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GST trap for unwary business vendors
Many people attempting to sell
their business without competent professional help would be shocked to
discover they may have to hand one-eleventh of the purchase price over to the
Australian Tax Office.
Yet, unfortunately, this is a potential outcome for vendors who use a poorly
drafted sale contract, or fail to use a contract at all.
GST was meant to be a simple tax, but six years on that has proven not to be
the case. Indeed, GST has introduced a greater level of complexity to sale of
business transactions than we have ever seen before.
The ATO tax ruling on “when is a 'supply of a going concern'
GST-free?” runs to some 30 pages. The ruling is highly prescriptive,
and it is common to find that the circumstances of a particular business sale
will not entitle it to be GST-free, as first expected.
For example, it is a common for a vendor who owns both a business and the
freehold from which it operates, to be selling to a purchaser who wishes to
buy the freehold in his or her personal name, but the business in a company
or trust. Such structuring is prudent for the purchaser, from an asset
protection perspective.
However, according to the tax ruling, this is not the ‘supply of a
going concern’, and GST would be payable.
Further, under the tax legislation it is actually the vendor, not the
purchaser, who is liable to pay GST.
Thus, a well drafted sale contract will contain a “clawback
clause”, enabling the vendor to recover back from the purchaser, any
GST which the vendor is required to pay, together with any penalties and
interest.
Another common scenario is where a company or trust vendor sells a business,
but a licence required to operate (eg, a travel agent’s licence) is
actually held in the name of an individual associated with the business.
Again – GST may be payable.
These are only two of many more sets of circumstances which one might assume
would qualify a business sale to be GST-free, but due to a technicality do
not.
There are solutions for guarding against this – in the first example,
by settling the freehold and business components of the sale on two
consecutive days, the sale can retain its GST-free status.
In any case, it is critical to use a well-drafted sale contract to ensure
that, if GST is ultimately payable, the vendor will not be left unexpectedly
out of pocket.
If you are thinking about selling your business, please feel free to call us
to discuss GST and any other issues you may have.
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Asset Protection Basics
If you are about to buy, or are in
the early stages of operating a new business, you should be careful to choose
the most suitable ownership structure.
Often, all too little attention is given to this important issue. Once you
are locked in to a certain structure, it can be difficult and costly to
change later, so it is important to get it right from the start.
There are a number of considerations, including:
- income tax minimisation
- flexibility to allow more
parties to become owners later on
- capital gains tax consequences
on selling the business
- weighing up the relative
administrative costs of the different structures.
Asset protection should also be a major factor. This is about
designing your business structure so that debts and claims relating to the
business are, as far as possible, kept separate from your other valuable
assets.
For example, you might choose to hold your business in a family trust (to
enable income streaming to minimise tax) but hold the freehold for the
premises from which the business operates in another entity.
Thus, if a customer successfully sued you for injuries caused by a product
you sell, and their claim exceeded your insurance limit or fell within one of
the many exclusions which insurance policies contain – then your
freehold would be protected or “quarantined” from their claim.
Your business might suffer, but you would not lose everything as a result.
Asset protection can also protect against insolvency more generally, although
the benefits can be partially undermined where personal guarantees are given
to banks, landlords and suppliers.
Another common example of structuring for asset protection, for more
sophisticated businesses with valuable intellectual property (such as a
trademark or patent), is to own that IP in a holding company or trust, which
then licences the use of it to the main operating entity.
Again, if the operating entity is sued or goes into liquidation, the valuable
trademark or patent is protected.
You should consider, now rather than later, whether you and your business
will benefit from asset protection.
The longer you leave it, and the more valuable your assets become, then the
greater the capital gains tax and, in the case of land, stamp duty, you will
have to pay to transfer those assets.
Feel free to give us a call if you would like to discuss asset protection and
structuring solutions.
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Paul Stephens
Cathy Drake
Kent
Mallinson
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