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.

AML – Are You Ready?

In 2013, the laissez-faire world of New Zealand business as we knew it came to an end with New Zealand playing catch up with the rest of the world.  Phase 1 of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (“the Act”) introduced new laws to tackle money laundering and terrorist financing.

The Ministry of Justice estimates $1.3 billion of proceeds from illegal activities are laundered through New Zealand businesses each year. The new rules have added in an extra level of regulation that has taken some people in New Zealand by surprise.  However, many countries around the world have already adopted these rules and New Zealand was late to the party.  On a positive note, the rules New Zealand adopted are more robust than many other countries.

As you will know by now under the new laws Banks, Casinos and a range of Financial Service Providers had “practical measures” imposed on them to protect New Zealand businesses and reduce the ability of criminals to benefit from illegal activity. It has taken awhile for these organisations to come to grips with the amount of information (read mountains of paperwork) required to comply with these measures.

In short, every customer’s identity needs to be verified and their source of wealth determined to ensure there is no criminal activity involved.

Phase 2 will see the Bill, when it is passed mid-2017, extend this requirement to real estate agents and conveyancers, many lawyers and accountants, businesses that deal in expensive goods and betting on sports and racing.  The law will come into effect in stages between July 2018 and July 2019 allowing these businesses to prepare for the changes.

One result of the introduction of these new rules is that when applying for an Inland Revenue Department (“IRD”) number for a non-resident/off-shore individual is that you either need to supply a New Zealand bank account number or have completed customer due diligence on the applicant.  In our experience, New Zealand banks are not interested in opening bank accounts for non-residents if it does not result in ongoing income for them, which is the case for most non-resident applicants.  This only leaves one option and that is to have a reporting entity as defined by the Act, carry out full know your client (“KYC”) checks on the applicant.  The process of opening a bank account also takes a considerable amount of time and paperwork compared to previously.

Covisory Trust Services is a reporting entity for the purposes of the Act and governed by the Department of Internal Affairs.  In our capacity as a reporting entity we regularly carry out independent KYC checks for non-resident applicants for IRD numbers and provide the appropriate sign-off for the IRD to allow the application to proceed without having to open a New Zealand bank account.  Assuming the KYC checks do not throw up any untoward results they can be completed relatively quickly.  This is a bonus when the IRD application is urgent.

If you are interested in using this service or just want to talk about anti-money laundering and its possible impact on your business please contact either Marcus Diprose or Nigel Smith (

Insight | Tax Transparency Debate

There has been some interesting recent dialogue in Australia around whether large private companies should disclose the amount of income tax they pay. Proposed legislation would have required private companies with revenue over $100m to disclose their tax contribution. Public companies already have to do this.
The counter debate against this was that it would make the family members vulnerable to kidnapping and being held to ransom. However, interestingly, Dick Smith (former owner of the now defunct retail electronics chain), argued that these families do this already by their ostentatious displays of wealth. Simply saying how much they paid in tax was confirming what people always suspected, ie they had lots of money and probably paid little tax!.
For now, the proposal has been scrapped, but it was an interesting debate.

Insight | Taxable! New Zealand Inland Revenue considers proceeds from the sale of gold and silver bullion

The IRD recently released a statement on its view on whether proceeds from the sale of gold and silver are taxable. The Commissioner’s view is that gold bullion bought as an investment will necessarily be acquired for the purposes of disposal. Consequently, any amounts derived on its disposal will be income. The Commissioner considers that the very nature of the asset leads to the conclusion that it was acquired for the purposes of ultimately disposing of it.
Central to the IRD’s view is that gold and silver as a commodity do not provide annual returns of income while being held. They have no use or value in other terms like for instance art where they have an aesthetic value. Such investments are therefore considered to have been acquired for the purpose of disposal, so the proceeds are considered by the IRD to be taxable under section CP 4 of the Income Tax Act 2007.
While there is logic to the IRD’s view, in a world of negative interest rates, it could be argued that perhaps gold does offer a return because it holds its capital value.

If you would like to discuss the possible impact for you – please contact Nigel Smith

Insight | New Zealand Tax Focus – IRD Continues high level of Audit Activity

We have continued to see a high level of audit activity from the IRD, in relation to property transactions and more recently with a continuation of audits of the cash economy (cafes, restaurants, takeaways and bars) and medium to large sized privately owned companies.  There has been a project run in Auckland by the Manukau and Takapuna offices looking specifically at large privately owned companies and their taxation obligations.

These audits tend to be fairly surgical in that the IRD will do a risk review and then focus on maybe one or two points that are significant to the company that the IRD feels could not only warrant some further investigation, but which would likely bear some cash collection for them.

A senior IRD official recently explained to me that they now view the disputes process as a failed audit, ie the IRD has an expectation when it does an audit that it is picking up on points that it considers to be correct and has a high likelihood of winning without having to go through the disputes process.  Whether that is on a negotiated settlement or by virtue of the taxpayer accepting the IRD’s position will often vary from case to case.

Insight | New Zealand Tax Focus – Residential Property in the Gun

The Government and IRD made their intentions clear that they intend to continue their focus on the taxation of property transactions. The recently introduced 2 year rule and the newly proposed withholding tax for certain non-residents show that there is an intention to get serious about the collection of tax.

In short, the key changes are as follows:
1. Income tax will be payable on any gains from the disposal of residential land acquired and disposed of within 2 years of acquisition.
2. Residential land will be defined but will exclude land that is used predominantly as a business premises or farm land. It will be ordinary homes.
3. There will be 3 specific exemptions to the rule:

a. The disposal of the main residence of the transferor;
b. Inherited land;
c. The transfer under relationship property agreements.

4. The main home exemption will apply if property has been used predominantly for most of the time that the person has owned the land as their main home. However, there are also rules which pick up when the exemption has been claimed twice in relation to other properties in the previous 2 years, ie you cannot have a regular pattern of buying and selling these.
5. A similar rule will apply to trusts where it is the main home of a beneficiary or settlor.
6. Losses arising from the Bright line test will be ring fenced and only able to be used against similar gains.
7. There will also be some anti-avoidance provisions around transfers of shares in companies.
8. A withholding tax is proposed is relation to certain sales of land by non-residents. This is still at the Bill stage.
9. There has also been increased requirement for non-residents to provide documentary evidence and information enabling them to be tracked to their home country so that the IRD can pursue them for taxation if required.

Family Business ~ Insight | Proposed changes to Approved Issuer Levies

The IRD and Government recently released a discussion paper setting out proposed changes to the approved issuer levy (“AIL”) regime.  AIL was introduced originally because typically New Zealand corporates who borrowed funds from non-residents were subject to what are called gross up provisions in the lending documents.  This meant that if a New Zealand borrower was obliged to deduct non-resident withholding tax from payments to a non-resident lender, the interest rate the non-resident lender wanted was net of and after any New Zealand withholding taxes.  This in effect increased the cost of borrowing funds for New Zealand borrowers.

The Government implemented a solution which was approved issuer levy.  Instead of being a withholding tax like PAYE which was deducted from the interest paid to the non-resident, it was a stamp duty and it was a charge on top of the interest paid by the borrower.  It is 2% of the interest whereas withholding tax rates are typically 10% or 15% of the interest, but supposedly suffered by the lender (unless of course there were gross up provisions in the loan documentation).

The other requirement for approved issuer levy was that the lender and the borrower could not be associated, i.e. it needed to be an arm’s length transaction.

The Government had indicated in 2014 that it was going to review the NRWT and AIL rules and has now released a discussion paper on it.  While this is only for consultation at the present time, it is likely that within the next 12 months this will become law in a substantially similar format to what is proposed.

In broad terms, a simplified summary of the proposals is:

  1. NRWT will need to be used rather than approved issuer levy where there is a back to back arrangement where say an offshore bank is interposed between an offshore associated lender and its New Zealand associated subsidiary or related entity. Often a third party is used on a back to back basis so that approved issuer levy can be used in New Zealand whereas if funds had been advanced by the offshore associate directly to New Zealand, non-resident withholding tax would have been required to be deducted because the lending was then from an associated person.
  2. Similarly, a further anti-avoidance provision is also proposed where there is an arrangement between a group of persons to try to avoid non-resident withholding tax and ensure eligibility for approved issuer levy. An example of this would be offshore parent 1 lending to the New Zealand subsidiary of unrelated offshore parent 2.  At the same time, offshore parent 2 lends to the New Zealand subsidiary of offshore parent 1.  It is effectively a criss-cross arrangement where two unrelated overseas parents work together to ensure that the interest they receive is subject to approved issuer levy as opposed to non-resident withholding tax.
  3. It is also proposed that approved issuer levy could only be used by offshore financial intermediaries or where money is raised from a group of 10 or more non-associated persons. This will catch many current AIL loans and make then ineligible in the future for AIL.
  4. Finally, there are also some rules around the eligibility for onshore and offshore branches to use approved issuer levies in these circumstances.

It is likely that these proposals will be subject to submission and ultimately included in a tax bill by the end of 2015, with a view to them becoming law in the first half of 2016.

If you are affected by these in any way, please do not hesitate to contact us so we can look at how best to restructure your current position or to determine its status under the proposed changes. Call us today.

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 | Government Announces Crackdown on Property Transactions

As you will be aware by now John Key announced a number of proposals to improve tax compliance in New Zealand’s Property Investment sector the first parts of which will be included in Thursday’s Budget.

Currently, under New Zealand’s existing tax laws, anyone who buys a property with the intention of selling it for a gain is liable for tax on any gain. This applies equally to New Zealanders and to overseas buyers. These existing laws, while clear about taxing gains, have to rely firstly on establishing the intent of the buyer or an assessment of their intentions by the Inland Revenue at the time of purchase and then being aware that the property has been sold and then having sufficient information on the investor. This is especially true for overseas investors where currently the Inland Revenue may not have the information to track them down and enforce compliance.  They then may have to chase foreign vendors to recover the tax.

To ensure fairness the Government is proposing, in addition to the existing laws, new measures (tightening the tax rules and allocating extra funding to the IRD to track and identify transactions that are likely taxable and enforce compliance) to make sure that property investors pay their fair share of tax – whether they are from New Zealand or overseas.

Subject to consultation the new measures, which would come into force from 1st October 2015 for any property brought and sold, are:

  • A New Zealand IRD number will need to be provided by both New Zealanders and Non-Residents who are buying or selling property as part of the land transfer process. The exception will be the main family home.
  • Non-resident buyers and sellers, if resident for tax purposes in another jurisdiction, must also provide their tax identification number that has been issued to them by that country as well as identification (For example a current passport).
  • To ensure that the Anti-Money Laundering Rules apply to Non-resident buyers, they will be required to set up a New Zealand Bank Account, prior to applying for an IRD Number in order to buy a property.
  • A new “Bright Line” Test will be introduced for both New Zealanders and Non-Residents buying residential property to supplement the current Inland Revenue’s ‘intentions’ test. Under this new test, which will apply to any property brought on or after 1st October 2015, any gains from residential property sold within two years of purchase will be taxed. The exemptions are:
    • If the property is the seller’s main home, or
    • Inherited from a deceased estate or
    • Transferred as part of a relationship property settlement.
  • Under the Bright Line Test if the property is sold within the two year window any gains will be taxed at the seller’s normal income tax rate. The Seller will include the gain in their income tax return for the year.

In addition to the new measures the government is proposing to research the possibility of introducing a withholding tax for non-residents selling residential property. By ensuring all buyers and sellers are required to provide an IRD number for property transaction will make the tracking of non-residents for the Inland Revenue simpler. This additional measure is being mooted to be introduced as early as mid-2016 to ensure overseas property buyers meet their obligations under both the existing law and the new measures.

Timeline for the new Bright Line Test:

  • The government will be consulting with parties over the new proposals;
  • Issues paper released July 2015;
  • Legislation introduced August 2015
  • New Bright Line Test will apply to all properties brought on or after 1st October 2015.

So while there may be an arbitrary 2 year bright line test, the aim of the changes is to make it easier for the IRD to track who is buying and selling property and to recover tax from them. We would expect that there will be a very high chance that a withholding tax will be introduced.

Finally, recent Herald and other newspaper articles covering foreign buyers arriving at their lawyers’ offices with suitcases of cash to pay for properties may be true, but the current Anti Money laundering Rules are more than sufficient to cover these situations. The lawyers are under an obligation to determine the source of the funds and if in any doubt to notify the police immediately or they themselves will face prosecution.

As always, we are available to assist you. Call us to discuss.

Family Business ~ Insight | Inland Revenue’s Annual Tax Statistics Available online….

You may well ask why in earth would I want to access or know about these BUT

The Inland Revenue for the past 5 years have responded to the request of many external users who want access to a range of data about tax revenue and social entitlements. This snap shot of statistics from both the IRD and the Court Statistics provides you with a visual picture of their customer’s world and hence the world you and I work in. Here you can see how trends are moving with the data, both in graphical and spreadsheet form, being provided between the years 2001 – 2013.

Did you know:
o there were 7,391,454 customers registered with the IRD as at 31st March 2013
o In the year to March 2013 11.9 million tax returns were processed
o In the year to June 2013 $53,771 million dollars of revenue was collected

So how could you use this data for you personally or your business….

Link to the Inland Revenue Annual Tax Statistics here