Buying a going concern?

[Peter1]

Hi there.
We want to buy a bed and breakfast property.
The vendor doesnt live in the house but rents it out to paying customers on a per night basis.
The property also has some free standing residential flats on the same land which are let out as residential tenancies.
My understanding is he charges GST on the B and B but not on the rent for the flats.
I intend to buy the property, live in the house and run it as a B and B or Backpackers charging guests on a per night basis.
My aim is to also change the use of the flats from residential tenancy to motel units.
The vendor is advertsing the sale as plus GST.
I have a GST registered company.
Do I buy this property as GST inclusive or Plus GST?
Also would IRD classify this as a going concern?
Any advise would be appreciated.

[Orkibi]

My aim is to also change the use of the flats from residential tenancy to motel units.

First check that this will be permitted with the local council.

This is a questions that your accountant should look at.

But over all if you intend to buy the property/ Business as a going concern the price should be Plus GST, BUT you have to have this clause in:

17.
The property is sold as a going concern; both parties agree that the transaction will be zero rated .


And for the property be acceptable as going concern you require to do the following:

1. Bee GST reg entity prior to settlement
2. Check out if there is a lease in place from the vendor to his company who rent the property out as a business.

In general with commercial property the Vendor/Seller need to be different from the tenant for the property to be able to be sold as going concern.

** Please note, I'm not a tax expert and I advice you to seek professional advice.

Good luck.

[Winston001]

Whenever I come across these odd-ball or hybrid contracts I firmly advise the Vendor to require the GST to be paid by the Purchaser. It can be claimed back after the sale is completed or even before, on an invoice basis.

The Vendor has to apportion the GST elements of the sale but his accountant should already be doing that. Apportionment of GST on part of a sale is common.

Better still, why don't you negotiate a GST inclusive price and decide what you want to do later.

[Perry]

I can't understand all the fuss.
If bought as a going concern,
it's zero-rated, anyway - right?
.

[Orkibi]

I can't understand all the fuss.
If bought as a going concern,
it's zero-rated, anyway - right?

YES - But the sale/Vendor and purchaser / Transaction need to qualify for this by IRD.

[Perry]

But only meet the IRD's criteria for sale as
a going concern. No more than that. Viz.

Sale of a Going Concern

To be a going concern, the sale must meet the following criteria:

* It must be the supply of the whole or stand-alone part of a taxable activity, from one registered person to another.
* It must be the supply of all the goods and services necessary for the continued operation of the activity.
* Both parties must agree in writing that there is a supply of a going concern.
* Both parties must intend that the activity is capable of being carried on as a going concern by the purchaser.
* The business must be a going concern at the time of supply and carried on up to the time of the transfer to the purchaser.

Such a sale by one registered person to another registered person is zero-rated (GST content is nil). Also, when only part of a taxable activity (able to operate separately) is sold as a going concern, the sale is zero-rated.

[Winston001]

Originally Posted by Perry

But only meet the IRD's criteria for sale as a going concern. No more than that.

Appreciate your innocent view Perry but unfortunately in the real world, things are different. By that I mean no disrespect - GST and Going Concerns look simple on the surface. This is a trap for real estate agents and optimistic buyers.

Commonly buyers like to buy a going concern because they think that saves them money. An illusion. Sellers like to do it to encourage the buyer and possibly squeeze the price up a bit - which can work.

For most businesses there isn't a problem. But there are those odd hybrid sales where there are no fixed premises, or part of the property has personal use, or only some of the business assets are included.

Later - much later, IRD investigate and assess GST should have been charged and paid - and thus substantial penalties apply. Technically this is all covered by the contract but......the vendor has a heart attack, the purchaser has no money having spent everything he can on this wonderful new opportunity which one day....soon surely, it will all come right.....

If you sold a farm with 100 dairy cows but kept the Fonterra shares - is that a going concern? How about a shop where the plant belonged to your mother-in-law so wasn't included - but the shelves and cans of beans etc are? Or a contract you had to supply school meals from the shop was personal to you and not part of the sale?

Such questions can be cheaply avoided by charging GST on the sale. No risk to either party.