Don’t Buy a Business Until You’ve Seen Its BAS, PAYG, and Superannuation Payments
Don’t Buy a Business Until You’ve Seen Its BAS, PAYG, and Superannuation Payments
The headline says it all. Reviewing the tax compliance of any business you are considering as a potential purchase is essential. You must include it as part of your due diligence.
Here’s why.
But first, we must make sure we all understand where to find this information.
BAS: The Window Into Tax Compliance
The BAS will show you the GST collected and credits received during the reporting period. Depending on the size of the business, this could be a month, a quarter or the full year.
Added to that will be PAYG (Withholding), the tax deducted from employees’ wages each pay period (not to be confused with PAYG).
PAYG is an estimate of the income tax payable by the business based on an Australian Tax Office (ATO) estimate of income tax payable for the current year.
The total of all those is the amount the business should have paid to the ATO.
A BAS may also include adjustments for prior periods. Typically, these arise because an error is found. If the error is minor, the business can adjust for it in a subsequent BAS.
The need for adjustments is a red flag for a potential purchaser as it may indicate poor accounting records and should be investigated.
In any case, you should check that the items on the BAS correspond with the accounting records. And, if the records are not computerised - RUN AWAY!
Superannuation Payments: Protecting Employee Entitlements
Again, provided the accounting records are computerised, identifying the amount of superannuation guarantee payable for employees is relatively simple. The system will generate a report of all the superannuation payable for the period.
A computerised payroll system will transmit all payroll information to the ATO each payday without the need to report it on a separate form.
Therefore, the ATO already has a record of each employee's total liability, which it matches to the contributions made to the employee’s superannuation and (apparently) follows up shortfalls.
Payroll Tax: The tax on employment!
While we are discussing tax liabilities, we should mention payroll tax. This is a state tax (so the rules are different in each state) imposed on employers with payrolls above specified levels.
You need to check whether the business you are considering is liable for this tax and whether it is complying with the relevant state legislation.
Where the rubber hits the road
But, while knowing the BAS, income tax and superannuation liabilities is helpful, a potential purchaser also should confirm that these liabilities are paid - in full and on time. Severe penalties can accrue for non or late payments.
The simplest and most reliable way to establish the business’s standing with the ATO is to obtain a current Integrated Client Account for BAS transactions and an Income Tax Account for income tax payments. Both can be obtained from the ATO but only by the current business owner.
Reluctance to provide these is another red flag.
But what about superannuation?
Australian computerised payroll systems integrate with SuperStream, a standard (and simple) protocol for paying employee superannuation contributions. Do you see why I am such a fan of computerised systems?
A review of SuperStream transactions in the business records will establish whether these payments are up-to-date.
Even more rubber
Suppose you identify existing ATO or superannuation liabilities but still want to proceed with a purchase. In that case, you should negotiate that all liabilities are paid as part of the settlement process from the sale proceeds.
Alternatively, reduce the sale price to account for the effect of these liabilities, but make sure you include all the penalties in the calculations. This approach has capital gains tax implications for you when you decide to sell, so factor that in as well.
Never rely on “guarantees” from the seller that payments will be made. You could be left “carrying the can”.
Final Thoughts
No matter how promising a business looks on paper, failing to examine its BAS, PAYG, and superannuation records can expose you to hidden liabilities and compliance risks.
These records are a critical part of your due diligence and will assist you in making an informed decision. Save yourself from future financial headaches and ensure a smoother ownership transition.
Tags: buying business owner small business tips
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