GST AND PROPERTY TRANSACTIONS

There is often confusion about how to deal with GST on a property transaction. “Sort of” getting it right on the Agreement is not an option. That’s because if its not right its wrong.
The basics
  1. Is the Vendor registered for GST?
To be able to register for GST, the Vendor must be using the land for making “taxable supplies” for GST purposes, and must not be using the land as a principal place of residence. “Taxable supplies” is legalese for such things as commercial letting, short term letting, a developer selling sections, someone running a business on the land.
Long term residential letting however, is not a taxable supply for GST purposes.
  1. If the Vendor is registered for GST:
Two things must happen on the Agreement:
  • The Vendor must state on the Agreement (now right near the top of the front page) that he (meaning he, she or it) is registered for GST, and again in Schedule 2 of the Agreement.
  • The price should be shown as “Plus GST (if any)”.
  1. If the Vendor is not registered for GST:
He must say so on the front page. Then there is no need to do anything in Schedule 2.
  1. Is the Purchaser registered for GST (or intending to be by the settlement date)?
Sometimes the Purchaser is planning to conduct a business on the property and will be forming a new company to do so. That new company will need to be registered by the settlement date. The Purchaser must complete Schedule 2 accordingly.
  1. If the Purchaser is registered for GST:
The Purchaser must say so in Schedule 2 and answer ALL of questions 2 to 6 of Schedule 2.
  1. If the Purchaser is not registered for GST:
The Purchaser must answer “no” to questions 2 and 3 of Schedule 2.
Scenarios:
  1. What if neither the Vendor nor the Purchaser is registered for GST?
There is no GST implication to worry about. The Vendor should still answer “no” on the front page to confirm that he is not GST-registered. It won’t matter if the Purchase price is shown as “Plus GST (if any)” or “Inclusive of GST (if any)” because neither party is GST-registered.
  1. What if the Vendor is GST-registered but the Purchaser is not?
The Vendor MUST record the Purchase price as “Plus GST (if any)” otherwise he will have to pay GST out of the funds he does receive whether he likes it or not.
  1. What if the Vendor is not GST-registered but the Purchaser is?
The Vendor can’t say the Purchase price is “Plus GST (if any)” because he is not registered. So the Purchase price will be “Inclusive of GST (if any)”. And the Purchaser will be able to claim the GST in his next GST return.
  1. What if the Vendor and the Purchaser are both GST-registered?
If the transaction involves the sale of a business then it will be regarded as the sale of a going concern and will be zero rated.
If not but both parties are GST-registered, AND the Purchaser declares in Schedule 2 that he intends to use the property for “making taxable supplies” AND the Purchaser does not intend to use the property as a principal place of residence, then the transaction will also be zero rated. This is called “Compulsory Zero Rating”.
  1. What if the GST status of one or other party changes between the time the Agreement is signed and the Settlement Date?
The Vendor’s GST status is not likely to change but the Purchaser’s might.
If the Purchaser changes GST status he must notify the Vendor no later than two working days before settlement so that the settlement statement can show the correct position.
That’s because the relevant date is the GST status of the parties at the Settlement Date.
  1. What about where one or both of the parties are GST-registered but part of the land is intended to be used as a principal place of residence?
This is common in farming situations. That part of the property that is intended to be used as a home will be separated out because it is not a taxable supply and does not attract GST. The rest of it will, but if both parties are GST-registered then it will be zero rated.
  1. What about where both of the parties are GST-registered but the Purchaser intends using the land half of the time for making taxable supplies (e.g. short term apartment letting) and half of the time for GST-exempt supplies (e.g. personal use of the apartment)?
Here the Purchaser will have to pay GST on half of the purchase price because he cannot claim zero rating for personal use – it is not a taxable supply and he cannot claim to be GST-registered for it.
  1. What if the Purchaser nominates another party to buy the property and that nominee has a different GST status than what the Purchaser disclosed in Schedule 2?
The Purchaser must inform the Vendor no later than two working days before settlement so the settlement statement can be changed.
The Agreement for Sale and Purchase form seek to address these questions. But there are still risks, for example where a transaction is mistakenly zero rated.
We are happy to help wherever we can. Please call Jerry Li on 03 4500000 or email on jerry@queenstownlaw.co.nz