Going-concern sale of a leased office building
Kauri Commercial Ltd sells its Wellington office building, associated fit-out, plant and existing leases to Tui Holdings Ltd for $4,600,000 plus GST (if any). The building is a commercial office leased to three unrelated tenants. The sale agreement records that the supply is a going concern, both parties are GST-registered, and Tui intends to continue the leasing activity. Kauri also sells separate unused furniture stock, not used in the building, for $23,000 plus GST. Settlement is 1 June 2025. Tui pays a $50,000 deposit on signing on 15 April 2025. Kauri claimed input tax on the building and fit-out when purchased. Tui has not yet confirmed whether its GST registration will remain active at settlement because it is restructuring. The agreement does not separately allocate the price between building, plant and leases.
1. Is Kauri entitled to zero-rate the building, fit-out, plant and leases? Explain the conditions and the main risk.
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Zero-rating is available only if the supply is genuinely a supply of a going concern. The key conditions are that both parties are GST-registered, the agreement is in writing and records that the supply is a going concern, the purchaser intends to carry on the same taxable activity, and the assets supplied are necessary for that activity. On the facts, the office is leased to tenants and Tui intends to continue leasing, so the building, fit-out, plant and leases can be treated as a going-concern supply. The risk is Tui's GST registration status at settlement. If Tui is not registered on 1 June 2025, the zero-rating condition fails. Kauri would then have to charge GST on the $4,600,000 consideration, creating output tax of $690,000. Kauri should obtain a written warranty and indemnity from Tui and confirm Tui's registration before settlement.
2. What GST should Kauri charge on the furniture stock and on the $50,000 deposit?
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The furniture stock is not part of the going-concern supply because it is unused stock not used in the building activity. It is a separate standard-rated supply. Kauri should charge GST of $23,000 × 15% = $3,450. The $50,000 deposit is not a separate supply. It is part of the consideration for the going-concern supply, so it does not change the GST treatment. If zero-rating applies, no GST is charged on the deposit. If zero-rating fails, the deposit is simply an early payment towards the GST-inclusive price and output tax is calculated on the total consideration, not again on the deposit.
3. What are the consequences if Tui is not GST-registered at settlement?
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If Tui is not GST-registered at settlement, the going-concern zero-rating fails for the building, fit-out, plant and leases. Kauri must account for output tax at 15% on $4,600,000, or $690,000, plus $3,450 on the furniture stock. Kauri may have already claimed input tax on the building and fit-out, and that recovery is not automatically reversed just because the sale is standard-rated. Tui cannot claim input tax if it is not registered. The parties should address the risk contractually: Kauri should require Tui to confirm registration before settlement, and the agreement should require Tui to indemnify Kauri for any GST cost caused by Tui's registration failure. If Tui registers later, the parties should not assume the sale can be retroactively zero-rated.