understand gst on purchase and sale of business

[HattrickNZ]

I am trying to understand the process involved in buying and selling a business and whether it is worth being gst registered.
I am trying to understand it best from the buyer and seller and then from from the buyers perspective when they try and sell again in future.

To help me explain/understand this I have 4 simple different scenarios:

• 1 - Registered Company A Buys Registered Company B for 600K, zero-rated and no gst is exchanged, then if A sells (sometime Later) for 1M to Registered Company C for 1M, zero rated so profit is 400K for company A??
• 1A - Registered Company A Buys Registered Company B for 600K, zero-rated and no gst is exchanged, then if A sells (sometime Later) for 1M to Non Registered Company C for 1M, Does C pay 1M+gst and A can claim back gst??
• 2 - Non Registered Company A Buys Registered Company B for 600K, plus gst of 15% 690K, then if A sells (sometime Later) for 1M to Registered Company C for 1M, zero rated? so profit is 310K??
• 2A - Non Registered Company A Buys Registered Company B for 600K, plus gst of 15% 690K, then if A sells (sometime Later) for 1M Non Registered Company C for 1M, zero rated? so profit is 310K??

Which is the preference for the seller (registerd company B) ? receive 600K + GST from NRComp? Or 600K from RComp? Or does it make a difference for the seller?

Some Qs/observations on the different options:

• 1 - seems pretty straight forward as everything is kept in the gst net, but it seems to get complicated when it comes outside the gst net?
• 1A - does it make a difference to A when it goes to resell to non registerd company C , compared with option1
• 2 - the theory here is that compA pays the gst up front and then when it goes to sell it does not include gst so the profit is entirely compAs.
• 2A - same as option2 but selling to a NRCompC, what is the difference in the outcome for NRCompA with option 2

[Anthonyacat]

This is quite a complex question. I wouldn't usually answer in such detail, but I'm having a slow afternoon.

The short answer is that yes, it is worth being GST registered when buying and selling businesses. The long answer? Well...

To start with, there's a difference between buying a company, and buying a business. Important to be clear which you're wanting to buy. If you're buying Company B (ie, purchasing all the shares from the current shareholders) there is no GST to account for at all. No GST on financial instruments. So we'll assume you're wanting to buy a business from Company B.

Your understanding of GST on the purchase of a business is a little off. The 'business' is not a Good or Service, and thus has no GST content. When you buy a business, you purchase all of its assets, take on all of its liabilities, and the difference between that net value and the price paid is Goodwill. There is no GST on Goodwill.

So for example, your $600k purchase could be:

Assets (Building, Machinery, Inventory): $1M
Loan secured over machinery: $500k
Net asset value: $500k
Goodwill: $100k

Because it's a going concern, there's GST at 0%. But if it was sold to a non-registered buyer (why? because they got some really bad advice) it'd be $600k + GST. GST is $150k (15% of the Assets, 0% of the Loan, 0% of the Goodwill) and total price is $750k, not $690k.

Alternatively, it could be:
Assets: $300k
Goodwill: $300k

And GST content would only be $45k (15% of 300k).

Another significant point is that at any point during the process, if the business is expected to generate a turnover of over $60k, the owner of that business is obliged to register for GST, rendering this entire conversation moot.

But ignoring all the implications above, and answering your question assuming there is no Goodwill, no loans, and the 'business' is made up entirely of equipment, which for some reason go up in value over time (as you can see, not very likely - maybe during hyperinflation?). Moving on...

Option 1: The simplest, and makes the most sense. This is the option everyone would use in practice. There is absolutely no sense in buying a going concern business while not GST-registered.

Option 1A: The sale for $1M would be for $1.15M inclusive. C pays the full value and can't claim the GST back (because they're not registered). A receives the full value, and has to pay 150k to IRD. Total "Profit" on sale of business is still $400k.

Option 2: A buys for $690k, and doesn't claim GST back (because not registered). They could then sell for $1M to C, but this would not be 'zero rated', it would be 'GST Inclusive'. C would be able to claim GST back (GST on second-hand goods), making their net purchase price around $900k. A's "Profit" would be only $310k as you say.
Alternatively, if the assets are 'worth' $1M net of GST, A could sell to C for $1.15M, which C would be happy to pay because they get the GST back. Then A's "Profit" is actually $460k.

Option 2A: Yep, what you've said is correct.

I hope that clears things up? Quite a mission of a question.

That'll be $100, thanks. To whom do I send the invoice?

[Rosco]

As this is propertytalk, shouldn't you be keeping it to property questions? Or at least put in another section!

Ross

[HattrickNZ]

great explaination

Firstly thank you very much.

The main reason I did ask it was that, in relation to option2, if compA(not gst registered) bought compB(gst registered) for 600K+GST=690K then when compA goes to sell in future it will somehow not have to pass on the gst from the future sale price of 1M to compC(gst registered).
(600K+GST =690K - lets just say that Assets=600K, Goodwill=0 for simplicity)

And I was more interested in the reselling part and increasing the profit from 400K(1M-600K,optionA), if you did not have to pass on the gst. And like you say this can be achieved if compA sells to a compC(gst registerd) with assets 'worth' $1M net of GST, A could sell to C for $1.15M, which C would be happy to pay because they get the GST back. Then A's "Profit" is actually $460k. (1.15M-690K)

hmmm. in this example pay 90K gst now as a nonRegComp to receive 60K extra profit in future. The numbers would have to be better for this to make sense?

I take it that it is the same re option2A A(non registered) could sell to C(non registered) and there would be no gst exchanged or claimed back so profit would be the same for A $460k. (1.15M-690K) but C would not be registered so would not be able to claim it back so might not want to spend that much, so it could end up being 310K(1M-690K).


This is interesting and I did not know. but you could lower or raise the valuation of the assets to consequently lower or raise the gst paid, if you were paying gst for the reason I outlined above.

Your understanding of GST on the purchase of a business is a little off. The 'business' is not a Good or Service, and thus has no GST content. When you buy a business, you purchase all of its assets, take on all of its liabilities, and the difference between that net value and the price paid is Goodwill. There is no GST on Goodwill.

I am aware of this, but if this was done it would be with the anticipation that turnover/revenue would be <60K.

Another significant point is that at any point during the process, if the business is expected to generate a turnover of over $60k, the owner of that business is obliged to register for GST, rendering this entire conversation moot.

Again thank you very much, I hope at least if it was not crystal clear in you head it is now, and if it already was it is in mine too.

[Anthonyacat]

The main problem here is that very few business purchases and sales are comprised completely of tangible, GST-able assets. THe benefit of your little arbitrage opportunity drops enormously as soon as Goodwill is added into the equation. And Goodwill is the only bit of the business that is truly likely to appreciate over time; the assets you buy will probably go down in value.

Another thing to consider, while I've never seen it applied to a business, is that the 'purchase with the intent to sell' taxability laws may apply. Though I have to admit I wouldn't know exactly how to apply them, and would need to request advice from an external tax expert.

I wonder if the big-time business flippers pay tax on their gains like this. Should ask Graeme Hart if hepaid tax on the gains from selling off the various parts of Carterholt...

[Wayne]

Anthonyacat - what would you usually charge for the advice you just wrote?

[Anthonyacat]

I just wrote a nice detailed response, and my browser crashed so I lost it all. I'll try to summarise quickly, but today is a lot busier than I was the day I had time to write that.

In short, I joked about $100 at the end of the post, but it's probably relatively accurate for a client who provides me with ongoing business. One-off consultancy would have to be a bit higher. I either agree fees up front (not common so far, but hopefully increasing over time) or charge my time hourly. I dont recall exactly how long that took me, but most of my work is charged out at $45-70 per hour. I'd then review whether the fee looks 'acceptable value', not too high, not grossly too low, and adjust if necessary. More again if it needs to be all pretty and official for a bank or capital-backer.

I'm aiming to be a low-cost provider significantly below competition, but honestly at the moment I'm probably grossly undervaluing my time, so my rates will probably rise as I get significantly more work. Will always remain a cheaper option though.

Why do you ask? Are you looking for a new accountant? I'm not actively looking for new clients at the moment as I'm in London for the next year or so, but I'm not actively turning them away either. PM me and we can talk.