We often see situations where our clients could be disadvantaged from land transactions where the sale and purchase agreements are not completed correct and they have not had the documentation reviewed prior to signing.
In 2011 the Compulsory Zero Rating scheme for land transactions was introduced for transactions between GST registered parties that was designed to simplify the GST on land transactions.
If you are GST registered and purchase a property as part of a taxable activity from an unassociated non-registered person, you can normally claim the GST on the property. However you can be denied the GST claim if the vendor turns out to be GST registered and have not correctly disclosed this on the agreement. The contract is likely to be agreed at a price inclusive of GST if any, and when the vendor is required to be GST registered suddenly the Compulsory Zero Rating rules apply, there is no GST on the sale, the contract cannot be amended and you cannot get a GST claim on the purchase price.
There are remedies to overcome this situation including adding an additional clause into the contract allowing for a change in purchase price if the vendor is deemed to be GST registered or was GST registered at the time and did not disclose.
Lifestyle properties are also an area that can be problematic from a GST point of view as they can be advertised at a price “plus GST on the land”, meaning you have to pay the higher GST inclusive price if you don’t become GST registered. Clients come to us asking to become GST registered, however there needs to be an ongoing taxable activity otherwise IRD can cancel GST registration and GST has to be repaid at market value. We often recommend to clients to not register for GST on lifestyle properties to avoid being trapped in the GST loop, having all the administration when on investigation it would be marginal whether the IRD would deem there to be a continuous taxable activity.
Recently we have also seen an increase in clients renting their house or batch on a short term basis through various holiday home websites. GST is often not considered, however when your gross rental income exceeds $60,000 for the year you must register for GST. Not only will you have to pay the GST portion of your rent to the IRD, but you must also consider the GST impact on the property. There is potential for a GST claim on the purchase of the property, but this can be limited depending on when the property was purchased and the cost price. GST must then be repaid based on market value of the property if you stop renting or sell the property. With property prices increasing there can be a significant amount of GST to pay at this point and often more than you have been able to claim.
Our recommendation is that you should always seek professional advice before signing sale and purchase agreements, so that you are fully aware of the GST implications and any risks associated to the transaction is mitigated.
Glen White
