Buying a business is exciting — but there’s one tax trap that catches many buyers off guard: the GST going concern exemption.
When structured correctly, a business sale can be treated as GST-free, potentially saving you 10% of the purchase price upfront. Get it wrong, and you could face unexpected GST liabilities, stamp duty increases, cash flow pressure, and contract disputes.
Understanding the risks around GST going concern rules under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 is essential for anyone buying a business in Australia.
Quick Summary: GST Going Concern Risks
- A business sale can be GST-free only if strict legal conditions are met
- The ATO applies a “substance over form” test
- If rejected, GST of 10% becomes payable
- Many contracts shift GST risk to the buyer
- Proper due diligence and contract drafting are critical
What Is a GST Going Concern?
A going concern refers to the sale of an operating business that is capable of continuing after settlement.
Importantly, the business does not need to be profitable. It must simply be operating and structured in a way that allows the buyer to continue the enterprise without interruption.
Under section 38-325 of the GST Act, the sale of a business can be treated as a GST-free going concern if specific conditions are satisfied.
The exemption exists because the buyer is acquiring a functioning enterprise — not just individual assets. Instead of paying an additional 10% GST on top of the purchase price, the transaction may be treated as GST-free.
5 Requirements for a GST-Free Going Concern
For a business sale to qualify as a GST-free going concern, all conditions must be met:
- The sale must be for consideration (monetary payment or value).
- The buyer must be registered for GST or required to be registered at settlement.
- The seller and buyer must agree in writing that the sale is of a going concern.
- The seller must supply everything necessary for the continued operation of the enterprise.
- The seller must continue operating the business until the “day of supply” (usually settlement).
If even one requirement fails, the exemption may not apply.
Major GST Going Concern Risks for Buyers
Risk 1: ATO Rejection and Unexpected GST Liability
Even where both parties believe the transaction qualifies, the ATO can later determine that the requirements were not satisfied.
If rejected:
- GST becomes payable on the sale price
- Interest and penalties may apply
- Contractual clauses may shift liability to the buyer
While the seller is legally responsible for remitting GST, most sale contracts include clauses requiring the buyer to pay the GST if the exemption fails.
Common reasons for ATO rejection include:
- Not all necessary assets were transferred
- Key contracts or licences were excluded
- The business stopped trading before settlement
- The buyer was not properly GST-registered
- Documentation was incomplete or poorly drafted
The ATO applies a substance over form approach. Simply stating “going concern” in the contract is not enough.
Risk 2: Missing “Everything Necessary” for Continued Operation
The phrase “everything necessary” is where many transactions fail.
This includes all assets, rights, and operational elements required to carry on the enterprise.
Examples often overlooked:
- Lease or premises rights
- Software licences and subscriptions
- Domain names and digital assets
- Supplier contracts and trade credit terms
- Customer databases
- Intellectual property
- Operational manuals and systems
For example, if a buyer acquires a mortgage broking business but does not take over the lease or premises rights — even if planning to relocate — the ATO may determine that the business supplied was not capable of continuing in its existing form.
We’ve seen transactions where a missing lease assignment created a six-figure GST exposure after settlement.
Risk 3: Cash Flow Shock at Settlement
If the GST-free treatment fails, 10% GST becomes payable immediately.
Example:
Business purchase price: $500,000
GST (10%): $50,000
That additional $50,000 must be paid at settlement.
Although the buyer can typically claim an input tax credit in a later BAS period, it creates:
- Immediate cash flow pressure
- Potential additional borrowing
- Delayed recovery of funds
For leveraged acquisitions, this can materially affect financing structure.
Risk 4: Increased Stamp Duty Costs
If GST applies, stamp duty is calculated on the GST-inclusive price.
Using the same example:
Purchase price: $500,000
GST: $50,000
Total for duty calculation: $550,000
The additional duty payable on that $50,000 GST component is a permanent cost — and the GST portion of stamp duty is not recoverable.
Many buyers overlook this compounding effect.
Risk 5: Inadequate Contract Protection
Poorly drafted contracts significantly increase buyer risk.
Your sale agreement should include:
- Confirmation of GST registration status for both parties
- Clear written agreement that the sale is a going concern
- Warranties that all necessary elements are being supplied
- Indemnities if seller representations prove false
- Explicit clauses allocating GST liability if the exemption fails
Without these protections, the financial burden may fall entirely on the buyer.
How to Protect Yourself When Buying a Business
To reduce GST going concern risk:
- Conduct detailed financial and operational due diligence
- Verify GST registration well before settlement
- Ensure all critical assets, licences, and contracts are included
- Confirm the business continues operating until settlement
- Insert clear GST risk allocation clauses
- Seek an ATO private ruling for complex or high-value transactions
- Engage advisers experienced in business sale GST structuring
GST risk is not just a compliance issue — it is a transaction structuring issue.
Secure Your Business Acquisition with Infinity22
Buying a business is often a six-figure — or seven-figure — decision.
A misstep in GST structuring can cost 10% of the purchase price, plus additional duty, interest, and legal exposure.
At Infinity22, we help buyers:
- Identify GST going concern risks early
- Structure transactions correctly
- Conduct thorough financial due diligence
- Protect cash flow and contract position
A short pre-signing review can prevent significant post-settlement surprises.
Thinking of buying a business? Speak to Infinity22 before you commit.
People Also Ask
What happens if the ATO rejects a GST going concern exemption?
If the ATO determines the exemption does not apply, GST becomes payable on the sale price. While the seller is legally liable to remit the GST, most sale contracts shift this financial risk to the buyer. Interest and penalties may also apply.
Can a business be sold as a going concern if it is temporarily closed?
Generally, no. The seller must carry on the enterprise until the “day of supply” (settlement). Any significant cessation of trading before settlement may invalidate the exemption, except for very short operational interruptions such as maintenance.
What constitutes “everything necessary” for continued operation?
This includes all assets, rights, and operational components required to carry on the business — such as premises or lease rights, equipment, stock, intellectual property, licences, supplier contracts, and customer relationships.
Do both buyer and seller need to be GST registered?
Yes. The buyer must be registered or required to be registered for GST at settlement. The seller, as an enterprise conducting taxable activities, is also typically GST-registered. Registration status should be verified and documented in the sale agreement.
