+ Taxation Issues on Sale of Business

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Taxation Issues on Sale of Business

Amora Hotel Jamison, 11 Jamison St., Sydney

30 November 2006

Prepared and presented by Leigh Adams

Principal,  Leigh Adams Lawyers

GST and Sales of a Going Concern

GST may apply where a business is sold by a vendor that is GST registered or required to be GST registered. However, s. 38-325 of A New Tax System (Goods and Services tax) Act 1999 provides for the going concern exemption. It means that no GST will apply to the transaction at all if the following conditions are satisfied:

1. the sale must be for consideration
2. the buyer must be registered or required to be registered for GST purposes
3. the seller and buyer must have agreed in writing that the sale is of a going concern

4. under the agreement, the seller carries on the business until the date of sale. For example, the exemption will not apply if the business is closed down before sale, and;
5. under the agreement, the seller supplies the buyer with all of the things necessary for the business’ continued operation.

Detailed guidelines on how the commissioner interprets these requirements are contained in GST ruling GSTR2002/5.

What is necessary for the business’ continued operation?

One of the issues which continues to be of concern to practitioners is that of what is necessary for the continued operation of an enterprise. This issue, with a particular reference to the right of occupation of premises, is set out in paragraphs 53 - 70 of the ruling.

Stamp Duty

Under s. 8 (1)(b) of Chapter 2 of the Duties Act (NSW) 1997, dutiable transactions includes an agreement for the sale or transfer of dutiable property.

s. 11 gives a list of dutiable property and it includes business assets consisting of goodwill, intellectual property (as defined) and statutory licences, amongst other things.

Under the Duties Act (NSW) the delivery of goods or the provision of services in NSW during the twelve months preceding the transfer will give rise to goodwill in NSW (s. 11 (g)(i)).

Restrictive Covenants

S. 22 (3) of the Duties Act (NSW) provides that the amount or value of consideration for a Restraint of Trade entered into in connection with a transfer of goodwill is included in consideration for transfer of business goodwill.

Intellectual Property

Under the NSW Duties Act, intellectual property can be dutiable property if it is a business asset the subject of a dutiable transaction that includes goodwill and which has been used or exploited in NSW in the twelve months preceding the dutiable transaction – s. 11 (g)(ii) Duties Act (NSW) 1997.

Stock in Trade

In NSW, stock in trade is excluded from the definition of dutiable property. Stock in trade includes goods in manufacture, livestock and primary production goods.

Goods, Wares and Merchandise

The transfer of goods, wares and merchandise, other than stock in trade (e.g. plant or equipment other than motor vehicles) may be exempt from stamp duty provided they are not transferred with other dutiable property in a dutiable transaction. Anti-avoidance provisions are designed to prevent contract splitting in NSW. The Commissioner has a discretion not to apply ad valorem duty to such transfers if it would not be just and reasonable to do so – s.26 Duties Act (NSW) 1997. An example of this is where more than 90 per cent of the value of the transaction involves goods, wares and merchandise. The duties ruling in respect of the former Stamp Duties Act 1920  [ruling 211] deals with these circumstances.

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