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The Exit Plan: Winding Up Your Business
– Part 2
Wednesday, 16th April, 2014, by Channa Perera
In today's Smart Tax Bulletin:
- Selling or closing your business – what you need to know
- 4 GST-related issues when selling your business
In last week’s edition of the Smart Tax Bulletin, I brought you 9 things to do when you wind up your business.
In today’s edition I will explain the treatment of GST on a sale of a business – and next week I will do the same for CGT.
Especially when it comes to a sale of business, the treatment of GST can be very confusing and could make or break your bank, even after you sell your business.
Continues below…
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4 GST-related issues when selling your business
1. The unpleasant sting
The reason why I call it a nasty sting, is that the ATO is not yet ready to ‘let you go’ when you cancel your GST registration.
Reason 1: There is a requirement put in place by the ATO to lodge one final activity statement that covers the period up to the GST registration cancellation date.
Note: The GST included in the selling price of business assets may need to be included in the preparation of the final BAS statement.
Reason 2: If the sale of business contract states that the business is being sold as a ‘going concern’, there is no need for a GST inclusion – hence the sale will be GST exempt. (A ‘going concern’ refers to an entity’s ability to continue functioning as a business even if there is a change of ownership.)
A written agreement must be entered into on or before the contracts are exchanged as it shows all concerned parties acknowledge that the business in indeed a going concern.
Tip: You will qualify for a GST-free sale if you fulfil the following criteria identified by the ATO:
- both seller and buyer must be registered for GST;
- the purchaser must be provided with everything needed to run the business once it’s sold;
- the seller to carry on the business until the day it is sold;
- a monetary transaction should take place; and
- have a written agreement with the buyer that the sale is for going concern, before the sale.
Note: Even if you qualify with the above mentioned criteria, please be aware that the ATO will notnecessarily have the same view of the relating parties. Hence they could argue that your sale does not meet the criteria under the going concern concept and might not award you with a GST exemption.
2. Assets and the period of ownership
When it comes to selling your business assets, it is important to identify the period of ownership of an asset. This is one of the main adjustments that relates to input tax credits claimed on assets while the entity was registered for GST.
The likelihood whether such an adjustment must be made will depend on the cost of the asset and how long it has been owned by the business.
The ATO considers the ‘period of ownership’ to the number of complete financial years after the year when an asset was purchased.
The following table outlines this:
Asset Cost
|
Complete Financial Years
|
| Less than $5000 | 2 years |
| $5001 - $499,999 | 5 years |
| $500,000 or more | 10 years |
For an example, let’s assume that a new car purchased in 2009 for $25000 (50% business usage) has a market value of $11000 by the time you cancel the GST registration. Then your adjustment payment for the ATO will be $500, (Calculation = $11000×50%/11).
Note: You will have to review all assets purchased over (at least) the last 6 years.
3. Applicable Value
The applicable value is the value used for the GST, which will be the lower of the GST inclusive market value just prior to the cancellation of GST registration.
Tip: For the final BAS statement, the adjustment amount for an asset sold will be one eleventh of the applicable value after taking account of the business use of that asset.
4. Last Business Activity Statement
Once the sale of your business has been finalised, you need to complete and lodge a final business activity statement with the ATO.
This BAS must cover the period up to your cancellation date of the GST registration and should include the following adjustments;
- adjustments:
- for sale of the business;
- for sale of any business assets;
- for any business assets held after the GST registration cancellation;
- for all sales, purchases and imports made during that period;
- PAYG withholding:
- report any outstanding PAYG withholding amounts of any FBT obligations.
Note: If your business was operating under cash basis; then you are obligated to record all the sales and purchases that you still need to attribute from a previous tax period.
You can find the find the ATO’s selling or closing your business checklist here.
Stay tuned until next week to find out about the treatment of CGT in winding down your business.
Until then,
Channa Perera
Editor
Smart Tax Bulletin
Editor
Smart Tax Bulletin
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The information in this email is intended solely for the addressee. Access to this email by anyone else is unauthorised. If you are not the intended recipient, please return the message to the sender and delete it from your records. All content is © 2007-2013 Portner Press Pty Ltd All Rights Reserved.
Disclaimer: We research our recommendations and articles thoroughly, but disclaim all liability for any inaccuracies or omissions found in our publications. Click here to view our Privacy Policy and Terms and Conditions.
Queries: For general enquiries, email cs@portnerpress.com.au or call 1300 782 911.
Smart Tax Helpdesk: Paid subscribers to the Smart Tax Handbook can ask our experts for advice.
Syndication: To republish a Smart Tax Bulletin article, please email cs@portnerpress.com.au for information.
Smart Tax Bulletin ISSN 1838-9651
Portner Press Pty Ltd
96-98 Bridport Street
Albert Park VIC 3206
Australia
