GST When Buying & Selling a Business as a Going Concern

23 April, 2020 | Bret Gower

When selling a business as a “going concern” the transaction is zero-rated for GST purposes, subject to certain requirements being met. The requirements include that both the vendor and the purchaser are registered for GST in accordance with the Goods and Services Tax Act 1985 (“the Act”) at the “time of supply” — this would normally be the settlement date of the transaction.

A further requirement under the Act is that the sale comprises supply of a taxable activity capable of being carried on as a going concern. This means, for example, that all of the assets necessary to run the business are included in the transaction.

In addition, the vendor and the purchaser must agree that the transaction is for the supply of a going concern and must record that agreement in a document. This agreement is provided for in the commonly-used Auckland District Law Society (“ADLS”) Agreement for Sale and Purchase of a Business, in paragraph 11 of the General Terms of Sale. It must also be the common intention of the parties that the business is capable of being carried on as a going concern by the purchaser.

Why is this relevant and why does it matter?

Zero-rating of the transaction means the GST component of the purchase price amounts to zero. The vendor does not have to pay GST output tax on the transaction but equally the purchaser cannot claim GST input tax. This effectively makes the transaction GST neutral from Inland Revenue’s point of view.

The policy reason for treating the sale of a going concern as zero-rated is to encourage new business owners to enter agreements to purchase without the added burden of raising more capital than they really need to buy the business.

If the zero-rating rule did not apply, and the transaction was liable for GST, the purchaser would have to pay the GST input tax at the time of settlement. The purchaser would be entitled to a credit or refund of the input tax in their first GST return but there could be a substantial delay between paying the GST and getting their GST credit or refund depending on the GST period the purchaser is registered for.

How to ensure your transaction is zero-rated

The easiest way to ensure you are properly entitled to claim the transaction is zero-rated is to work closely with one of Smith and Partners’ commercial lawyers experienced in dealing with these transactions. Ideally you should engage with us before you negotiate an agreement and definitely prior to signing the agreement for sale and purchase.

We will ensure the entity being used to purchase the business, be it a person a trust or a company, is registered or is capable of being registered for GST at the date of settlement (what is called “supply” under the Act). We can also assist with drafting of the necessary clauses to ensure the purchaser’s and vendor’s intention are clearly recorded — in addition to the standard clause in the ADLS document recording the agreement.

For assistance with buying a business or selling a business, talk to expert business lawyer, Bret Gower today by phone at 09 837 6893 or email bret.gower@smithpartners.co.nz