GST on Land Transactions
From 2011, a long lasting GST problem relating to sale of land should disappear.
GST has always caused cash flow and compliance headaches for commercial property owners. From the 1 April, all commercial property sales will be at a GST rate of 0% as long as some simple criteria are met.
The 0% will apply to all sales involving land, regardless of how small the land may be as a component of the total sale, as long as the vendor and purchaser are GST registered.
From 2011, a long lasting GST problem relating to sale of land should disappear. GST has always caused cash flow and compliance headaches for commercial property owners. From the 1 April, all commercial property sales will be at a GST rate of 0% as long as some simple criteria are met.
The 0% will apply to all sales involving land, regardless of how small the land may be as a component of the total sale, as long as the vendor and purchaser are GST registered.
New rules means when you buy a property, you and the vendor now have to disclose your GST status. The key objectives of the Taxation (GST and Remedial Matters) Bill that came into effect on 10 December 2010 were to improve the integrity and fairness of GST administration. The main changes to the Goods and Services Tax 1985 were to:
 Remove tax avoidance opportunities
Clarify taxpayers obligations
Reduce business compliance costs.
The key points are as follows:
Relevant to:-
The new GST legislation is particularly relevant to commercial property investors and GST registered property traders and developers.
Close Loopholes:-
The legislation was designed to close ‘loopholes’ in the former legislation that potentially allowed land transactions between associated parties to generate refunds to the purchaser before vendors had been required to account for output tax. If the vendor proved unable to pay the tax, the IRD was potentially out of pocket addresses so called “Phoenix” fraud.
Zero Rating of land transaction:-
From the 1 April 2011, transactions involving the sale of land between GST-registered persons must be zero-rated, providing:
the purchaser provides a written statement that the land is to be used in their taxable activity and;
provided the purchaser and vendor are GST- registered; and
that the land is not to be used as a principle place of residence by the purchaser or any person associated with them. Vendors are charged GST at 0% on any land transaction with a GST-registered person.
Nominations:-
Another area that has been problematic is nominations in sale and purchase agreements. The new legislation seeks to clarify these situations, which had previously given rise to questions over whether or not taxable supplies were being made from the nominator or the nominee.
The new legislation deems the supply to be treated as made by the supplier to the nominee. This change is sensible and will come as welcome relief to those property traders in the habit of nominating alternative purchasers, who have met with differing tax treatments under the previous legislations.
Basically the GST treatment will be determined by economic substance. According, nominees will generally be ignored for GST purposes such that the transaction will be accounted for as between the supplier and the ultimate recipient.
Section 21 GST Act:-
Old Formula
There are also changes to the section 21-adjustment provisions that required a GST-registered property developer to make adjustments if the property was rented out domestically or lived in by the developer. Given the property was being applied to an exempt activity, an output tax adjustment on the value of the non-taxable use will be made.
New Formula:-
There is a new formula to make this calculation that looks at factors, including the amount derived on the sale and any rental income received to determine the taxable use percentage.
Closure
Tax-payers that have become used to dealing with regular land transactions involving GST should check with their tax practitioner before they sign agreements and certainly before they file their GST returns, to ensure the right compliance advice is given to the completion of returns under the new legislation.
Seeking confirmation of the other party’s GST position will become a critical new requirement in all land transactions between registered parties.
Whilst it is unclear whether the new rules will improve the integrity and fairness of the GST regime, taxpayers will be exposed to penalties for getting it wrong.
 Contact us to discuss your GST on land sales requirements and obligations on 339-7260.
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The GST changes which came in on the 1 April 2011 are significant for property investors, developers and traders a like.
Definitions of “dwelling” and “commercial dwellings”
The definitions of commercial dwellings and dwellings have also been amended.
Commercial dwelling will now include farm-stays, home-stays, bed & breakfast, and serviced apartments.
Dwelling will now be defined as a person’s principal place of abode.
The new law attempts to define which rental activities are GST exempt. This is done by defining what constitutes a persons home or in tax speak “principal place of abode”. For example, bed and breakfast establishments are classified as commercial but taking in a boarder in your personal place of residence is not.
Exception:
Any transaction conducted between GST-registered suppliers and non-GST registered purchaser, or
Where the land is for the principal place of residence.
Written statements:-
A written statement must be provided by settlement date and the vendor will be entitled to rely on the content of the statement provided by the purchaser.
Disclosure Requirements:-
The Auckland District Law Society has produced a new appendix for the standard sale and purchase agreement that incorporates some of these new disclosure requirements.
In-eligible to be zero rated:-
If, after the settlement, it is found that the transaction was for any reason ineligible to be zero-rated, the purchaser will be required to account for the GST that should have been charged.
Apportionment rules old legislation:-
Old Legislation
There is also significant changes to the Principal Purpose test in the old legislation. Previously, to be able to claim GST on a supply, the goods needed to be used predominantly in the taxable activity. There was a 50% threshold test to determine whether this was the case.
New Legislation:-
GST will be able to be recovered only to the extent that the goods are used in the taxable activity. For example, if a mixed-use is acquired that is
30% commercially
70% private,
A GST input tax credit will be available on the 30% of the property that is used in the taxable activity, despite the fact that the remaining 70% will be exempt.
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