GST On Sale of Goodwill

James Murphy Tax

A query relating to GST on sale of goodwill…

Client A has a business of IT/Software consulting/licence sales…and currently owes software Supplier B $180,000 for licences sold to customers.

Supplier B has decided to cease providing licences to Client A and has offered $180,000 in compensation…and suggested that Client A keep the $180,000 rather than pay Supplier B.

Is the $180,000 “compensation” subject to GST?

My thoughts are:

Had Client A remitted the $180,000 to Supplier B, they would have claimed a GST credit of $16,363.

Conversely, if the $180,000 compensation is subject to GST, this would be offset against the $16,363 credit to be claimed on the amount payable to Supplier B…Thus, the transaction is potentially GST neutral.

Supplier B has also offered a further compensation amount of USD 13,000 (approx AUD 18,140)…which I assume may be subject to GST of $1,649.

In summary, they’ve agreed to pay my client USD 134k…but are aware of an amount of USD 102k owing by my client for outstanding invoices…which they are not going to chase in lieu of part payment of the exit fee.  In addition, there’s a further USD 18k that they’re going to “forgive”….and payment of USD 13k to my client…in total = USD 134k as compensation for terminating their contract.


Company B is simply not going to enforce payment of the debt.

It is an act of commercial goodwill – not a sale of goodwill.

You can’t claim input tax credits on transactions that don’t take place.

The same applies to the USD 13k.   

The precise commercial relationship between Company A and Company B has not been properly explained.

This goes beyond the nature of our advice on tax technical matters.

When the term “pro forma invoices” is used.. it is concerning as the transactions may be contrived.