Tax Due Diligence When Buying a Small Business in Australia: A Practical Guide

Tax due diligence when buying a small business in Australia means reviewing the target business's full tax compliance history — GST lodgements, payroll tax obligations, PAYG withholding, income tax returns, and any outstanding Australian Taxation Office debts — before you commit to purchasing. It's a separate exercise from financial due diligence, and it's the one most buyers skip. That oversight has a way of becoming very expensive.

I've seen buyers spend weeks on the P&L and fifteen minutes on the tax position. Then they settle, and three months later there's an ATO debt they didn't know about sitting inside the company they now own. (Not a metaphor. This actually happens.)

This guide covers the six tax areas you need to check before buying a small business in Australia, why each one matters, and how to structure your review.

Why tax due diligence is different from financial due diligence

When you check the financials, you're assessing whether the numbers are accurate and the business is as profitable as the vendor claims. Tax due diligence goes a layer deeper: it checks whether the business has been meeting its tax obligations, what liabilities might be hidden on the ATO's records, and whether the structure of the deal (asset sale vs share sale) changes your exposure.

The stakes vary. In an asset sale vs share sale, the difference can be tens of thousands of dollars in stamp duty, GST, and inherited liabilities. This is covered in depth in Module 5 of the Playbook.

The six areas to cover are GST, stamp duty, payroll tax, PAYG withholding and superannuation, income tax history, and the structure of the deal itself.

1. GST and the going concern exemption

Rule of thumb: if the vendor doesn't say "going concern" in writing before settlement, assume 10% GST is added to the purchase price.

If you're buying a business as a going concern — meaning the business will continue to operate after settlement — the sale may be GST-free under section 38-325 of the GST Act 1999. This is a significant saving on a $300,000 or $500,000 purchase.

But the exemption has specific conditions. Both buyer and seller must be registered for GST. Both must agree in writing (usually in the sale contract) that it's a supply of a going concern. The vendor must supply everything necessary for the business to continue operating. And the vendor must carry on the enterprise right up to settlement.

If any of those conditions aren't met, the vendor is required to charge 10% GST on the full purchase price. A broker told me last year about a deal in Queensland where the buyer assumed the exemption applied and nothing was documented in the contract. After settlement, the vendor's accountant flagged the error. The buyer had to pay an additional $42,000 in GST retroactively, which they hadn't budgeted for.

Check: Is the going concern exemption agreed to in writing in the sale contract? Are both parties registered for GST?

2. Stamp duty: the state-based cost most buyers underestimate

Rule of thumb: if the deal involves real property — a workshop, a yard, a commercial lease with fixtures — budget for stamp duty separately.

Stamp duty in Australia is a state tax, which means the rates and rules vary across New South Wales, Victoria, Queensland, Western Australia, and the other states. Most states have abolished stamp duty on the transfer of general business assets like plant, equipment, and goodwill. But real property (land and buildings) still attracts duty at standard property rates.

For small trade businesses, this matters most when:

The business operates from a property the vendor owns (and you're buying it)
The deal includes significant fixtures or plant attached to real property
You're buying the shares in a company that owns real property (most states apply landholder duty in this scenario)

In a share sale involving a company with real property in Victoria or Queensland, you may be up for full stamp duty as if you'd bought the property directly. In some states, that's 4-5% of the property's market value. On a $1 million property, that's $40,000-$50,000 that surprises a lot of buyers.

Check: Does the business own or lease real property? Are there significant fixtures? Are you doing an asset sale or share sale? Have a conveyancer confirm duty liability before signing.

3. Payroll tax and the successor employer trap

Rule of thumb: in a share sale, you inherit the vendor's full payroll tax history. In an asset sale, you generally start fresh — but your headcount still matters.

Payroll tax is a state-level tax on wages paid above a threshold (ranging from around $1.2 million to $2.5 million per year depending on the state). For most small trades businesses — plumbing companies, electrical contractors, landscaping operations — the payroll is below threshold and this isn't a direct issue.

But the trap comes in two forms. First, if the vendor has been using contractor arrangements to avoid payroll tax, and those arrangements don't survive scrutiny under the relevant state's payroll tax grouping rules, you may inherit the underpayment. Second, if you're growing and you're already at threshold across multiple entities you own, acquiring this business might push you over — and both the acquired entity and your existing entities could become grouped.

I've seen an owner run a cleaning business and a landscaping business in separate companies specifically to stay below the payroll tax threshold in Queensland ($1.3 million in 2026). When a buyer acquired both, they got grouped — and suddenly owed payroll tax they hadn't modelled.

Check: Has the vendor lodged payroll tax returns in every state they've operated? Are there any outstanding assessments? How does the acquisition affect your existing entities' grouping?

4. PAYG withholding and superannuation compliance

Rule of thumb: request the vendor's last 12 months of BAS lodgements and Activity Statements. Missing or late lodgements are a red flag.

Pay As You Go (PAYG) withholding is the system where employers deduct income tax from employee wages and remit it to the ATO. Superannuation guarantee (SG) requires employers to pay 11.5% of eligible employees' ordinary time earnings to their super funds by the quarterly due date.

If the vendor hasn't been remitting PAYG correctly, the ATO can pursue the employer for the shortfall plus penalties and interest. In a share sale, that obligation lives inside the company — and it transfers to you at settlement. In an asset sale, you're generally not liable for the vendor's historical PAYG shortfalls (though check this with your solicitor).

Superannuation non-compliance is nastier than PAYG shortfalls in one respect: unpaid superannuation guarantee charges are not tax-deductible and attract a significant administration component on top. A business with $80,000 in unpaid super from the past three years might owe $120,000+ by the time the ATO catches up.

Check: Request BAS lodgement history for at least three years. Confirm super contributions have been made on time via payroll records. Ask whether there are any current ATO payment plans in place (a sign of prior non-compliance).

5. Income tax returns and outstanding ATO debts

Rule of thumb: request a ATO tax clearance letter or ask the vendor to provide evidence of nil balance. Don't take their word for it.

The vendor should have lodged income tax returns for every year of the business. In a company structure (buying shares), you want to see that all company tax returns are up to date and that there are no unpaid income tax debts sitting on the ATO's records.

You can ask the vendor to authorise access to the ATO's online services to confirm their tax position, or request a tax clearance certificate. Some vendors will resist this — which is itself information.

Also worth understanding: if the company has accumulated tax losses, those losses may be valuable (they can offset future profits). But under continuity of ownership rules, significant changes in shareholding can extinguish those losses. Know what losses exist, and whether they'll survive the acquisition, before you pay a premium for a business with a loss history that might be worthless to you.

A final point on this: Division 7A. If the vendor or related parties have taken loans from the company without proper documentation, the ATO may treat those as unfranked dividends. In a share sale, undocumented Division 7A arrangements can become your problem. Ask specifically whether there are any shareholder or related-party loans.

Check: Tax returns lodged and up to date? Outstanding ATO debts? Division 7A loans? Any tax audits in progress or assessments under review?

6. Asset sale vs share sale: how structure changes your tax exposure

The structure of the deal determines which tax liabilities follow you home.

In an asset sale, you buy the business's assets — plant, equipment, customer list, goodwill — without taking on the company's prior tax history. You generally get a step-up in the cost base of depreciable assets (you can claim depreciation on the purchase price you paid, not the vendor's original cost). Your GST and PAYG obligations start fresh from settlement.

In a share sale, you buy the company itself — and everything inside it. Prior tax debts, underpaid super, any ATO assessments underway, Division 7A issues, accumulated losses with continuity risks. The upside is the vendor may accept a lower price to access their small business CGT concessions (reducing their capital gains tax), and you may inherit useful tax losses.

There's a detailed breakdown in the asset sale vs share sale guide — but the short version for tax due diligence is: in a share sale, assume everything the vendor has done (or not done) on tax is now your responsibility until proven otherwise. Go looking for problems.

Want the full checklist?

The Due Diligence Checklist for Buying a Business in Australia has a dedicated tax section covering every item above, plus the specific documents to request and what to look for in each one. Free download.

There's also a Financial Red Flags Checklist with ATO-specific warning signs covered in the financial section.

How to actually run your tax due diligence

You need a tax adviser, not just a general accountant. The specific skills required — GST, payroll tax grouping, Division 7A, state duty — span multiple disciplines and most generalists will miss something.

The practical sequence:

Before you make an offer: check the structure (asset vs share) with your tax adviser. It affects the price you can justify.
During preliminary due diligence: request BAS history, activity statements, tax return summaries. Look for late lodgements and payment plans.
During confirmatory due diligence: request ATO portal evidence, payroll tax lodgements, super fund payment records. Have your adviser review the last three years of tax returns.
Before settlement: confirm outstanding balances (ideally via ATO written confirmation), and ensure any tax warranties and indemnities in the SPA cover the periods you've reviewed.

This connects to the broader due diligence when buying a small business process and the legal due diligence side of reviewing the SPA. None of these work in isolation.

Frequently asked questions

What is tax due diligence when buying a business? Tax due diligence is a review of a target business's tax compliance — checking that GST, payroll tax, PAYG, superannuation, and income tax obligations have been met correctly, and identifying any outstanding ATO debts or hidden tax liabilities before you commit to buying.

Do I pay GST when buying a business in Australia? Not necessarily. If the sale qualifies as a going concern under section 38-325 of the GST Act — and both parties agree to this in writing — the sale is GST-free. If the conditions aren't met, the vendor must charge 10% GST on the purchase price.

What are the red flags in financial due diligence for tax? Missing or late BAS lodgements, ATO payment plans in place, undocumented shareholder loans, inconsistencies between reported wages and PAYG remittances, and super contributions not matching payroll records.

Is stamp duty payable when buying a small business in Australia? It depends on the state and what assets are included. Most states have abolished duty on general business assets. Real property still attracts duty at standard rates. Share sales involving companies with real property often trigger landholder duty rules.

Should I use an asset sale or share sale for tax reasons? This depends on your situation. Asset sales give you a fresh start on tax history and a step-up in asset cost bases. Share sales can allow the vendor to access CGT concessions (potentially lowering their price expectations) but you inherit all prior tax liabilities. Get specific tax advice before deciding.

Tax due diligence isn't glamorous. It's the part of buying a business that most buyers deprioritise because the numbers feel abstract and the problems are hypothetical. Until they're not. Get a proper tax adviser involved early, ask for the documents above, and treat a vendor who won't provide them as someone who has something to hide.

More on the overall due diligence process in The Leveraged Worker newsletter — I cover the mistakes I've made and the ones I've watched others make, on a regular basis.