FAQs

What to consider when selling a business

Going Concerns

Selling a business as a going concern is an attractive option for buyers and sellers. One of the reasons for this is that a Going Concern is exempted from paying GST on the sale of the business. For a purchaser that means a saving both on the purchase price and on Stamp Duty as well as avoiding timing delays that result when claiming input tax credits. For a vendor it means the business is more attractive to potential buyers.

To receive the exemption, the business entity must be able to continue functioning as a business immediately upon the new business owner(s) take over the business. In addition, the requirements of the Australian Tax Office must be complied with.

This means that not only does the business have to continue to function as a business without interruption, but it must also:

1. Be purchased for consideration (i.e. money)

2. The purchaser must be registered for GST (pre-registration is possible).

3. The parties must agree in writing (in the contract of sale for the business) that the business is sold as a going concern and this must be done before the date of supply (i.e. the day effective control and possession of the business is handed over to the purchaser) and preferably before contracts exchange. This term may not be inserted into the contract after the date of supply has passed.

4. The vendor supplies all things necessary for the continued operation of the business - i.e. major things without which the business could not operate such as particular equipment, an operating licence or a particular telephone number. It is not necessary that absolutely everything in the business be sold for the business to continue to operate as a going concern, however, it is important to note that what the ATO considers necessary for the continued operation of the business may be quite different from what the parties to the contract see as necessary to the continued operation of the business, therefore caution should be applied. It is important that prospective vendors and purchasers check the requirements for the particular business with the ATO in this regard.

5. The vendor must continue to operate the business as a business until the day of supply. The supply date can occur before the actual settlement date.

Finally, it is important to note that only single business entities can purchase or sell going concerns. If a business is held in different parts by different entities, it can not be sold as a going concern. There are a few exceptions.

The risk that the transaction might not be viewed by the ATO as a going concern ultimately rests with the vendor. Although generally sale contracts provide the purchaser is liable for GST, as a matter of law, it is the vendor that is required to remit the GST to the ATO. For this reason the Vendor should require the purchaser to indemnify the Vendor for any GST (and penalties) that may be payable in the event that the parties are mistaken as to whether the sale of the business constitutes a GST-free business (i.e. going concern).

The business vendor's duty of disclosure

Vendors should be mindful that they do not mislead the purchaser by their statements, silence or conduct. Vendors should be diligent in providing correct and full information when requested, and if the Vendor is unsure of the answer to the question put by a Purchaser, the Vendor should admit to not knowing the answer and advise the Purchaser to make further investigations relating to that question. Likewise, when selling a premises together with the business, the Vendor should ensure their real estate agent does not make false or misleading representations for which the Vendor could be held vicariously liable.

Where a Vendor discloses information to a Purchaser, it cannot always be assumed that the Purchaser is bound to keep that information confidential. An obligation of confidentiality can only be said to exist if it can be proved that a Purchaser knew or ought to have known that the information disclosed was disclosed by the Vendor in confidence. Therefore in some instances it may be necessary to enter into a confidentiality agreement prior to entering into negotiations for the sale of a business.

Tax implications for the sale of your business

Tax can be a complex matter and before you sell your business,  we recommend you discuss the tax and other financial implications with your tax advisor.

Restraints of trade

Restraints of Trade must be reasonable in public interest (i.e. must afford only the minimum, adequate protection and nothing more). Protection of legitimate business interests must be finely tuned so that the business does not venture into territory of becoming a monopoly.

The length of time that the restraint should reasonably apply for as well as the area to which it may reasonably be applied depends very much on the nature of the business being bought and sold.