How the GST Going Concern Exemption Works
Cassandra Research — Tax Division
Research methodology: Reviewed against current ATO rulings, ITAA 1997, and Federal Court precedent.
Overview
The sale of a business as a going concern can be GST-free under Division 38 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). This exemption is critical for business sales and commercial property transactions, and understanding the requirements is essential for both buyers and sellers.
This guide explains the conditions, practical steps, and common pitfalls of the going concern exemption.
1. Confirm Both Parties are Registered for GST
The going concern exemption under section 38-325 requires that both the supplier (seller) and the recipient (buyer) are registered or required to be registered for GST at the time of supply. If either party is not registered, the exemption cannot apply.
2. Ensure the Supply is of a Going Concern
A supply of a going concern means the supply of an enterprise that is carried on up to the day of supply. The seller must carry on the enterprise until the point of transfer. All things necessary for the continued operation of the enterprise must be supplied — this includes physical assets, contracts, licences, intellectual property, and goodwill.
3. Written Agreement Required
The parties must agree in writing that the supply is of a going concern. This is typically included in the sale contract. Without a written agreement, the exemption does not apply even if all other conditions are met.
4. Supply All Things Necessary
The supplier must supply to the recipient all of the things that are necessary for the continued operation of the enterprise. This does not mean every single asset — it means everything necessary. The ATO's guidance in GSTR 2002/5 provides detailed commentary on what is 'necessary'.
5. Carry On the Enterprise Until the Day of Supply
The enterprise must be carried on by the supplier right up to the day of supply (settlement). If the business ceases operations before settlement, the going concern exemption is jeopardised.
6. Issue Correct Tax Invoice
Because the supply is GST-free, no GST is charged. The tax invoice should clearly state that the supply is GST-free as a going concern under section 38-325.
Worked Examples
Example 1: Sarah sells her café to Michael. Both are GST-registered. The sale contract states the supply is of a going concern. Sarah operates the café until settlement day and transfers all equipment, the lease, supplier contracts, and recipes. The sale is GST-free.
Example 2: A company sells a commercial building with existing tenants. The company is carrying on an enterprise of leasing. If the building is sold with all existing leases assigned, and both parties are GST-registered with a written agreement, the sale can qualify as a going concern.
Checklist
- Both parties are GST-registered at the time of supply
- Written agreement that the supply is of a going concern
- Supplier carries on the enterprise until the day of supply
- All things necessary for continued operation are supplied
- Lease/licence assignments are completed
- Employee arrangements are addressed (transfer or termination)
- Tax invoice correctly reflects GST-free status
Common Pitfalls
- ⚠Seller ceases business operations before settlement — destroys the going concern status
- ⚠Failing to include a written going concern clause in the contract — the exemption requires it
- ⚠Not transferring all necessary assets (e.g., forgetting to assign a critical licence or lease)
- ⚠Buyer is not yet GST-registered at the time of supply
- ⚠Treating the sale of bare commercial land as a going concern — land without an active enterprise is not a going concern