Buying an existing business can accelerate growth. You gain an established brand, customer base, systems, and revenue stream.
But every acquisition carries hidden risks.
A proper business purchase due diligence checklist protects you from inheriting tax liabilities, GST exposure, payroll errors, and ATO compliance issues that could significantly reduce the value of your investment.
Before signing heads of agreement or final contracts, here’s what you must review.
What Is a Business Due Diligence Checklist?
A business purchase due diligence checklist is a structured financial and tax review conducted before acquiring a company or its assets.
It helps buyers identify:
- Unpaid GST or income tax
- Payroll and superannuation liabilities
- ATO audits or compliance issues
- Structural risks in share vs asset sales
- Overstated profits or inflated valuations
In Australia, tax compliance risks have increased due to expanded digital reporting requirements enforced by the Australian Taxation Office.
Without a detailed review, you may inherit liabilities you didn’t negotiate for.
Why Due Diligence Is Non-Negotiable
The ATO now uses:
- Single Touch Payroll (STP) reporting
- Real-time GST data matching
- Enhanced audit analytics
- Digital transaction tracking
Errors are easier to detect — and penalties can be substantial.
Without proper tax due diligence, buyers risk:
- Inheriting unpaid GST
- Taking on unresolved ATO audits
- Assuming unpaid superannuation
- Overpaying based on inaccurate earnings
- Facing director penalty exposure (in share purchases)
Due diligence protects your capital and your negotiating power.
Core Tax & GST Areas to Review
Below is a structured tax-focused due diligence checklist for Australian business acquisitions.
1. Business Structure Review
First, determine what you are actually buying.
- Sole trader, partnership, company, or trust?
- Share purchase or asset purchase?
- Any related entities involved?
- Are there intercompany loans or guarantees?
Why this matters:
- A share purchase means you inherit historical liabilities.
- An asset purchase generally limits past exposure but may trigger GST and capital gains implications.
Understanding structure determines your risk profile.
2. BAS & GST Compliance
GST errors are one of the most common acquisition risks.
Review:
- Minimum 3 years of Business Activity Statements (BAS)
- GST reconciliation to financial statements
- Accuracy of GST treatment on revenue and expenses
- Unpaid GST liabilities
- GST registration status
- Adjustments or amended BAS lodgements
Watch for:
- Large GST refunds
- Sudden GST fluctuations
- Repeated late lodgements
These may signal deeper compliance issues.
3. GST Going Concern Assessment
One of the most critical areas in Australian acquisitions is whether the sale qualifies as a GST-free going concern under GST legislation.
For the sale to be GST-free:
- The business must be sold as a functioning enterprise
- All necessary assets must transfer
- Both parties must agree in writing
- Both buyer and seller must be GST registered
If incorrectly structured, a 10% GST liability could apply to the purchase price.
This can materially change transaction economics.
Professional review is essential here.
4. Income Tax Position
Your due diligence checklist should assess:
- Last 3 years of lodged tax returns
- ATO integrated client account statements
- Outstanding tax debts
- Payment plans with the ATO
- Carried forward tax losses
- Deferred tax assets and liabilities
If acquiring shares, tax issues remain within the company.
You should also test:
- Alignment between accounting profit and taxable income
- Large add-backs or aggressive tax positions
- Related-party transactions
Discrepancies may signal risk.
5. Payroll & Superannuation Compliance
Payroll risk is often underestimated.
Confirm:
- Single Touch Payroll compliance
- Superannuation Guarantee payments made on time
- PAYG withholding properly remitted
- Contractor vs employee classification
- Leave balances accurately recorded
Unpaid super can trigger penalties and, in some cases, director liability.
This is a major red flag area.
6. Employee Entitlements & Leave Provisions
If staff transfer with the business, you may assume responsibility for:
- Accrued annual leave
- Long service leave
- Redundancy entitlements
- Bonus arrangements
- Employment contract obligations
Understated leave liabilities directly impact working capital post-settlement.
7. Debtors & Revenue Quality
Revenue quality matters more than revenue size.
Review:
- Aged receivables
- Customer concentration risk
- Recurring vs one-off revenue
- Revenue recognition policies
- Disputed invoices
If 40% of revenue depends on one customer, that concentration risk must be priced in.
8. Asset & Inventory Verification
Overstated assets distort valuation.
Review:
- Fixed asset register
- Depreciation schedules
- Inventory counts
- Obsolete stock
- Slow-moving inventory
Inventory misstatements affect both purchase price and GST calculations.
9. ATO Reviews or Audits
Ask directly:
- Has the business been audited?
- Are there ongoing ATO reviews?
- Have amended assessments been issued?
- Are objections or disputes in progress?
Active ATO scrutiny significantly increases acquisition risk.
Share Sale vs Asset Sale: Tax Risk Comparison
| Share Sale | Asset Sale |
|---|---|
| Historical liabilities transfer | Generally limited historical exposure |
| Company tax history inherited | New entity can start fresh |
| Potential exposure to unpaid tax | GST implications may arise |
| Director penalty risk may apply | Fewer historical tax risks |
Transaction structure directly impacts tax exposure.
Common Red Flags in Due Diligence
Watch for:
- Unlodged BAS or tax returns
- Frequent ATO payment arrangements
- Large unexplained GST adjustments
- Revenue spikes before sale
- Poor documentation
- Cash-heavy operations
- Missing employment contracts
- Significant related-party transactions
- Aggressive tax treatments without formal advice
One red flag doesn’t always kill a deal — but it requires deeper investigation.
Financial Testing Beyond Compliance
Strong due diligence also includes financial stress testing:
- Gross margin consistency
- EBITDA normalisation
- Net profit trend (3–5 years)
- Debt-to-equity ratio
- Working capital adequacy
- Cash flow sustainability
If the business struggles to comfortably meet tax, wage, and supplier obligations, its sustainability is questionable.
How Due Diligence Strengthens Negotiation
A thorough review doesn’t just reduce risk — it creates leverage.
If issues arise, you can:
- Adjust purchase price
- Request indemnities
- Hold funds in escrow
- Restructure deal terms
- Shift from share sale to asset sale
Well-executed due diligence often saves buyers significant capital.
De-Risk Your Business Purchase with Infinity22
The difference between a strategic acquisition and an expensive mistake is expert review before contracts are finalised.
At Infinity22, we provide structured, tax-focused acquisition due diligence across:
- GST risk review
- ATO compliance analysis
- Share vs asset sale structuring
- Payroll and superannuation exposure
- Transaction risk mitigation
Before signing, speak with our advisory team for a tailored pre-acquisition tax risk assessment.
Protect your capital. Negotiate from strength.
