Workshop sale as a going concern, trading stock and post-sale GST adjustments
Kestrel Fabrication Pty Ltd (KFP) is registered for GST and has aggregated turnover of $8.4 million. On 1 July 2025 it settled the sale of its Townsville fabrication business to Baxter Engineering Pty Ltd for $1,320,000. Baxter has been registered for GST since 2019 and is registered on settlement day. The contract, signed 12 June 2025, states: 'The parties agree that the supply made under this contract is a supply of a going concern.' The assets supplied are plant, goodwill, the work-in-progress ledger and the assignment of the workshop lease. Baxter separately paid $66,000 for KFP's spare-parts inventory, which the contract identifies as a separate supply. In March 2024 KFP bought a CNC press for $110,000 including GST and claimed 80% business use at acquisition; by 30 June 2026 the press was 95% used in the taxable business and 5% used privately by the managing director (an employee). In August 2025 KFP wrote off a $27,500 invoice (including GST) to a customer placed in liquidation; the GST had been attributed in the March 2025 BAS. KFP accounts for GST on a non-cash basis.
1. Is the $1,320,000 supply GST-free? How should the $66,000 inventory payment be treated in KFP's BAS, and what is the exposure if the going concern conditions are not met?
Read the worked answer
The supply is GST-free only if all three conditions in s38-325 are satisfied:
- Going concern - KFP supplies everything necessary for Baxter to continue the same enterprise (plant, goodwill, WIP ledger, lease). The enterprise must be carried on up to settlement and be capable of continuation; the recipient does not have to run an identical business, but the assets must let it continue the enterprise.
- Recipient registered - Baxter is registered on the day of supply.
- Written agreement - the 12 June clause is sufficient; a separate document is not required, but the agreement must be in writing and be made before the supply (a post-settlement agreement is exposed to challenge).
Result: no GST is attributable on the $1,320,000 and Baxter gets no input tax credit for it.
The inventory is a separate taxable supply. GST is 1/11 × $66,000 = $6,000, attributable in the tax period the invoice is issued, and Baxter can claim the $6,000 credit because it acquires for a creditable purpose. The parties' identification of the stock as a separate supply should be respected, but if the stock were in substance part of the going concern, the $66,000 would also be GST-free and the contract price would need to be read as including it.
Exposure: if a condition fails, KFP is liable for $1,320,000 ÷ 11 = $120,000 of GST out of its own pocket, because the contract fixes the price at $1,320,000. Retain the agreement, proof of registration and evidence the business operated to settlement.
2. Calculate any Division 129 adjustment for the CNC press for the year ended 30 June 2026, and explain KFP's ongoing obligations.
Read the worked answer
At acquisition the GST on the press was $110,000 ÷ 11 = $10,000, and KFP claimed 80% × $10,000 = $8,000.
Division 129 requires KFP to compare, at the end of each adjustment period, the actual extent of creditable purpose with the extent used to work out the credit. An acquisition of $110,000 falls in the $5,000 to $499,999 band, giving five annual adjustment periods.
For the adjustment period ending 30 June 2026:
- actual creditable purpose 95%; originally applied 80%; difference 15 percentage points;
- the 10 percentage point threshold is exceeded, so an adjustment is required;
- the adjustment is calculated on the total credit for the acquisition, not the $8,000 claimed: 15% × $10,000 = $1,500 increasing adjustment, reported in the BAS for the tax period ending 30 June 2026 (June 2026 quarter), increasing net GST payable.
Points to watch:
- The comparison is repeated at the end of each remaining adjustment period and reverses (decreasing adjustment) if business use falls back.
- If the director's 5% private use is provided as a fringe benefit to an employee, the fringe benefits rule in s11-15 can keep creditable purpose at 100%, producing a 20-point (not 15-point) adjustment of $2,000 instead - confirm the arrangement before lodging.
- If the press is sold before the adjustment periods run out, Division 129 stops and the disposal is dealt with under Division 132.
3. Explain the GST consequences of writing off the $27,500 debt, including timing, documentation and reversal.
Read the worked answer
Because KFP attributes GST on a non-cash basis, it has already remitted the GST on the invoice. Section 21-20 gives a decreasing adjustment of 1/11 × $27,500 = $2,500 when the consideration is written off as a bad debt (or is 12 months overdue).
- Timing: the adjustment is attributable to the tax period in which the debt is written off - the September 2025 quarter (if the write-off was recorded in August 2025). Do not amend the March 2025 BAS.
- Amount: only the unpaid portion is adjusted; if the customer had paid part of the invoice, reduce the $27,500 accordingly.
- Documentation: no adjustment note is needed for KFP's own decreasing adjustment. However, an adjustment note should be issued so that a GST-registered customer can make the corresponding increasing adjustment; without it, the customer keeps the credit it has already claimed.
- Cash-basis suppliers get no adjustment, because no GST was attributed on the supply.
- Reversal: if KFP later recovers any of the debt, it must make an increasing adjustment in the period of recovery. A payment arrangement is not a write-off, and the debt must genuinely be written off in the accounts - an accounting provision for doubtful debts is not enough.
Practical check: confirm the write-off date and journal before lodging, and reconcile the adjustment to the debtors ledger and to the customer's tax invoice.