TECH Corner – GST Claims on Land Purchases

The compulsory zero rating of land transactions between registered parties has reduced the number of situations where GST can be claimed as an input tax deduction on land purchases. However, GST can be claimed on the purchase of land where it is considered the purchase of a second hand good.

How to qualify for a second hand goods input:
  • The land needs to have one previous owner;
  • The land is in New Zealand;
  • The supply is made by an unregistered person;
  • The supply is by way of sale (rather than a gift or a lease);
  • Payment is made for the supply in the taxable period where the credit is claimed; &
  • The purchaser is registered for GST.

However, where the vendor and the purchaser are associated, the amount of the deduction is limited to the lesser of:

  • The GST component (if any) included in the original cost of the goods to the supplier;
  • 3/23 of the purchase price; or
  • 3/23 of the (GST inclusive) open market value.

The lowest amount is likely to be GST component of the original cost of the goods to the vendor. If a credit is claimed in this situation, it will be important to obtain evidence of the original cost of the land to the vendor.

As always, we are here to assist.

Avoiding issues with Property Transactions

GST issues relating to Partial Use

We commonly come across errors around accounting for GST on property transactions and their financial impact can be significant for the parties involved. Following on from our discussion around whether there is GST or not on property transactions let us now look at the GST impact around partial use when purchasing property.

By law, GST is charged on all land sales and claimed on all land purchases. Exceptions being when that property is used for making non-taxable supplies such as Residential accommodation or the transaction is compulsory zero-rated.

From 1st April 2011 new apportionment rules were introduced requiring suppliers of land or supplies that include land to charge GST on the supply at the rate of zero percent where the purchaser intends to use the land to make taxable supplies.

However, what happens in the case of transactions where there is both a residential and economic activity component to the property transaction. Inland Revenue allows for the apportionment into two distinct supplies for GST Purposes. Each component must be valued separately and be considered independently to determine what GST is payable or receivable.

Let’s consider the following example:

Sarah purchases a new building for $5 million on 30th October 2017. Sarah has a balance date of 31st March. There is no GST included in the supply as it is subject to the zero-rating rules.

Where both the vendor and purchaser are registered for GST AND the purchaser declares on Schedule 2 of the ADLS/REINZ Sale and Purchase Agreement (S&PA) that they intend to use the building 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 of the S&PA it will become compulsory for the transaction to be zero rated for GST purposes.

Sarah intends the building to be mixed use and to lease the ground and first floor of the building to commercial tenants, and the 2nd floor of the building will be leased to residential tenants.

On acquisition Sarah applies the rules in section 20(3I) of the GST Act 1985.

  1. Calculate the nominal tax component that would be chargeable on the value of the supply if subject to the standard rate of GST.

$5m x 15% = $750,000

2. Determine the extent to which the building will be used for making taxable supplies.

a.Sarah determines that the building will be used 66.7% for making taxable supplies (rent to commercial tenants) and 33.3% in making exempt supplies (rent to residential tenants).

3. Sarah now needs to account for the proportion of the nominal GST component that relates to the non-taxable use of the goods as output tax on the acquisition of the building.

a.$750,000 x 33.3% = $249,750

4. On the acquisition of the building, Sarah will need to account for output tax of $249,750.

The same principals would apply to transactions where there is both a residential and economic activity as in the case of Farms (Rural farms, lifestyle farms, and orchards), Vacant land where residential use is planned, land used for a Dairy, or hotels and motels where the owner or manager lives onsite.

The rules require the taxpayers to make a fair and reasonable estimate on the intended taxable and non-taxable components of the initial transaction. In subsequent periods after the initial tax deduction claimed the taxpayer may be required to make further adjustments if the actual taxable use of an asset was different to its intended taxable use.

The first adjustment period runs from the date of acquisition (30th October 2017) to the persons first balance date after acquisition or to the person’s first balance date that falls at least 12 months after the date of acquisition. In Sarah’s example, this would either be 31st March 2018 or 31st March 19. Subsequent adjustment periods would run annually from this point.

In our example, Sarah elects to go with option 1 the period 30th October 2017 to 31st March 2018. Her second adjustment period will run from 1st April 2018 to 31st March 2019. There is no limit to the number of adjustment periods in relation to land.

Using our example, Sarah would be required to keep records showing the usage for both the taxable and non-taxable portions. These logs form the basis to make an annual adjustment if the percentages differ or there is a change in use.

This document has been written as a general guide and should not be used or relied upon as a substitute for specific professional advice.


Are you avoiding issues with Property Transactions – What happens around GST?

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.

Insight | New Zealand Tax Focus – Will GST be charged on imported digital goods and services?

The Government issued a discussion document in August on the GST treatment of cross border services, intangibles and goods.  Broadly they are seeking to force non-resident suppliers of certain digital services (movies, music and video streaming) to register in New Zealand and account for GST.  It is still only a discussion document but again clearly shows the Government’s intent on where it is heading.

Family Business ~ Insight | GST and Land Transactions: How the simple is suddenly complex

The compulsory zero rating provisions for GST were supposed to bring about greater simplicity and transparency when transferring land between GST registered persons.  The basic theory is sound, where land is sold from one GST registered person to another, both of whom use the land as part of their taxable activities, the sale is automatically GST zero rated.  The vendor does not need to account for 15% GST to the IRD nor does the purchaser need to go through the troublesome process of an IRD review and obtaining a GST refund, often leaving them out of pocket for the GST for several months.

So why are the rules all getting out of hand and we are getting so many questions with everyone getting tied up in knots?  The answer is it is to do with the wording in sale and purchase agreements as to whether a sale is plus GST or inclusive of GST.  This is also particularly relevant when we are dealing with transactions with a registered person and an unregistered person.

Let us take an example and say that there is a commercial property worth $1.15m, i.e. $1m plus GST.  If there is to be a transaction between two registered parties, presumably that property would transact at $1m GST zero rated if the true market value of the property was $1.15m.

Where things get a little bit confusing is that valuations of properties are often stated as being “plus GST (if any)”.  So does this mean that the real value of the property is $1m plus GST being $1.15m or that the real value of the property is $1.15m including GST?  As can be seen, it is necessary to understand what the valuer is saying.

The problem is made worse when we have a transaction between a GST registered vendor and a non-registered purchaser.  In its simplest form, let’s assume that the vendor of the land is a property developer who has created a bunch of land titles and is now selling them off to the public and other GST registered parties, i.e. spec builders.

In our first variation, let us assume again that the land is worth $1.15m and because it is residential land we know that that is the value of it.  Because the GST registered vendor is selling to an unregistered person, the compulsory zero rating provisions do not apply so the vendor has to account for 15% GST.  This means that the purchaser pays $1.15m and as they are not registered they cannot get any of the GST back.  Conversely, the vendor gets $1.15m but in turn has to pay $150,000 to the IRD as GST.  This means they net $1m.

The other twist on this is that the Land Transfer Office shows the land being sold for $1.15m for a residential section, which is the market value of it.

Again we have to be careful here about what valuers say land is worth.  If they were to say it is worth $1.15m plus GST, does that mean that it is worth $1.15m plus 15% GST being $1,322,500?  A valuer should be saying that it is $1.15m including GST (if any).  Many valuers get this wrong.

The problem is also shown when the vendor of the land, a property developer, sells a section to a spec builder who is GST registered.  The spec builder intends to build a house on it and on sell it so is not using it for personal use (in which case the spec builder is in effect an unregistered person if he is buying a house for his own personal use).  Here the sale will again be GST zero rated so presumably the vendor should be selling the land for $1m GST zero rated.  This gives the vendor the same $1m in their pocket after GST and the same $1m out of pocket for the purchaser again after GST. However at the Land Transfer office the same land is shown as being sold for $1.0m which can create market confusion for future buyers and valuers.

This is where the GST inclusive or plus GST (if any) clauses in the sale and purchase agreement become relevant, naturally along with the schedule to the new sale and purchase agreements which sets out whether the purchaser is registered or if they intend to nominate (note as we understand the legal position even if the purchaser ticks no to intending to nominate, they can still do so at law up to 2 days prior to settlement including to someone who ash a different GST status to them).

If the contract says it is $1m plus GST (if any), then the vendor will get $1m in all cases.  If the purchaser is registered, they pay $1m but if the purchaser is unregistered they pay $1.15m.

In summary, when dealing with land and GST registered persons, take time to think carefully about the maths and understand what the market value of the property is along with what is actually going to be paid.  I have seen a few too many cases lately where a market value of $1.15m has had 15% GST on top of it because people have not understood the way the contract is worded and the market value has been stated in a valuation report.

As always, we are available to assist you and to review these if you need help. Call us to discuss.

Family Business ~ Insight | GST on Imported Goods

Over the Christmas holidays, the Retail Association came out as usual saying that they were being unfairly disadvantaged having to compete against foreign online retailers who could supply goods to customers in New Zealand effectively free of GST if it is below the diminimus.  They felt that GST should be paid on all imported goods.

I am not unsympathetic to their view however, there are a few wider points that need to be considered in the debate.  I think that their view is a little bit too simplistic.  Let me expand:

  1. The current diminimus is NZ$400 below which GST is not payable on goods imported to New Zealand.  The reason for this is that it is considered to be administratively not worth the effort.
  2. Imported goods are however not the only exemptions.  Technically all goods imported digitally aren’t caught because there is no physical crossing of the border for GST to be imposed on.  So it is not just physical goods that have a GST issue, it is non-physical goods and in the digital world it probably is significant when you add up movies, music and any number of other digital downloads such as programmes and books.
  3. Also, when you travel overseas and buy goods for personal consumption such as clothes, perfumes and the like, and return to New Zealand, these are basically not subject to duty.  Yes there is the requirement for you to disclosed goods acquired on the customs immigration form, but in reality it is possible to go overseas and buy a whole new wardrobe of clothes, and simply bring them back to New Zealand in your suitcase.

So if we are going to have a debate about retailers being at a disadvantage, all of these three items need to be looked at, not simplistically looking just at goods physically crossing the border ordered off an overseas website.

The other point to consider is why people do buy goods from overseas website.  Typically it is because they can get either a better selection overseas, they cannot be bothered going to the shops in New Zealand or they can simply buy the goods cheaper overseas.  The latter point has been quite prevalent lately when you look at the rise of parallel imported new European cars out of the UK and Europe.  What it has shown us is that in New Zealand we have paid far too much for far too long compared to what others are paying in other countries.  The differences cannot simply be put down to geography and the fact that the goods have to be shipped here, it is down to the fact that in New Zealand too many people have made to big a margins for too long.  Maybe this is partly because we are a small country but the reality is that we have paid too much for goods for too long.

Add to the fact that you can sit at home and do your Christmas shopping on line without having to fight 20,000 – 50,000 other people at a shopping mall, it all starts to look very attractive.

So in short there is no quick fix solution to all of this and in reality the simple answer is that what the Retailers Association needs to do is to continue to make retailing more affordable and a better experience.  My Christmas present this year was ordered online but at least it came from New Zealand.

Nigel Smith