Business brokers - beware the time of supply rules for GST [Apr 2009]

Dealing with GST in sale transactions for most business brokers is commonplace.  Most business sales are going concerns and as a consequence those vendors attempt to sell properties plus GST but on the basis that the transaction will be zero rated.  Generally, business brokers sign up agreements, even those that are to be zero rated, showing the price as “plus GST”.  Importantly, that a transaction is zero rated should not be considered as automatic.

Rules of zero rating

The parties must comply with the zero rating rules.  One very important feature of the rules is that both the vendor and purchaser must be registered for GST.  For the vendor there is never any question about that.  Purchasers, especially purchasers buying a business for the first occasion may not be registered for GST.  The Business Form 3rd edition requires the purchaser to warrant that they are registered for GST and that they prove “by the date of taxable supply” that they are registered for GST.  This is often where the problems occur.  To comply with this aspect of the zero rating rules, the purchaser must be registered for GST by the time of supply. This requires a knowledge of when time of supply occurs in unconditional and conditional contracts.

Time of supply

It is very important for business brokers to have an understanding of the time of supply rules.  Because most business contracts are conditional contracts it is probably best to focus on the time of supply rules for conditional contracts.

Under Section 9 (1) of the GST Act, time of supply is triggered for a conditional contract when two things occur.

0. All conditions are met and

0. An invoice is issued by the supplier (vendor) or the suppliers agent or ….. funds are paid for the benefit of the vendor.

In practice this means that time of supply occurs when the contract becomes unconditional, the agent raises an invoice for the commission, takes the commission from the deposit and pays out the balance to the vendor.  This is a very common situation and brokers must appreciate that they are part of the triggering of time of supply for conditional contracts.

If a broker is selling a business to a purchaser who is not registered for GST at the time of entering the contract, the purchaser needs to be advised to take both accounting and legal advice about getting registered for GST. This needs to be done in a timely manner prior to time of supply occurring.  In other words, prior to the contract becoming unconditional.  The alternative is that they may face having to pay GST on top of the purchase price – an extra 12.5%!!!

Purchase by another entity

For those purchasers who choose to nominate another entity (normally a company) to purchase the business this adds another step in the process and another possible chance of a slip up.  In one case where a purchaser failed to get itself registered by time of supply (Mortre Holdings Limited v. Starrenburg) the court found that the purchaser was liable for GST.  Recent articles in the tax journals have suggested that this introduces an additional contract between a purchaser and nominee which may require a separate GST invoice.  Because this issue is somewhat uncertain, the safest and best approach for purchasers and for brokers is to recommend to purchasers that they ensure that they have made the nominations well before time of supply occurring. Also that the new entity (company) is registered for GST well before the time of supply occurs.

It is all a matter of knowing what the time of supply rules are and appreciate the importance of the timing of registration for GST either by the purchaser or the purchaser’s nominee.

For more inromation contact Tim Jones at .(JavaScript must be enabled to view this email address) or Anthea Coombes at .(JavaScript must be enabled to view this email address)

The contents of this newsletter are of a general nature only. While the information is believed to be correct no responsibility is accepted for its accuracy. Readers are advised to establish the applicability of information in relation to specific circumstances and not to rely solely on the text of this newsletter.

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