mistakes made by solicitors acting for vendors are:
  • failing to ensure that the parties have agreed in writing that the supply is of a going concern (either by way of a condition in the contract of sale or by an exchange of letters prior to settlement); and
  • failing to check or require confirmation from the purchaser before settlement that the purchaser is registered for GST.

If there is no GST exclusive “claw back” clause in the contract, vendors’ solicitors are exposed in these circumstances.

The most complex aspect of whether a sale of business will qualify as the supply of a going concern is the requirement that the vendor supplies to the purchaser all of the things that are necessary for the continued operation of an enterprise. In this respect, the ATO ruling GSTR 2002/5 provides:

  • Where the freehold from which a business is conducted is owned by one entity and the business by another, the sale of both to a single purchaser may qualify if the contracts are interdependent and settle simultaneously (paras 137-140).
  • Where the freehold from which a business is conducted and the business are owned by one entity, the sale of both to two separate purchasers may qualify if a lease of the freehold is granted to the purchaser of the business by the date of settlement and the sale of the business settles at least the day before the sale of the freehold (paras 133-136).
  • Where a business is conducted from premises which are not owned by the vendor, the right to occupy the premises must be supplied for the sale to qualify.

– If there is a lease, the vendor may supply the lease either by way of assignment or by surrendering the lease and facilitating the entry by the purchaser into a lease or agreement for lease of the same premises by the date of supply (paras 58-63).

– The absence of a written lease will not be fatal. A periodic tenancy which is capable of assignment is considered sufficient (e.g. over holding under an expired lease). However, a mere tenancy at will, which is not capable of assignment, will not qualify (paras 64-70).

– If particular premises are not required, the supply of alternative suitable premises will be sufficient. However, if premises are necessary but are not supplied because the purchaser has some already, the sale will not qualify (paras 90-99).

  • Where a vendor is selling a business but retaining the freehold from which it is conducted, the vendor will need to grant a lease to the purchaser effective from the date of settlement for the sale to qualify (paras 100-102).
  • If the enterprise is a business, goodwill must be supplied as one of the things necessary for the continued operation of the enterprise (para 111).
  • The vendor must take all reasonable steps to facilitate the transfer of the skills and knowledge of key personnel for the sale to qualify (paras 125-128).
  • Admitting a new partner, assignment of a partnership interest or sale of a partnership interest will not qualify (paras 190-192).

Solicitors acting for vendors need to carefully consider whether the sale of the client’s business will qualify as the supply of a going concern – it should never be assumed. The Legal Practitioners’ Liability Committee recommends:

  • lIf acting for a vendor client in circumstances where there is doubt that the sale will qualify, either:

– apply for a private ruling from the ATO to clarify the position before settlement; or

– treat the sale as taxable from the outset.

  • Always use a GST exclusive “claw back” provision in the contract as a safety net in the event the sale does not qualify and consider expanding the GST definition to include penalties and interest.
  • Be conscious of the timing issues where you are acting for separate vendors selling both freehold and business to a single purchaser or for a single vendor selling both freehold and business to separate purchasers.
  • Be wary of sales where assets are excluded or the right to occupy premises is not supplied.
  • Ensure that the parties have agreed in writing that the supply is of a going concern before settlement.
  • Require evidence that the purchaser is registered for GST before settlement.

This column is provided by the LEGAL PRACTITIONERS’ LIABILITY COMMITTEE. For further information, ph 9670 2001 or visit the website http://www.lplc.com.au

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