Tax Due Diligence Checklist for Buying a Business in Australia (Free Download)

Tax Due Diligence Checklist for Buying a Business in Australia

How to use this checklist: Work through each phase with your accountant and solicitor before signing the Sale and Purchase Agreement. Items marked ⚠️ are high-priority — failure to verify these has caused real deal problems. Tick each item when verified, not when the documentation is received. Receiving a document and actually reading it are different things (as many buyers discover too late).

---

Phase 1: Income Tax Returns and Assessment

• ⚠️ Obtain last five years of income tax returns (company, trust, or individual — depending on entity type)
• Verify that all returns have been lodged with the ATO (check lodgement compliance on ATO portal summary)
• Compare reported taxable income to normalised EBITDA from your valuation — significant divergence warrants explanation
• Review ATO assessment notices for the last five years — look for amended assessments or outstanding objections
• Check for any ATO audit correspondence or review activity in the last three years
• ⚠️ Confirm no outstanding income tax debts, payment plans, or deferred liabilities on ATO account
• Review whether the business has claimed any tax losses — understand what they are and whether they survive the acquisition (they generally don't in an asset sale)
• Check for any private rulings obtained from the ATO that affect the business's tax position
• If it's a share sale: review the full group tax history, including any related entities

---

Phase 2: GST and Business Activity Statements (BAS)

• ⚠️ Obtain last five years of BAS lodgements — monthly or quarterly depending on the business
• Verify all BAS have been lodged on time (late lodgements can indicate cash flow stress or deliberate avoidance)
• Compare GST reported on BAS to revenue reported in the P&L — material discrepancies indicate either unrecorded income or BAS errors
• Confirm all GST collected from customers has been remitted to the ATO
• Review any GST input tax credit (ITC) claims that appear unusually large relative to the business's cost structure
• ⚠️ Check for any ATO GST audit or compliance review correspondence
• Confirm the business is registered for GST and the registration date aligns with when they exceeded the $75,000 threshold
• For asset sales: understand the GST treatment of the sale itself — most going concern acquisitions can be GST-free under s38-325 of the GST Act, but the conditions must be met
• Check whether the business has any outstanding GST debts or ATO payment arrangements relating to GST

---

Phase 3: ATO Debts and Disputes

• ⚠️ Obtain a current ATO account balance (request a Creditors' Rights Notice or ask the vendor's accountant for an up-to-date portal summary)
• Confirm no running balance account debt (RBA debt) on the ATO account
• ⚠️ Check whether the business is on an ATO payment plan — a payment plan indicates prior inability to pay on time
• Confirm no ATO Director Penalty Notices (DPN) issued against directors (critical for share sales)
• Review any ATO garnishee notices — if the ATO has been directly debiting from the business bank account, that's a significant flag
• Check the ASIC register for ATO-registered charges against the business (ATO can register a charge when debt exceeds a threshold)
• Confirm no ATO-initiated insolvency proceedings or winding up applications
• Review any ATO objection or dispute history — understand the basis and outcome of any disputes

---

Phase 4: PAYG Withholding and Superannuation Guarantee

• ⚠️ Verify PAYG withholding has been correctly calculated, withheld, and remitted for all staff for the last five years
• Cross-check PAYG withholding remitted to ATO against total wages paid (should be consistent with tax rates for those wage levels)
• ⚠️ Obtain a superannuation guarantee (SG) compliance history — ask for evidence of on-time super lodgements via the ATO Small Business Superannuation Clearing House or fund statements
• Check for any Superannuation Guarantee Charge (SGC) assessments — SGC arises when super is paid late and is more expensive than standard SG (includes an interest component and administration fee)
• ⚠️ Verify super has been paid for all eligible employees, including any contractors who may be deemed employees under the SG legislation
• Check that super has been paid at the correct rate for each year (rate has increased progressively — confirm the business tracked the annual changes)
• Confirm all super payments were made by the quarterly due dates, not just by year-end
• Review whether any subcontractors should have been treated as employees for SG purposes — trades businesses frequently get this wrong

---

Phase 5: State-Based Taxes

Payroll Tax

• Determine whether the business is liable for payroll tax in its state/territory — thresholds vary ($700K–$1.3M+ in wages depending on jurisdiction)
• ⚠️ If liable: confirm all payroll tax returns have been lodged and payments made — contact state revenue office if verification is needed
• Check for any payroll tax audit correspondence or outstanding assessments
• ⚠️ Verify the treatment of contractor payments — state revenue offices are increasingly scrutinising contractor arrangements in trades businesses; some contractors are captured by payroll tax as "relevant contracts"
• Review whether the business has claimed the payroll tax threshold correctly (businesses with related entities may have their threshold reduced or eliminated)

Land Tax

• If the business owns real property: confirm land tax obligations have been met with the relevant state revenue office
• Check whether any land tax exemptions (e.g., primary production, home) have been applied correctly
• For asset sales involving real property: clarify who is responsible for the current year's land tax at settlement

Stamp Duty

• ⚠️ Understand the stamp duty implications of the proposed deal structure — in most Australian states, asset sales attract duty on certain assets (equipment, goodwill, business-use land); share sales attract duty on the shares themselves
• Obtain a stamp duty estimate from your solicitor before signing — in some states duty can be material (Victoria's PPT duty on business assets above $2M, WA's general dutiable property rules, etc.)
• Confirm whether any stamp duty concessions apply (e.g., small business concessions in some jurisdictions)
• Check if any past transfers of assets to or from the business triggered duty that wasn't paid

---

Phase 6: Structural Tax Issues

Division 7A (Loans from Companies)

• ⚠️ If the business is structured as a company: review whether any loans, payments, or forgiven debts to shareholders or associates exist — these may be Division 7A loans with ATO implications
• Confirm all Division 7A loans have compliant loan agreements and have been repaid or properly treated
• Review whether any unpaid present entitlements (UPEs) exist owed to corporate beneficiaries — these can create ongoing Division 7A compliance obligations

Trust Distributions

• If the business operates through a trust: review the last five years of trust distribution resolutions and minutes
• Confirm distributions were resolved before 30 June each year (late resolutions create trustee tax issues)
• Check whether any distributions were made to corporate beneficiaries and whether UPEs arose
• ⚠️ Review whether any trust distribution strategies may be challenged under section 100A of ITAA 1997 — the ATO has been active on this

Related Party Transactions

• ⚠️ Identify any transactions between the business and related parties (the owner, family members, associated entities) — review for arm's length pricing
• Check for owner-occupied property leased back to the business: confirm rental rates are commercial and the arrangement is properly documented
• Review whether any management fees, consulting fees, or service charges paid to related parties are commercially defensible

---

Phase 7: Asset vs Share Sale Tax Analysis

• Confirm the proposed deal structure (asset sale vs share sale) and understand the tax consequences for both buyer and seller
• ⚠️ For share sales: understand that you inherit all historical tax liabilities — the Phase 1–6 items above are even more critical in a share sale
• For asset sales: confirm how the purchase price is allocated across asset classes (plant and equipment, stock, goodwill, restrictive covenant) — this affects the seller's tax outcome and your depreciation position
• Understand whether the seller is eligible for the small business CGT concessions (50% active asset reduction, 15-year exemption, retirement exemption) — this can affect their willingness to accept certain deal structures
• ⚠️ Confirm that the tax-free treatment of goodwill in the seller's hands doesn't affect the price allocation in ways that harm your depreciation claim
• Review transfer pricing of assets in an asset sale — ensure plant and equipment values are supportable (overpaying on equipment to get immediate deductions is an ATO audit trigger)
• For the buyer: understand which assets are immediately deductible (consumable items, items under the instant asset write-off threshold) vs which must be depreciated
• Confirm the GST going concern treatment applies if claiming the exemption — both parties must be registered for GST, the sale must be a going concern, and specific documentation is required

---

Post-Checklist Actions

• Engage a tax accountant with business acquisition experience — not just a compliance accountant — to review your findings
• If material issues are found: price adjustment, indemnity clause in the SPA, or escrow arrangement are your tools
• Include a seller tax warranty in the SPA covering the period up to settlement — your solicitor should draft this
• ⚠️ Check the SPA's indemnity clause covers tax claims arising from pre-settlement periods — many standard contracts are vague on this point
• Consider a retention amount (held in trust for 12–24 months post-settlement) if tax risk is material but not deal-breaking
• Register with the ATO as the new entity owner immediately after settlement — don't let the seller's obligations merge with yours

---

For more on the full due diligence process, see the comprehensive due diligence checklist and the Financial Red Flags Checklist. The blog post on tax due diligence when buying a business covers the why behind each area.

This checklist is general information only. Engage a qualified tax accountant and solicitor before completing any business acquisition. ATO rules and state-based tax thresholds change regularly — verify current rates with your adviser.