Whether there is GST or not on property transactions gives rise to a lot of confusion. The implications if you do get it wrong can cause serious ramifications for both parties to the agreement – think 15% of the purchase price. We are talking hundreds of thousands if not millions of dollars.
The standard ADLS/REINZ Sale and Purchase Agreement for Real Estate in New Zealand (currently ninth edition 2012 (7)) has highlighted the need to ask questions around GST. The agreement does make things slightly easier as long as the form is filled in correctly. We have put together this basic overview as a starting point.
Let’s set out the basics firstly from the Vendors Point of View. To be able to register for GST the vendor is not using the land for their principal place of residence and instead is using the land for making “taxable supplies”. Examples could be:
|Taxable Supply for GST purposes|
|Long Term residential letting||NO|
|Short term letting where you receive a rate per night. For example – Airbnb||YES|
|Commercial Lease of a building||YES|
|Farming (but there are exceptions)||YES|
If the vendor does make a taxable supply and has registered for GST, then they need to show this on the Sale and Purchase Agreement by:
|Respond YES to the question asking whether the Vendor is registered under the GST Act in respect of the transaction evidenced by the agreement and or will be so registered at settlement||This question is located at the top of Page 1 of the Agreement|
|The purchase price must be shown as “plus GST (if any)”||Located on Page 1 of the Agreement. This averts the possible problem if the purchaser nominates a non-GST registered entity after signing. Meaning the vendor would still need to account for 15% of the purchase price to the Inland Revenue, and ends up getting 15% less of the sale as a result of the Purchaser’s actions.|
|The Vendors GST registration number is to be entered in under Schedule 2 of the agreement.|
If the vendor is not registered for GST, then they respond NO to the question asking whether the Vendor is registered under the GST Act in respect of the transaction evidenced by the agreement and or will be so registered at settlement and they do not have to fill out Schedule 2.
Secondly if the purchaser is GST registered then they need to state this in Schedule 2 answering all questions 3 to 11. If they are not registered, then they would answer questions 3 and 4of schedule 2 as NO.
Let’s look at some possible scenarios
|Vendor GST Registered||Purchaser GST Registered|
|NO||NO||1. No GST on the sale
2. the Vendor must answer NO on the front page to confirm they are not GST registered.
3. The price can be shown as either Plus GST (if any) or inclusive of GST (if any) or if neither is crossed out it automatically defaults to Inclusive of GST (if any). In reality it makes no difference.
|YES||NO||1. The vendor must answer Yes on the front page to confirm they are GST registered.
2. The price must be shown as Inclusive of GST (if any). This way the vendor can only be better off if the Purchaser Registers.
3. Questions 1 and 2 must be answered on Schedule 2
|NO||YES||1. the Vendor must answer NO on the front page to confirm they are not GST registered.
2. The price to be shown as inclusive of GST (if any)
3. The purchaser can claim the GST in their GST return as they pay for the property (irrespective of their actual GST registration basis).
|YES||YES||1. Where both parties are GST registered AND the purchaser declares on Schedule 2 that they intend to use the property for making taxable supplies AND the purchaser does not intend at the time of settlement to use the property as a principal place of residence then under Clause 15 it will become compulsory for the transaction to be zero rated for GST purposes.|
Yet, let’s consider what happens when the GST status of one of the parties to the transaction changes prior to the settlement date. If the purchasers GST status changes they are required under clause 14 to provide the vendor with no later than 2 days prior to settlement for the correct position to be recorded on the settlement statement. The relevant date for GST status is taken from the status of the parties at the date of settlement.
In the next edition of Covisory Connect we will address GST issues around partial use and change in use. As always, we would advise that you seek specialist legal and tax advice when faced with GST.