Private ruling: Goods and services tax (GST) and going concerns
Published: March 2013

Ruling: Q1: Can the GST going concern exemption apply to proceeds received in connection with earn-out arrangements as part of the sale of the business? | A1: Yes. Provided that the sale of the business is a GST-free supply of a going concern, the GST going concern exemption will apply to the earn-out payments.

Relevant facts and circumstances: You are registered for GST. You will sell a business. A clause of the business sale contract provides that you agree to sell or assign, as the case may be, the Assets and the Business for the Purchase Price to the Purchaser. A clause of the business sale contract provides that in consideration for the sale of the Assets and the Business to the Purchaser, the Purchaser agrees to pay the purchase price in accordance with a clause of the contract and assume liability for and perform, pay and discharge when due, the Assumed Liabilities with effect from the Completion Date. A clause of the business sale contract provides that the purchase price payable by the Purchaser to the Vendor for the Assets is the sum of various amounts, including the Earn-Out Entitlements There is a maximum earn-out entitlement of a certain amount if revenue target of a certain amount is achieved for the period. The earn-out entitlements are to be received as instalments of a certain amount commencing on a certain date to a certain date with the balance of a certain amount received on a certain date. There is a maximum earn out entitlement of a certain amount if revenue target of a certain amount is achieved for the period. The earn-out entitlements are to be received as instalments of a certain amount commencing on a certain date to a certain date with the balance of a certain amount on a certain date.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 section 9-70 | A New Tax System (Goods and Services Tax) Act 1999 section 9-75 | A New Tax System (Goods and Services Tax) Act 1999 section 38-325

Reasons for decision: Summary: Provided that the sale of the business is a GST-free supply of a going concern, GST will not be payable on the payment of the earn-out amounts, because these payments would be consideration for a GST-free supply. | Detailed Reasoning - Detailed reasoning: GST is payable by you on your taxable supplies. You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with Australia; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (*Denotes a term defined in section 195-1 of the GST Act) A sale of a going concern is GST-free under section 38-325 of the GST Act if certain requirements are satisfied. In accordance with sections 9-70 and 9-75 of the GST Act, GST is worked out on the consideration for the taxable supply. Consideration is defined in section 9-15 of the GST Act. Subsection 9-15(1) of the GST Act provides that consideration includes any payment in connection with a supply and a payment in response to or for the inducement of a supply. Paragraph 180 of Goods and Services Tax Ruling GSTR 2006/9 provides that in determining whether a payment is consideration under section 9-15 of the GST Act and whether there is a supply for consideration, the test is whether there is a sufficient nexus between the supply and the payment made. A clause of the business sale contract provides that in consideration for the sale of the assets and the business to the purchaser, the purchaser agrees to pay the purchase price in accordance with a clause. A clause of the business sale contract provides that the purchase price payable by the purchaser to the vendor for the assets includes various payments, including the earn-out entitlements. Therefore, the earn-out payments are part of the purchase price for the business. The earn-out payments are in response to and for the inducement of the supply of the business. Hence, there is a sufficient nexus between the sale of the business and the payment of the earn-out amounts. Therefore, the earn-out payments are part of the consideration for the supply of the business. We do not consider that the earn-out payments are consideration for some other supply. Hence, if the sale of the business is a GST-free supply of a going concern, the payment of the earn-out amounts would form part of the consideration for a GST-free supply. Therefore, provided that the sale of the business is a GST-free supply of a going concern, the going concern exemption would apply to the earn-out payments. Hence, provided that the sale of the business is a GST-free supply of a going concern, GST is not payable on the earn-out payments. GST would also not be payable on the other amounts the purchaser is required to pay you under the clause of the business sale contract, provided that the sale of the business is a GST-free supply of a going concern.