Property problems: Zero rating sale avoids having to pay GST

Q: We bought a commercial property a few years ago and converted it into a student hostel. When we bought the property, we claimed a GST refund. Now we want to sell either the whole business as a going concern, or just the property. As I understand it, if we sell the property we would have to pay GST. However, if we sell the business as a going concern, we would not have to pay GST. Can you advise?

A: Commercial, not GST, considerations will determine whether you undertake a business or property sale, or potentially both. If possible, sale of the business and/or property as a going concern, zero-rated for GST purposes, may be preferable.

We assume that you (or any structure through which you operate) are GST registered.

If you sell any aspect of your business, such as real estate or buildings (or any right to use those things), you will need to charge and account for GST at 12.5 per cent on the sale price.

If you sell your business as a package, you will need to charge and account for GST either at 12.5 per cent or, if the sale is of a going concern, at 0 per per cent (i.e. "zero-rating").

If your business is owned by a company, you might also be able to sell it by selling the shares in that company. The sale of shares generally falls outside the GST net.

Zero-rating is primarily attractive to the buyer, although it might affect your sale price. If the sale is not zero-rated, you must charge and account for GST at 12.5 per cent on the sale price. For the buyer, this means:

* the GST amount is a net cost, if the buyer cannot claim a GST credit for the amount; or

* even if a credit can be claimed, funding the GST amount up front may have cashflow implications.

Zero-rating will apply only if:

* you and the buyer are GST registered;

* the business sold is a taxable activity;

* the business sold is a going concern at the time of supply;

* you and the buyer agree, in writing, that the sale is of a going concern; and

* both of you intend that the buyer will be able to operate the business as a going concern.

Running a student hostel, and leasing real estate to commercial tenants, can be taxable activities.

The business sold will be a going concern if:

* it is capable of separate operation;

* all things necessary for its continued operation pass to the buyer; and

* you will carry it on until it is transferred to the buyer.

Things necessary for continued operation of your hostel business may include the property/building (or the right to use those things), key contracts, employees, trading stock, intellectual property, and goodwill. In relation to leasing real estate to commercial tenants, the continuing lease is generally all that is necessary.

In the sale documentation, from your perspective:

* the purchase price should be plus GST (if any); and

* you and the buyer must expressly agree that the sale is of a going concern;

* you may expressly record your mutual intent that the buyer will be able to operate the business as a going concern.

Unless your sale is particularly complicated, it may be convenient for you to base your documentation on standard contracts.

For example, Auckland District Law Society business and real estate sale and purchase agreements include standard GST zero-rating provisions.

However, if you are selling real estate as part of a business sale, both agreements may be required (each being conditional on the other) and with appropriate GST zero-rating provisions.