04 Jun 2013
Words Tim Admin

Terms of the Contract

We explored the pitfalls of pre contractual negotiations in last months edition. We will examine the terms of a contract and issues arising from those terms over the next few editions. A starting point is Goods and Services tax. The "supply of a going concern" is deemed to be GST free under the A New Tax System (Goods and Services Tax )Act 1999 ("the Act"). A "Supply of a Going Concern" is defined as: (a) a supply made for consideration; (b) where the purchaser is registered for GST purposes; (c) where the vendor and the purchaser have agreed in writing (i.e. in the contract) that the supply is a going concern; (d) the vendor supplies to the purchaser all of the things that are necessary for the continued operation of an enterprise; and (e) the vendor carries on the enterprise up to and including the day of supply (i.e. settlement). In order to ensure that the sale of a motel business and its land and buildings are a GST free "supply of a going concern" there are numerous aspects that should be taken into consideration. It is common to have a business structure in which one entity owns the land and buildings and a separate legal entity operates the business from those premises under a lease. The sale of the business is an enterprise which includes the sale of the plant and equipment and goodwill together with forward bookings. The enterprise must be capable of continued operation by the purchaser so that it is a supply of a going concern. Provided that the vendor assigns the lease of the premises to the purchaser it will be making a GST free supply of a going concern. Consider the same business structure where the land and buildings are sold. It is the activity of leasing the property that is considered the enterprise. Again this enterprise must be capable of continued operation by the purchaser so that it is a supply of a going concern. Provided that the property is supplied with the lease of the business in tact it will be making a GST free supply of a going concern. In the event that the business and the motel are owned by one entity the motel must be sold subject to a lease for the business in order to be a supply of a going concern. The lease must be in existence for at least one day. The sale of the business can only occur on the following day. Where a sale is subject to GST there are a number of adverse consequences particularly for the purchaser. The vendor is able to pass any GST on to the purchaser. The purchaser has to pay stamp duty on the GST as well as the purchase price. In any event most contracts will require that a purchaser be registered for the purposes of GST. If a purchaser is not registered for GST purposes they are not able to obtain a refund ( input tax credit) or acquire a GST free supply of a going concern. Clearly there is a minefield of issues raised by the GST and we strongly recommend that you seek professional advice.