A guide to the changes in GST legislation affecting land transactions
What is GST?
Goods and Services Tax (GST) is a tax based on the consumption of goods and services and is built into the amounts charged for these items. This tax is currently set at the standard rate of 15%. People who are registered for GST must charge and collect this tax on behalf of the Government and pay it to the Inland Revenue Department.
What is the change which now affects transactions involving land?
As of 1 April 2011 compulsory zero rating has been introduced which applies to all transactions involving land between parties that are registered for GST.
The removal of the GST component of the purchase price on these transactions means that the purchaser will pay a price and the vendor will receive a price without incorporating a GST component.
- This change is designed to assist with cash flow in the market place; and
- Prevent Phoenix transactions from occurring.
What criteria must be satisfied before the transaction is compulsorily zero rated?
- All transactions involving land;
- Both vendor and purchaser must be registered for GST;
- The purchaser intends to use the land for making taxable supplies; and
- The land is not intended to be used as the principal place of residence of the purchaser.
What specific type of land transactions are caught by the new rules?
The new rules have a wide definition of ‘land’ and consequently a wide scope. Even if land is only a minor component of the property, the new rules will apply to it. Examples include:
- Bare land;
- Lifestyle blocks;
- Run off or grazing blocks.
What are the implications for issuing tax invoices?
Despite transactions attracting GST at the rate of zero percent, the vendor is still required to issue a GST invoice. If the property being transacted includes a residence, the parties may obtain a dwelling & curtilage certificate apportioning the value of the land and the house. The invoice will be apportioned to show the supply of the land attracting GST at the rate of zero percent and the supply of the residence being exempt from GST. This is effectively two transactions as far as the IRD is concerned, within one.
What happens if only one or neither of the purchaser nor vendor is registered for GST?
If only the vendor is registered for GST but not the purchaser, for example a property developer selling to a home buyer, the new rules don’t apply. The transaction will be treated as GST inclusive but the vendor will want to add the GST component to the price because it will still be required to return GST to the IRD on settlement.
Purchasers need to be aware
The vendor is entitled to rely on the representations made by the purchaser in the GST addendum to the agreement for sale purchase. The obligation is on the vendor to make sufficient enquiries of the purchaser as to its status for satisfying the new rules, and the purchaser is obliged to confirm its registration details and intentions in relation to the supply. Provided that the vendor has made these enquiries of the purchaser as to its registration status and intentions as to use of the land, it is entitled to rely on those statements and will not be required to account for output tax.
If any of the information given by the purchaser is incorrect or has been misrepresented the purchaser will be liable to pay GST on the supply at the standard rate.
If any of the conditions of the new rules are not met do the ‘going concern’ rules still apply?
Yes. For example, if a purchaser is purchasing a farm from a vendor with a farmhouse, outbuildings, stock, plant, machinery and chattels with the intention of carrying on business in the same way that the vendor did, the supply is one of a going concern.
This is a guide only and may not be relied upon as specialist tax advice. Each party to a transaction where the new GST rules may be at issue should obtain specialist advice specific to that transaction.