Sale of Business

During December 2013 the Federal Government advised that it intended to remove the current GST free treatment for the sale of a going concern (and farm land) “during 2014”. The intention is to provide a “reverse charge” arrangement.

The reverse charge mechanism provides that the parties will be able to agree for the purchaser to be responsible for payment of GST on the sale and purchase of businesses as a going concern as if it were the vendor, allowing the purchaser to claim an input tax credit in the same period, if it is entitled to do so. Should the parties not agree, the vendor will need to account for GST in the usual way. It is anticipated that the impact on the purchaser under the reverse charge procedure will be neutral as it will be entitled to an input tax credit for the GST paid at the same time as the GST is payable, requiring no payment.

The qualification for the reverse charge mechanism is that:

  •  the test for a going concern will need to be satisfied (it is understood that the test will berelaxed requiring the supplier to only supply “substantially” all things necessary for the going concern); and
  • the purchaser must be registered or required to be registered for GST

Unless these criteria are satisfied the reverse charge mechanism will not be available and the vendor will be liable for any GST.

It is necessary to highlight these potential changes because where contracts for the sale of a business are prepared consideration should be given to including a special condition in the contracts to cover the possibility of changes becoming effective before the settlement date.

The advice and information contained in this news blog is of a general nature only and is not intended to constitute or replace professional advice.