Ever heard anyone yell that out moments before their bike hits a bump in the road, gets a serious case of speed wobbles and finally careers into a solid object?

A recent case from the Taxation Review Authority reminded me how a seemingly innocent transaction can end up with speed wobbles.

The transaction

Sale of trucking business for $75,000 (“including GST (if any)”).
Parties thought they were buying and selling a “going concern” (truck business with 1 truck and 1 customer).

Reminder – the sale of a business as a “going concern” by one GST registered person to another GST registered person can be “zero rated” provided certain requirements are satisfied. Therefore, no GST.

What went wobbly?

1. It wasn’t really a “business” but just a truck and some other assets. No customer contracts were transferred for example. So it couldn’t be a “going concern”. This meant 1/9th of the purchase price was GST. The vendor is $8,333 worse of and the purchaser could be $8,333 better of because the court said they could claim the GST back from IRD.

Comment: I bet the vendor wishes they’d had a “plus GST (if any) contract. Now they have to try to rely on a special section in the GST legislation which allows vendors to add the GST amount to the contract price in some situations where a transaction has incorrectly been treated as a going concern. It could be a lot of expense just for $8,333.

Also, Inland Revenue now have to devote resources to trying to recover the GST amount from the vendor.

2. Two “tax invoices” existed for the transaction: one said “GST amount $NIL – zero rated”. The other said “GST amount including or zero rated”.

Comment: It is an offence if a person “knowingly issues 2 tax invoices” in respect of the same supply. It’s unclear from the case whether the Inland Revenue is pursuing this aspect. Equally unclear is whether they consider one or both of the tax invoices to be invalid. If both were invalid the purchaser would not be entitled to claim the $8.333 GST from Inland Revenue. Another issue yet to be sorted out I suppose.

3. The evidence was that the purchaser actually drafted the tax invoices.

Comment: the GST law says a tax invoice must be “issued” by the supplier unless the Commissioner of Inland Revenue has specifically authorised the purchaser to issue a “buyer created tax invoice”. This isn’t discussed at all in the case but if the supplier didn’t “issue” the tax invoice and if the purchaser did not get the Commissioner’s permission to do so then the purchaser is not entitled to claim the GST back from Inland Revenue. Interestingly though, the TRA said they were.

Overall, given the parties’ very clear written agreement said they thought the transaction was “zero rated” this seems to be something of a windfall for the purchaser unless the vendor is able to get the extra GST out of them. The purchaser could be said to have taken advantage of a technical mistake by the vendor when they claimed the GST back from Inland Revenue even though they signed a contract agreeing there was no GST in the purchase price.

Pretty wobbly all round really.


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