When it comes to selling or purchasing a business, navigating the intricacies of tax laws, particularly Goods and Services Tax (GST), is paramount. Selling a business generally requires the vendor to pay GST. However, the sale is exempt from GST where the business sale is a going concern. This article will answer the questions:

  1. What is the going concern exemption?
  2. What criteria must be fulfilled to meet the going concern exemption?
  3. What are the benefits of the going concern exemption in business sales?

What is the going concern exemption?

The going concern exemption, as outlined in the A New Tax System (Goods and Services Tax) Act 1999 (Cth), provides a means for the sale of a business to be GST-free under specific conditions. To qualify for this exemption, several essential criteria must be met:

Consideration for the Sale
The transaction must involve consideration, typically monetary, exchanged between the buyer and seller.

Buyer’s GST Registration
The buyer must be registered or required to be registered for GST, reflecting their status as a business entity subject to GST obligations.

Written Agreement
Both parties must agree in writing that the sale is intended as a going concern, demonstrating a mutual understanding of the transaction’s nature.

Supply of Necessary Assets
The seller must provide all assets and elements necessary for the business’s continued operation to the buyer. This encompasses tangible assets like premises, equipment, and stock, as well as intangible assets such as contracts, licenses, and goodwill.

Continued Operation by the Seller
The seller is required to continue operating the business until the day of supply, ensuring a seamless transition of control to the buyer.

While the first three criteria are typically straightforward to fulfill, the latter two aspects warrant closer examination.


What criteria must be fulfilled to meet the going concern exemption?

Providing Necessary Assets

Ensuring the transfer of all assets essential for the business’ ongoing operation is crucial. This includes not only physical assets but also intangible elements that contribute to the enterprise’s value and functionality. It is essential to identify and transfer all components vital for the business continuity, as failure to do so may jeopardise the exemption’s eligibility.

Continued Operation by the Seller

Maintaining business operations until the day of supply is imperative for upholding the going concern exemption. The seller must ensure uninterrupted business activities, barring exceptional circumstances such as temporary closures for maintenance. Any cessation of operations leading up to the sale’s completion may nullify the exemption, potentially resulting in GST liabilities.

The Impact of ATO Determination 

Despite parties’ best efforts to meet the exemption criteria, the Australian Taxation Office (ATO) may ultimately determine that the sale does not qualify as a going concern. In such cases, GST obligations may fall upon the seller, leading to unforeseen financial implications. To mitigate risks, contracts often include clauses transferring GST liability to the purchaser in the event of ATO rejection, safeguarding sellers against unexpected tax liabilities.


Benefits of the going concern exemption in business sales

In short, there are potentially significant cost savings for both the business’ purchaser and vendor.

As concerns the purchaser, qualifying for the going concern exemption means they do not have to provide additional funds to cover the GST i.e. the purchaser pays less upfront for the business.

If a business is sold and GST applies, the purchaser is usually required to pay 10% on top of the purchase price at sale completion to cover the GST. This 10% GST can be reclaimed via a 10% input tax credit but not until after sale completion. Also worth noting, while the GST refund is available, if stamp duty is payable on the sale, the stamp will be calculated based on the purchase price including GST – the GST component of the stamp duty is not refundable.

The going concern exemption avoids timing delays resulting from claiming input tax credits. This will benefit purchasers who require financing to buy the business as additional borrowings will not be required to cover the GST.

Furthermore, the going concern exemption eliminates the need to separately value the assets which comprise the business being sold (although this may be a requirement for CGT purposes).

A vendor benefit is that, in certain situations, they can claim input tax credits for certain expenses, such as due diligence fees, when treating the supply of a business as a GST-free going concern. This option is not available if the sale of a business is conducted through a sale of shares which is considered input taxed and does not allow for claiming input tax credits on similar expenses.


Tying it all together

Navigating the going concern exemption requires meticulous attention to detail and thorough understanding of GST regulations. Sellers must ensure comprehensive compliance with exemption criteria, supported by professional advice to mitigate risks and ensure a smooth transaction process.

The going concern exemption offers a valuable avenue for GST relief in business sales, provided all requisite conditions are met. By understanding and adhering to these criteria, both buyers and sellers can navigate transactions with confidence, minimising tax liabilities and facilitating seamless business transfers.

Rouse is well-versed in mid-market to large complex cross-border sales. Recent examples of these and client feedback are available here. Contact one of our knowledgeable and friendly lawyers, at no cost, for an initial appraisal of your needs.



The information contained on this website is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved.

Accordingly, the information on this site is provided with the understanding that the authors and publishers are not providing legal advice. As such, it should not be used as a substitute for consultation with professional legal advisers. Before making any decision or taking any action, you should consult with a professional lawyer from Rouse Lawyers.

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