Sold as a "going concern"

I was looking at a few properties and noticed that quite a few properties were being sold as a "going concern".

I've done some research but the information I've found online hasn't been very helpful, could someone please explain what this means?

 

For a purchaser means no GST on sale, and sitting tenant

 

Thanks Dave, so it's simply the purchase price and any other acquisition costs?
If GST was applicable to the purchaser, is there a way of getting around it?

Also, I had a friend tell me that "going concern" meant your buying the business too. I take it this isn't true?

 

@JackKeily - you're only buying the freehold unless there's information about the business (from a business broker). A going concern from a gst point of view is that there's a tenant in place.

There's no way around the gst issue if you're not registered for gst you pay 10% on top and can't claim a credit but your cost base will be higher, like that's a good thing.

 

If you are buying a commercial property as an investment, then having a tenant in place with a formal lease (going concern) means you won't usually pay GST on the purchase.
So, its a good thing generally, if the lease and its associated conditions are favourable.
You need to spend a fair amount of time and effort in performing due dilligence on the lease and the entity / company that is the lessee. There are several other threads here that talk about some steps you can take.

 

Thank you for your replys everyone.
Another questions I have is what exactly is the Cap rate? I can't seem to wrap my head around what it is and what determines a cap rate of an area/

 

Net rent / purchase price

 

So is the Cap rate linked to the yield in any way? Wouldn't you use that formula to work out the yield?

 

Cap rate is the net yield.

 

Thanks for clearing that up for me SNM

 

Just to be a little pedantic (and for future reference or clarification) there doesn't have to be a tenant in place nor lease on foot for an investment to be deemed a going concern.

A tenant can be occupying a property on an expired leased and the sale can be GST exempt....pretty straight forward.
But..... a property can be vacant and still be deemed a going concern. eg...If a property has become vacant and available for lease and the purchaser intends to continue to make the property available for lease the sale is still a going concern and gst exempt.

 

In WA (at least) the going concern exemption for GST is important as stamp duty is payable on the GST portion.

Aside from that it is practically difficult to fund the GST component and then claim it back from the Tax Office.

On another level (not tax related) - the benefit of a property as a going concern is that you have a cash flow associated with the property however the strength of that cashflow needs solid due diligence behind it.

 

Thats not necessarily the case. GSTR 2002/5 deals with going concern and para 25 is important. A going concern is not the property. Its the enterprise. What is the enterprise ?.... is the question that may arise when someone looks at this basis of the going concern and tries to fit it to their desired outcome.

I would consider anyone seeking to use the going concern needs tax advice as its easy to over simplify it. If the buyer changes the nature of the property use then is there a going concern ?
eg Buyer wants to modify the property from a single tenancy and still have tenants but they are artists who pay rent for a shared use of a portion of a factory area rather than a whole factory unit. Is that a going concern ? I would argue it is not.

 

Now who's being pedantic

Not doubt we both agree that just because a lease is not on foot or the property is vacant does not necessarily mean the property cannot be sold as a going concern. In my experience 50% of solicitors are not aware of this (also 50% of statistics are made up but you get where I'm coming from).

 

Sadly many small business sales occur with a business broker who doesnt know jack who just wants to close the deal and bypasses formalities like tax advice, no legal advice. Then the fan has to be cleaned later when the issues all become evident. Going concern is one of these issue and what seems so simple often isnt.

One of the best I saw
- Bus company sold GC
- Supply included SOME buses but not the coaches
- Didnt include the site which was integral
- Contract was for the buses as the sole supply (so its isnt a GC - Its just a asset sale)
Vendor signed a contract in haste to take a generous offer but it all got taxed....and was subject to GST.

Problems
- Vendor got hit with GST they couldnt claw back
- Vendor sold buses at a profit. No small business concessions but 100% tax on the asset profit
- Dividend trapped in a company since small business concessions didnt operate

I have seen more than one going concern sale of property to a SMSF which can be a real problem.

 

I tend to err on the conservative in these cases - a tenant may be on holdover but not as a tenant at will (ie no lease at all).

Other requirements which must be met to get the gst concession: linky

 

That's what I was looking for...I've had to send that link to several vendors solicitors before.

 

We are running a case that has this as an issue in the Supreme Court of QLD at present. Still 6 months away from hearing so will try and remember to post outcome when I can. That part of the case turns on whether in this instance ALL things necessary for the continuation of the business were supplied.

 

So what is your take on going concern D? I have never heard of this 'available for lease' loophole.

 

That goes against the requirements of the ATO
"a fully tenanted building, where the property and all leases, agreements and covenants are included in the sale" (and similar requirement for partially tenanted building + actively marketed).

I recently sold a property which was partially occupied and actively marketed to meet this requirement.