THE GOING CONCERN EXEMPTION FOR GST: WHAT DO YOU NEED?

23.07.2010 News No Comments

THE GOING CONCERN EXEMPTION FOR GST: WHAT DO YOU NEED?

The question of whether goods and services tax (’GST’) is payable on a supply arises in every business transaction, ranging from the sale of a commercial building pursuant to an REIQ Commercial Land and Buildings Contract or the sale of business assets pursuant to a Contract Business Sale.

It is important for the parties to the transaction to establish from the outset whether:

(a) GST is payable on the purchase price for the supply by the seller to the buyer; or

(b) GST is included in the purchase price for the supply made by the seller to the buyer; or

If the parties form the view that the going concern exemption is available to them, below is a list of key issues that must exist.

What must exist for the going concern exemption to apply?

The recipient of a supply must be registered for GST on or before the day of the supply being made by the supplier to the recipient.
The supplier must supply to the recipient all things necessary for the continued operation of the enterprise. For example, if an agreement was entered into for the sale of a business, all things necessary, including but not limited to the plant and equipment, business name and intellectual property must be supplied to the buyer along with any assignment of lease of the premises (if the business is operated from a leased premises).
The supplier must carry on the enterprise until the day of the supply. The enterprise must be active up to and including the date of supply. In the case of a restaurant for example, if it was not operating prior to the date of supply, and did not open again prior to the date of supply, the exemption would most likely not be available to the parties.
The supply made by the supplier is for consideration, i.e. the purchase price contained in a sale contract as payable by the buyer to the seller.
The supplier and recipient have agreed in writing that the supply is of a going concern. A contract entered into would provide for how the GST is to be treated.

All things necessary: What happens if “all things necessary” cannot be supplied to the recipient by the supplier?

Certain things cannot be supplied by a supplier to a transaction because of statutory or government restrictions, i.e. a food license for a restaurant cannot be transferred from a supplier to a recipient. A new food license must be applied for by the proposed purchaser of that particular restaurant. In these circumstances, the going concern exemption may still be available to the parties, as long as the following criteria are:

These things are incapable of assignment because of statutory or legal reasons;
The supplier must have made all reasonable efforts to supply such thing to the recipient;
Commercial practice provides that the only way the supply can be made is by way of supply by a third party, i.e. government body and not the supplier; and
This supply made by the third party must be made to the recipient.

What should you do?

If you become a party to a transaction where a supply is being made to you and it is the intention of the parties to apply the going concern exemption to the transaction, you should ensure that the prerequisites discussed above exist before executing any such agreement. We recommend that you should always consult with both your solicitor and accountant first.