The compulsory zero rating of land transactions between GST registered parties was introduced in an effort to both simplify what were typically large financial transactions and secondly ensure that there wasn’t a loss of revenue to the IRD in situations of insolvency.
The rules are basically simple and require that where there is a transfer of land from a registered vendor to a registered purchaser the supply is compulsorily zero rated (hence the CZR terminology). In order to affect this, the vendor and purchaser state and warrant their GST registration status and their intended use for the property in terms of the purchaser in the sale & purchase agreement.
In theory these rules should work well but in practice it has been far from the case. We have been involved in several cases where purchasers particularly have not understood the sale and purchase agreement they were executing, resulting in the fact that they have ended up paying too much for a property. A couple of simple examples will show what we mean:
Market value of property $115 GST inclusive
Sale by registered vendor to unregistered purchaser $115 including GST of $15
If the sale was to a registered purchaser, then the sale needs to be for $100 plus GST (if any) which would be zero as in zero rated. If it is for $115 either including GST or plus GST (if any) then the purchaser is effectively paying too much, being in reality $115 plus GST of 15% on top.
Strangely enough this can also lead to some interesting commercial consequences. For instance, two identical pieces of land can be sold for $100 compulsory zero rated to a registered person and $115 including GST of $15 to an unregistered person, both by registered vendor. At the Land Transfer Office and on the land title records, the two transactions are shown at different values, ie a lack of comparability of sales data.
Purchasers need to be particularly aware when they are executing these agreements that they understand how the GST provisions work. Sadly, I have seen too many that don’t. This can also particularly extend to real estate agents and in some cases even lawyers.
If in doubt, get advice. Nigel Smith and the Covisory Partners team are happy to help you with your questions.