Will buying or selling a business leave you exposed to GST? – Part 1

Do you plan to sell your business? Are you planning to streamline your operations by downsizing? Or perhaps you are in acquisition mode?

Provided the business is sold as a going concern, the ‘supply’ of that business will be GST free (that is, you won’t have to pay GST on the supply). This is useful – especially for taxpayers buying a business – as paying GST upfront on large transactions can create havoc for your cash flow.

Selling a business as a going concern requires three conditions to be satisfied:

1. There must be payment or other form of exchange in return for the supply.
2. The buyer must be registered for GST.
3. The vendor and buyer must agree in writing that the supply is of a going concern.

For the supply to be of a going concern, you need to transfer all the things necessary for the buyer to carry on the enterprise. You must also agree to continue to operate the enterprise until the transfer has taken place.

But what is an enterprise, and what do you need to transfer to enable the buyer to carry on conducting one? This will be the focus of my discussion in both today’s and Friday’s edition of the Smart Tax Bulletin.

What is an enterprise?

A complex definition is set out in GST law, but an enterprise is best understood as an activity, or series of activities, done in the form of a business or in the nature of trade.

To be considered to be carrying on an enterprise, you must:

• be engaged in an activity or series of activities with the purpose of making a profit;
• be carrying out that activity or those activities on a regular basis; and
• be carrying out that activity or those activities in a business-like manner.

If you are selling a business as a whole and are registered for GST, there is little doubt that you are carrying on an enterprise. You will already have considered this when you applied for GST registration.

The issue can get more difficult to work out when you are only buying or selling part of your business. In this case, you must have an activity that is clearly delineated from other parts of your business, so that it is able to be transferred.

The following examples would be considered to be an enterprise:

• a geographically separate branch of your retail business;
• a tenanted apartment block; or
• a division of your business such as an engineering business, including all of the intellectual property associated with that business.

The following examples would not be considered to be an enterprise:

• selling only the property in which you run your business operations without selling the business operations too;
• selling a vacant building; or
• selling the livestock and machinery used in a farming operation without selling or leasing the farm.

In my next Bulletin, I will discuss which items must be transferred to ensure the continued operation of an enterprise after its sale.

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Tags: GST