A mechanic sought to purchase an automotive business advertised for sale. After completing their due diligence, they made an offer to the vendor but required clarification on whether GST would be payable in addition to the purchase price. The standard Agreement for Sale and Purchase of Business states that the purchase price is plus GST (if any).

Many businesses will be sold as a ‘going concern’. Selling a business as a going concern means selling those assets of the business that the purchaser would require to run the business. These assets would usually include the:

  • Fixtures;
  • Fittings;
  • Premises (real property or transfer of lease);
  • Goodwill; and
  • Stock on hand.

The primary benefit of selling or purchasing a business as a going concern is that the transaction may be zero-rated from a GST perspective. Zero-rating is where the GST portion of the contract price is set to zero. Practically, this means that neither party can claim GST on the transaction; effectively neutralizing the transaction from a GST perspective.

The criteria to zero-rate a business sale are that:

  • Both parties (vendor and purchaser) must be registered for GST at the ‘time of supply’ (usually the Settlement Date);
  • The sale must comprise of the whole or stand-alone part of a taxable activity;
  • The sale must comprise of all goods and services which are deemed necessary for the continued operation of the activity;
  • Both parties must agree to the status of a ‘going concern’ sale, and record this in the sale and purchase agreement;
  • Both parties must intend that the business activity is capable of being carried on as a ‘going concern’ by the purchaser; and
  • The business must be a going concern at the time of supply (Settlement Date) and carried on up to the time of the transfer to the purchaser.

When zero-rating doesn’t apply

If any of the above criteria are not met, the transaction would not be zero-rated for GST. The purchaser would then be required to pay the GST portion of the sale price at the time of settlement, which could be problematic if you did not budget for it. If the purchaser is GST registered, they would be entitled to a refund of this GST when submitting a GST return 

Given the number of criteria to meet to ensure a business sale is zero-rated for GST, it is important to seek legal and accounting advice to understand the correct position and to not be met with an unexpected cost on settlement.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Rachel Collins and Raiyan Azmi