What is a going concern?

In short, going concern means the business is operating and making a profit.

The law requires you to sell everything necessary for the continued operation of the business. The business remains active until the day of the sale. This approach ensures that the buyer can seamlessly carry on the business without any disruptions.

Purpose of going concern exemption

The going concern exemption is designed to eliminate the need for the buyer to obtain additional funds to cover the GST that would normally apply. It also helps the buyer avoid delays associated with claiming “input tax credits,” which can account for 10% of the sale price. The goal is to ensure that the burden of the GST falls on the end user or private consumer.

Criteria to be a going concern

To be eligible for the exemption from paying GST, the sale of a business as a going concern must meet certain criteria:

• payment or consideration is made for the sale of the business.
• the purchaser is registered for GST;
• the vendor and purchaser have agreed, in writing, that the sale is of a going concern;
• the vendor supplies all things necessary for the continued operation of the business and carries on the business until the day of sale.

Let’s Take a Closer Look at Some of These Requirements:

• Agreed in writing

The agreement between the vendor and purchaser that the sale is a “supply of a going concern” must be made on or before the day of the supply. It doesn’t necessarily have to be part of the contract for the sale of the business, and there is no specific form that the agreement must take. However, it is crucial to ensure this agreement is reached before the exchange of the contract. If not, GST will apply.

• Supply must be of all things necessary for the continued operation

The term “all things necessary” doesn’t mean every single item in the business. It refers to the essential elements without which the business cannot function. This typically includes assets like premises, plant and equipment, stock-in-trade, and intangible assets such as goodwill, contracts, licenses, and quotas. It also encompasses the operating structure and processes of the business, such as ongoing advertising and promotion.

In practice

For sellers, it’s advisable to include a clause in the contract for the sale of the business stating that if the tax office deems the sale not to be a going concern, the buyer can be called upon to pay the GST.

Buyers should ensure they have sufficient funds available if GST becomes payable and aim to avoid late settlement. Seeking legal advice early in the negotiation process is always a wise decision.