A recent court decision highlighted the “best practice” of including a written agreement within the contract of sale in order for the GST going concern concession to apply.
By way of background, the GST going concern concession applies when a business or commercial property is sold and “all things necessary for the continued operation of the business” are supplied by the vendor. Effectively, the deal is put together in such a way that the vendor can leave their business on the Friday night and the purchaser can continue trading on the Monday morning.
The practical outcome is that where the GST going concern concession applies, no GST is charged on the sale of the business or commercial property. This provides obvious cash flow and stamp duty savings.
One of the conditions for applying the GST going concern concession is that both the vendor and purchaser must agree that the concession will apply.
In a recent case, a taxpayer was the owner of a commercial property and in 2009 entered into a contract to sell the property. The settlement occurred in December 2010.
In 2011, the Tax Office conducted an audit of the taxpayer and issued a notice of assessment for a GST shortfall of $206,818 in relation to the sale of the property.
The Tax Office contended that the GST going concern concession could not apply as the sale was not a going concern as there was no agreement in writing, as required. The Tax Office further contended that there had been no separate contract on the going concern issue and that the contemporaneous correspondence between the parties did not constitute an agreement in writing.
The taxpayer argued that the written agreement does not need to be contained in the contract and pointed to evidence of various other documents such as the written term of the agreement regarding the supply of going concern in a letter from the purchaser’s solicitor, a tax invoice provided in anticipation of settlement which stated that the property was a going concern, a goods statutory declaration and general correspondence between the parties.
Firstly, the court acknowledged the shortcomings of the contract of sale on its own as evidence of an intention to supply the property as a going concern. However, based on the collective evidence, it agreed with the taxpayer that the transaction had satisfied the going concern provision.
The court said that the requirement had been satisfied through a combination of contract of sale, the tax invoice and the goods statutory declaration. Therefore, the court set aside the Tax Office’s decision of a GST shortfall of $206,818 and held that the transaction between the taxpayer and the purchaser of the property incorporated an agreement in writing that the supply involved a going concern.
In the end the decision turned out well for the taxpayer. Whilst the decision proves that the agreement does not have to be written into the contract, not having the agreement specifically written into the contract of sale, means you run the risk of getting into a fight with the Tax Office.
Our advice would be to always include the agreement in the contract.
Should you wish to discuss this matter further, pleae contact Ellingsen Partners.