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A government plan to remove the GST exemption from the sale of a business as a going concern could severely damage the momentum of M&A activity, warns Pitcher Partners.
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Proposed tax change to hit M&A activity
27 August 2014
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Matthew Pringle, a partner in the firm, said under the current proposal all sale of business transactions would be subject to GST. He said the proposal, which has been pushed by large corporates demanding greater certainty on their exposure to GST on the sale or purchase of businesses, would have a dramatic impact on small and mid-market enterprises which hasn’t been properly considered.
“While the GST obligation can be transferred to the purchaser so that they match the payable amount with their entitlement to claim input tax credits, it still leaves the original owner at a substantial risk,” Mr Pringle said.
“The proposal enables the purchaser to net off the GST payable with the input tax credit they would be entitled to, however, it leaves the vendor seriously exposed to a GST liability if the purchaser fails to meet their obligations. Few business owners will trust a purchaser knowing there is a risk the ATO will knock on their door if the tax hasn’t been paid,” Mr Pringle added.
“The change is likely to result in business owners insisting upon a purchaser of their business paying them the GST at the time of purchase. Finding an additional 10 per cent of the entire purchase price will make the acquisition unaffordable for many. This proposal dramatically increases the cash flow requirements associated with the acquisition of a business for small and middle-market enterprises, and will put significant strain on their capacity to fund an acquisition."
In response to the proposed changes Pitcher Partners has suggested a compulsory reverse charge mechanism would alleviate the issue as the vendor would no longer be exposed to a GST liability.
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Mr Pringle said the remaining issue for the purchaser would then be whether their stamp duty cost would increase as stamp duty is calculated on GST inclusive balances.
“Unless the legislation contemplates an indemnity or compulsory reverse charge mechanism for the GST liability of the original business owner, to protect them should the purchaser fail to meet their GST obligations, this subtle change is likely to have a dramatic and very negative impact on sales of businesses,” Mr Pringle said.
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