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.