11 October 2012
Zero-Rating Of GST when Buying
or Selling a Business
When buying or selling a property, one of the many issues you must consider is GST. In some instances it may
be possible for a ‘zero-rating’ to apply. When a transaction is zero-rated, GST is taxed at the rate of 0% rather
than the standard rate of 15%.
Vendor and Pu rch aser pers pectives
Zero-rating is advantageous to a purchaser as they do not have to finance the GST component of the purchase
price. While the purchaser can claim the GST input tax back from the IRD if it is payable, this may take several
months resulting in finance costs (for instance, interest and administration costs).
From a vendor’s perspective, it is important to know whether GST is chargeable at 0% or 15%. If the parties
treat the transaction as zero-rated and the IRD later determines that it should have been charged at 15% then
the IRD will look to the vendor to return 15% of the purchase price as output tax, even though the vendor has
not collected this amount from the purchaser.
In this situation, if the sale and purchase agreement states that GST is “plus GST (if any)” then the Vendor may
be in a position to recover the GST payable from the purchaser, but if the purchaser is unable to pay this
amount, or is not able to pay it for some time, the vendor generally still has an immediate obligation to return
the GST amount to the IRD. The IRD may pursue the purchaser directly if the transaction was meant to be a
compulsory zero-rating (“CZR”) transaction, as described further below.
If the agreement states that GST is “inclusive of GST” then the vendor is not able to call on the purchaser for
GST but will still have a liability to the IRD. It is for this reason that we generally recommend that vendors of a
business ensure any agreements they sign are on a “plus GST (if any)” basis.
The two most common zero-rating methods that apply to the sale and purchase of a business are ‘going
concern’ transactions and ‘compulsory zero-rating’ (CZR) transactions.
This article is provided for general information purposes only and not as legal advice.
Going Concern
Simply defined, a ‘going concern’ is a business that operates right up to the date of settlement. The Goods and
Services Tax Act 1985 (the “GST Act”) states that a going concern exists where:
“…all of the goods and services that are necessary for the continued operation of that taxable
activity or that part of a taxable activity are supplied to the recipient; and… the supplier carries
on, or is to carry on, that taxable activity or that part of a taxable activity up to the time of its
transfer to the recipient”
An example of a going concern is where a purchaser of a petrol station would expect the vendor to run the
business as usual up until the day of settlement, and the vendor would take over on settlement day and
continue trading. In this situation, most customers would not even realise a change of ownership had
occurred.
For there to be a supply of the going concern, the following must apply (Section 11(a)(m) GST Act):
1. The supplier and purchaser must both be GST registered; and
2. The parties intend for the sale to be of a going concern; and
3. The sale and purchase agreement states that the supply is of a going concern; and
4. The business being sold must be a going concern at the time of supply (which is normally the settlement
date).
If all of the above requirements are satisfied, then the transaction may be zero-rated.
Compulsory Zero-R ating (CZR)
CZR is a relatively new type of zero-rating and applies in the following situation (Section 11(1)(mb) GST Act):
1. The transaction includes land; and
2. Both parties are GST registered; and
3. The purchaser intends on using the goods to make taxable supplies; and
4. The land being purchased will not be the principal place of residence of the purchaser.
Given the above definition, it appears that CZR has a wider application than the going concern rules. The going
concern rules specifically relate to the sale of a business, whereas the CZR rules can also relate to the general
sale of land, or business assets including land, by a GST registered entity.
Under CZR, the vendor relies on a statement from the purchaser (usually in the sale agreement) that the
purchaser will be GST registered and that the CZR rules will apply at the time of supply (usually the date of
settlement). If the vendor relies on that statement, and it turns out the CZR rules do not apply (for example,
the purchaser was not GST registered), then the IRD may pursue the purchaser directly, not the vendor.
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This article is provided for general information purposes only and not as legal advice.
Going Concern or CZR?
The type of zero-rating that may apply (if at all) will depend on the particular circumstances of each
transaction. For standard trading businesses (for example, retailer shops) it may be that the going concern
rules apply. However, for the sale of land by a developer, it may be that the CZR rules apply.
In some cases, such as the sale of a dairy farm, the land on which the farming business is run will generally be
CZR, but the homestead may need to be separated out (as the purchaser may live in it) and treated as GST
exempt.
If the going concern rules or CZR rules cannot be satisfied or do not apply, then the vendor will be required to
return 15% of the purchase price to the IRD, and should charge the purchaser for that GST in the sale
agreement. The purchaser (assuming they’re GST registered) will be able to claim a GST refund from the IRD.
Our commercial specialists have a wide range of experience and are the trusted advisor to many leading
businesses both locally and nationally. If you are looking at buying or selling a business please feel free to
contact us at the earliest opportunity to discuss all aspects of the transaction, including GST.
Written by
S t u B a r r a c l o u gh
Lawyer
DDI: (06) 768-3728
Email: [email protected]
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This article is provided for general information purposes only and not as legal advice.