Businesses are often sold as a going concern. These businesses sold as a going concern are operating and making a profit, with no goods and services tax (GST) being paid, providing conditions are met. The seller might be able to claim input tax credits for any goods and services tax paid on expenses.
Selling a business as a going concern is a popular way to sell a business, especially if it can continue operating. Today’s blog post covers selling a business in detail, looking at the tax and legal implications.
What Does It Mean To Sell A Business As A Going Concern?
Selling a business as a going concern is when a company sells a business to a buyer that can continue operating as usual in its current financial state. The business will be sold while operating, allowing the new owner to come in and continue trading as usual. A company can be sold as a going concern while making a profit and operating.
Doing so has tax implications, as no Goods and Service Tax is payable, making it a profitable option for many businesses. You need to continue operations for the business until the day it is sold to qualify for selling as a going concern.
Selling your business as a going concern usually indicates that the company is in good financial health and can continue trading for the next year. Of course, this does vary depending on the business, and you should do your due diligence before purchasing a business sold this way.
Is My Business Suitable To Be Sold In This Way?
For your business to be suitable to sell as a going concern, it must meet the following criteria.
The sale must include everything needed for the continued operation of the business. The previous owner should be able to walk out, and the new owner walks in with everything ready to continue operating.
The business’s previous owner must also continue operations until the day the business is sold. These are the criteria that the Australian tax office uses to determine if a business can be sold this way.
Is There Capital Gains Tax On The Sale Of A Business As A Going Concern?
You might have to pay Capital Gains Tax (CGT) on the sale of a business as a going concern if the business was acquired on or after 19 September 1985. Capital gains tax will be paid as part of your income tax on any gains, with capital losses deducted.
There are some small business concessions for CGT, including:
- Rollover exemption
- Retirement exemption
- 50% active asset reduction
- 15-year exemption
These concessions come with specific criteria that must be met; check these carefully before applying for a concession.
What Are The Benefits Of Selling A Business As A Going Concern?
The biggest benefit of selling your business as a going concern is that it can be sold without paying GST. The GST exemption can save you a significant amount of money, but you must check that you can sell your business with the going concern exemption.
For the sale to be GST-free, the sale must be for payment with the purchaser registered or required to register for GST, and there must be an agreement in writing between the seller and purchaser that this is a sale of going concern.
Another benefit is that you don’t need to sell any inventory or stock relating to the business. This will all be left for the new owner. The business must be left ready for the new owner to walk into and start operations, so you don’t have to try and sell any machinery or inventory before the settlement date. The operating structure must also be left, so you don’t need to do anything other than sell the business.
Are There Any Legal Considerations I Need To Consider When Selling My Business As A Going Concern?
As a business owner, you must consider the usual considerations when selling a business. This includes ensuring that all tax obligations are paid correctly and in full. You must also check that the paperwork is filled in correctly; a solicitor can help you.
For a business to be sold as a going concern, the business still needs to be operating and ready for the new business. Failure to do this could make the sale void.
You will also need to consider any insurance requirements for your business. This includes any legal claims that could be made after selling your business. A solicitor can walk you through any other legal considerations you need to make for your specific industry or business. You should also have legal advice before signing the sale contract for your business.
How Do I Sell My Business As A Going Concern?
To sell your business as a going concern with a GST exemption, you will need the following:
- The sale is for payment
- The purchaser is registered for GST or required to be registered for GST
- The seller and purchaser have agreed the sale is of a going concern, and the agreement is in writing
- The seller has everything the purchaser needs to carry on the operations of the business
- The seller operates the business until the sale is complete
You must demonstrate to the Australian Taxation Office (ATO) that the sale falls under the going concern GST exemption. You will need documents and information the ATO needs for their assessment.
You must show the ATO that the purchaser of the business receives everything they need to continue operating the business. You need to show that you can provide the following:
- The assets required to continue business operations
- The operating processes and structure
How To Value A Business That Is Being Sold As A Going Concern?
The best way to value a business that is being sold as a going concern is to use an independent business valuer. Walker Hill’s valuation service is an excellent choice, valuing your business and providing you with the information you need to sell your business and get the right amount for it.
An independent valuer will offer a personalised approach to your business valuation, looking at commercial or economic activity, other businesses in your industry, and more to get you the right purchase price for your business.
What Are The Tax Implications When Selling A Business As A Going Concern?
There are a few tax implications to consider when selling your business as a growing concern. Typically, a business sold as a going concern is GST-exempt.
The sale of your business must also be input taxed. This can happen to a financial supply if the business is a company with shares sold or a trust or partnership with the underlying interests being sold.
Should the financial acquisitions threshold be exceeded by the sale, you will be input taxed. No GST is paid, and you cannot claim input tax credits for any GST expenses.
Capital gains tax will be payable on the sale of your business if you acquired it on or after 19 September 1985. Any capital losses are deducted from the capital gains tax you must pay.
You might be entitled to small business concessions on capital gains tax. You can apply for specific concessions, but you must read through them carefully to see which one applies.
You will also need to complete the Capital gains tax cap election if money from the business has been paid into your super fund this financial year. You might also be entitled to debt forgiveness under Division 7A. Check the criteria of this carefully before applying.
