BBA (WA) Inc.
thanks Author Alan Langford and Bank of Western Australia for permission
to reproduce this Report.
GOING
CONCERN: A MAJOR
CONCERN
BACKGROUND:
GST-free
treatment of the sale of a business or property as a going concern
provides a cash flow break for a purchaser, who does not have to
"find" the additional money to pay their GST liability. Many
purchasers will often "push" for a sale to take place using
the going concern method. It is important for all vendors to protect
themselves as they are the party that will be responsible for GST
liabilities if the ATO reverses the GST-free treatment claimed.
For
example, if the ATO determines that a $5.5m property sale did not meet
the going concern criteria & the contract does not provide for a
taxable supply taking place, the vendor will be liable for GST of
$500,000 plus a flat penalty of up to 50% (ie. extra $250,000) plus an
interest charge at 12% per annum on $750,000.
Therefore
it pays for any vendor to carefully consider the GST treatment of each
sale to ensure that all conditions are satisfied. As we have come to
expect, the GST rules determined whether the sale of a business or of
tenanted properties as the supply of a going concern, are far from
clear.
To
try & assist us in the process, the ATO has issued ruling GSTR
2002/5 dealing with the supply of going concern (SOGC) rules. This is
the ATO's third attempt to clarify the operation of section 38-325, with
the ruling extending to 221 paragraphs & containing 35 examples.
It
is a matter of opinion as to whether ATO has been successful in
clarifiying the interpretation of the rules. Arguably this final ruling
raises as many questions as it answers, & still contains more than a
few nasty surprises.
What
needs to be remembered also, is that contrary to popular belief, any ATO
ruling is only the ATO's interpretation of the law. ATO rulings are not
law in themselves & therefore it will be up to taxpayers to
challenge ATO interpretations. In due course, the Courts will decide
many of the GST issues in respect of SOGC's.
WHAT
IS A SOGC - CAN IT BE GST-FREE?
SOGC
must be established from the facts in each individual case. GSTR 2002/5
provides clarification on how the ATO expects businesses to apply this
legislation in deciding whether a transaction can be a SOGC.
Section
38-325 (2) provides that a supply
of a going concern is a supply under an arrangement under which the
supplier:
(a)
supplies to the recipient all of the things that are necessary for the
continued operation of an enterprise,
and
(b)
carries on, or will carry on, the enterprise until the day of the supply
(whether or not as part of a larger enterprise carried on by the
supplier).
In
addition a supply of a going concern is not GST-free unless:
·
the
supply is for consideration, and
·
the
recipient is registered or required to be registered for GST, and
·
an
agreement in writing is entered into by both parties, agreeing that the
supply is of a going concern (before or at the time the supply takes
place.
Where
the supply has been established as a SOGC it is not automatically a
GST-free supply. A GST-free supply needs to be created by the actions of
both parties, & if this is not done properly then the supply will
become a supply of all the component assets & will be taxable in the
main part.
With
acknowledgment to PKF Chartered Accountants & Business Advisers
Chris
Jenkins & Mark Pollock
MARKET
REPORT
Although
the first quarter was quite strong, the second quarter of financial year
2002/2003 was not full of good news for business brokers. The third
quarter has commenced on a similar slow note.
Currently,
the market for small businesses valued under $250k generally is not very
strong although some areas were in demand and for very small businesses
demand can be quite weak.
For
businesses valued from $250k to $3m depending on the type of business
there are some buyers with capital and/or strong assets looking for
bargains Importing, manufacturing & wholesaling are the areas which
seem to be of most interest, Not a large number of sales seem to come
from the business migration area, but it is thought migrants seeking
businesses probably are satisfied by specialist & ethnic immigration
agents.
The
future is difficult to predict, with world politics bearing heavily on
investors' minds, & unexpected big business reversals are sending
cautionary messages.
It
is hoped the April/June quarter may see some signs of recovery by some
of those Australian iconic businesses which seem to need sharp changes
of direction. The world scene is less predictable, but it is hoped the
tension may ease in the coming months.
By
the end of 03 the bad news may have gone from the finance pages, and
buyers should be looking for July 1 take overs.
Thank
goodness we live in Paradise !!
Privacy a
must when buying or selling a business
Anyone buying
or selling a business that includes a customer database after 21
December may be caught by the Privacy Act, even though the business has
a turnover of under $3 million, warns CPA Australia.
'From 21
December, small businesses that trade in personal information, are
related to a large business or provide services under a Commonwealth
contract, will need to comply with the Privacy Act,' says Judy Hartcher,
Business Policy Adviser for CPA Australia.
'Trading in
personal information includes buying or selling a business with a
customer database, so businesses should check their compliance
obligations before finalising the sale or purchase.
'For instance,
anyone buying a business should ensure that the customers are aware of
the transfer of information and have the opportunity to remove their
personal data from the new owners' database.'
When buying or
selling a business, small business operators also need to ensure that
customers can reasonably expect their personal data to be used only for
the purpose of which it was originally provided.
'Businesses
that are sold as a going concern, offering the same services, will find
that the legislation has little impact,' says Hartcher.
'However, if
the nature of the business is to change after the sale or purchase,
business operators need to seek permission from their customers to
transfer their personal information to the new business owners, in order
to comply with the Privacy Act.
'For example,
an independent lawn mowing service may need to seek permission from its
clients before selling its customer database to a large company
providing a range of domestic services. Clients may not want to receive
information on other domestic services apart from the lawn mowing
services.'
The compliance
obligations are not onerous, and comprehensive information on how the
privacy laws impact on the due diligence process associated with the
sale or the purchase of a business can be obtained from the Federal
Privacy Commissioner's Office.
'Small
businesses with annual turnovers under $3 million should not assume that
they are exempt from the Privacy Act. To avoid potential litigation,
they should review the way they handle their clients' personal
information,' warns Hartcher.
Guidelines on
compliance requirements are available on the Federal Privacy
Commissioner's website at www.privacy.gov.au
The Privacy
Act came into effect on 21 December last year, regulating how businesses
in the private sector collect, use, store, disclose and dispose of
personal information.
Written
by CPA Australia's Business Policy Adviser Judy Hartcher
CPA
Australia is one of the world's largest accounting bodies, representing
97 000 finance, accounting and business professionals in Australia,
Asia and Europe.
A
CASE OF INTEREST
An
employer recently won a case brought against him by an ex-employee,
which should be of interest to all members. We cite this not as a
"win" but as an example of the care which employers must
take when employing staff. It is essential that staff are employed
with clear, written contracts so that misunderstandings by employees
as in this case are avoided.
The
pivotal issue requiring determination was whether the employee was
wholly remunerated on a commission or percentage reward basis. If her
remuneration was not wholly on this basis then she would be entitled
to annual leave. The case was brought under the Minimum Conditions of
Employment Act 1993 with a claim for 4 weeks annual leave each year.
The employer claimed the employee was remunerated wholly by commission
or percentage reward, and that the Act therefore did not apply.
The
magistrate found, on witness evidence & documents produced that
the employee was rewarded by:
The
magistrate found the Act did not apply to her employment and she was not
entitled to annual leave payments.
This
decision is a timely reminder to real estate employers that all payments made
to commission only employees are able to be proven to be based on a commission
or percentage reward structure. Employees labeled "commission only"
who receive flat payments or allowances may not actually be employed on a
commission only basis & may successfully argue they are entitled to annual
leave, paid sick leave & paid public holidays.
With
acknowledgement to 'REEFWA' Newsletter.
BUSINESS
SALES & MANAGING AGENTS
(with
acknowledgment to Agency
Magazine)
An
interesting story has come to Agency’s
notice
concerning the sale of a business.
An
application to the managing agent of a small business for the assignment
of a lease was refused until the managing agent was satisfied that the
purchaser's accountant approved the business'
profit
& loss figures.
Apparently
the managing agent was concerned that the purchaser had not done his
homework, & had reservations about his ability to run the business.
The
position of the managing agent is understandable, but does the managing
agent have the legal power to take this stand?
Agency's
legal
advisors fell that the lease would normally carry a clause dealing with
assignment, and refusal to assign could come under the term "fit
& proper person", that is , if the new purchaser fails to impress
as a business person then the managing agent can advise his owner against
assigning,
After
all, when a person or company wishes to lease a property they have to pass
credit trading checks & the same, principle covers assignment
