Selling a going concern

Consider what your GST obligations are if you are selling an ongoing concern.

Introduction

You are selling a ‘going concern’ if the:

• sale includes everything that’s necessary for the continued operation of the business
• business is carried on by you until the day of sale.

Property that’s part of a sale of a going concern can include any of the following:

• the business property, when sold together with the assets and operating structure of the business
• a fully tenanted building, where the property and all leases, agreements and covenants are included in the sale
• a partially tenanted building, were
• the vacant part of the building is either actively marketed for lease or undergoing repairs or refurbishment
• all leases, agreements and covenants are included in the sale.

The sale of a property by itself isn’t regarded as a going concern.

GST consequences

A sale of a going concern is GST-free if all the following apply:

• The sale is for payment.
• The purchaser is registered or required to be registered for GST.
• The purchaser and seller have agreed in writing that the sale is of a going concern.

If property is part of a GST-free sale of a going concern:

• you’re not liable for GST on the sale
• you and the purchaser may be able to claim GST credits on expenses relating to your sale or purchase of the property – for example, GST included in solicitor’s fees.

If a property is bought as part of a GST-free supply of a going concern, but the purchaser uses the property for a purpose other than to make taxable sales or GST-free sales, they may have to make an increasing adjustment. For example, the purchaser uses the property to make input-taxed sales of residential rent for private purposes.

The amount of the increasing adjustment is usually worked out as follows:

• 10% × the sale price × the proportion of non-creditable use.

If the proportion of non-creditable use changes over time, you may need to make additional increasing or decreasing adjustments.

Example: making an increasing adjustment for a going concern

Michael is registered for GST and buys a newly built unit for $495,000 in the Seabreeze Resort complex. The sale contract says the unit is sold subject to an agreement to lease the unit to the operator of Seabreeze Resort.

The sale is treated as a GST-free supply as Michael is purchasing a leasing enterprise as a going concern.

Michael has a written agreement with the vendor that the:

• sale would be a GST-free sale of a going concern
• lease would be assigned to Michael who, upon its expiry, would grant a new lease under varied terms to the operator.

As Michael will be making an input-taxed supply of the residential unit to the operator, his use of the unit is for a non-creditable purpose.

Michael will have an increasing adjustment. Using the above formula, the adjustment will be:

• 10% × $495,000 (sale price) × 100% (non-creditable use) = $49,500.

If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.