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Dav123
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Hi Leanne,

Your question is not simple and would require face to face discussion to give you a proper answer. However I will endeavour to provide you some general comments which maybe able to get you thinking on the right track.

My understanding of your situation is as follows:
1.Your have purchased a business for $120,000.
2.It was agreed the vendor will lend you $120,000 and you will pay them $3,000 a month which includes principal and interest.
3.You were informed that an additional $12,000 will need to be paid to the vendor because they have some GST liability in relation to the $120,000 loan provided.
4.Before the business was offfically purchased there was a verbal agreement that you would run the business and the vendor will continue to own the business. The vendor will take $3,000 a month from the business and leave you the rest.

My Comments
1. GST is complicated but in general 10% of your sales will need to be paid to the ATO but you can claim 10% of your expenses where those expenses relate to these sales.

Some sales are exempt from GST but being a courier business I don’t think you will have these. Some expenses do not have GST hence they will have nothing for you to claim back. These expenses include loans and interest.

Taking the sale of business a side and looking purely at the loan. You have received $120,000 (in the form of a business) this is not a sale so the vendor doesn’t have to pay 10% GST on this. Of the $3,000 you pay every month there is an interest and principal component. The principal component is just paying back what the vendor lent to you so this is not a sale hence no GST on this portion. The interest component relates to earnings (“sales”) from lending you this money. Although this interest is earnings it is specifically excluded from GST (politically sensitive for the government).

Therefore the granting of the loan and the loan repayments have no GST consequences.

2. The vendor has sold you thier business, this is a sale and as a result the vendor will need to pay 10% of the sale proceeds ($120,000) to the ATO. This is an obligation for the vendor to pay and not you, unless the purchase contract specifically states that you need to cover all GST costs then you shouldn’t need to pay the vendor any more money, they should have charged $132,000 instead of $120,000 if they wanted $120,000 after tax.

3. For arguments sake say you have to pay $12,000 to the vendor to cover the GST. The reason why this has occurred is because the vendor has sold the business, this is a sale hence 10% of the sale proceeds ($120,000) needs to go to the ATO. You can claim this money back depending on how you are registered for GST. If you are registered on accruals basis you can claim all of the $12,000 on the next BAS, if you are registered on cash basis you can claim only 1/11th of the principal component of the loan repayment each month. Changing basis of GST registration is not hard if you want to be on accruals.

4. In relation to your situation prior to the business being owned in your name. Unless you had formal agreements written up, I would argue the following: you were employees of the courier business, you were paid on commission basis being 100% of profit less $3,000 a month, the money you received should be classed as wages and taxable in your name but no GST is payable on this. The $3,000 a month paid to the vendor is not income to you but income to the vendor as it is profits. You should be paid super and other employee entitlements as well. Obviously this approach is quite aggressive but assuming no contracts have been signed, I don’t see how the vendors can argue it was your business when they still were legally owners and the profits from the business were still going into thier bank accounts (even though they passed this money to you).

5. Sales of business sometimes don’t attract GST if they are sold on a “going-concern” basis. You should check the contract to see if “going concern” appears anywhere. If so then you may not need to pay this extra $12,000.

I hope the above helps you but you do really need to seek proper face to face advice with a good accounting firm. Additionally for any future business arrangements you will need to ensure everything is documented.