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.

The Brave New World – What changes are likely from our Labour / New Zealand First Government

The past three months has taken New Zealand on a political roller coaster with the result being a new minority government with a new policy and social agenda for the next three years.  In our view, it was always a strong possibility that New Zealand First would go with Labour, and the exclusion of the Greens from the government is political suicide as they sit once again outside of the government and will have little to show for the same level of support that New Zealand First gives to Labour.

Labour identified a number of priorities it would be addressing in its first 100 days and is set to wind back much of the deregulation National introduced. Change is coming and what is going to be interesting is what does this change mean for you as typically a business owner in the context of the post-election New Zealand.

  • The promised tax cuts will not occur.
  • We would expect the top marginal individual rate and the top trust rate to increase to at least 36% and be aligned.
  • The Brightline test for residential property will extend from 2 to 5 years. What will be interesting is which properties this applies to, ie existing own properties or those bought after the law change is made.
  • A tax working group will be put together and involved in public consultation. Its report back will affect taxes from 2021 on.  It will focus on no increases in taxes, and no inheritance tax or other taxes on the family home.  That still does leave the door open for inheritance tax or other taxes on other assets and investments.  We think capital gains is unlikely as a tax, but time will tell.
  • A 12.5% tax back incentive for research and development.
  • Continued focus on multi-nationals. Nothing changes from the old government here and the BEPs programme will continue.
  • A key one will be the removing of the ability to use negative gearing losses. The question is exactly who this will apply to, ie company groups or just individuals claiming the losses in their tax returns?
  • An Auckland regional fuel tax for the Auckland Council and is expected to be implemented within 6 months.
  • Foreign ownership of land is to be subject to greater restrictions and greater involvement of the OIO. The concern here is the OIO is already significantly overloaded and has to date been largely a rubber-stamping exercise anyway.
  • A rent to own scheme for low-income workers to assist them to buy their first home.
  • Expect labour law reforms. Now is a good time to get rid of underperforming staff while you are still able to.
    • The 90-day trial periods, introduced by National in March 09, will be replaced with new trial periods and will require reasons for dismissal and justification.
    • Reinstatement will be the primary remedy for employment grievances.
  • The increase in the minimum wage to $16.50 from 1 April 18 and expectations for it to be moved to over $20 within the next 3 years.
  • Changes to paid parental leave increasing to 26 weeks per year, taking effect from 1 July 18.
  • Immigration restrictions targeting students and low skilled workers.
  • Superannuation to remain at age 65. With the Government resuming contributions to the New Zealand Superannuation Fund to help safeguard Universal Superannuation at 65.
  • Buy Kiwi made preference by the government.
  • Focus on regional development and rail networks, both within Auckland and in the wider sense.
  • A review of the reserve bank with an aim to lowing the New Zealand dollar.
  • Expect inflation to increase with particularly the increase in costs as a result of some of these and the added burden of the increase in the minimum wage. It can only push inflation up.


On the whole however, there is much for business and our clients to be happy with and excited by in terms of what Labour and New Zealand First have promising.  It creates opportunities in itself and you need to quickly focus on these to understand where they will be.

If we couple this with the trust law reform, which will still come into effect next year, even under a Labour government, it is going to be a busy year or two as we all get used to significant change in our existing environment.

As always, the Covisory team is happy to talk to you about your needs, now and going forward.  If there is anything we can do to help, please call us.

Please note that the information in this article is for informative purposes only and should not be relied on as legal advice. 

New Zealand Foreign Trust Disclosure Rules

Australian Federal Budget Brief – A NZ perspective of what you need to know about the 2017-18 Federal Budget

Some Important Information for Kiwis from Tuesday’s Australian Federal Budget.

On Tuesday 9th May, the Australian Federal Government released its latest budget. It was an attempt to squeeze more blood out of a stone and to try to balance its books.
Kiwi’s seem to have recently borne the brunt of the Australian Government’s attempts to balance its books with the removal of subsidised Australian university education as an example. The budget yesterday takes this a few more steps further and there are a couple of very important points that our clients need to be aware of:

1. Depreciation restrictions – it is proposed that for properties acquired subsequent to the budget, it will no longer be possible to depreciate plant and equipment apportioned out of the purchase price i.e. chattel split out. Previously there has been an ability to apportion out a part of the purchase price for a commercial property or commercial residential property and claim depreciation on the chattels at higher depreciation rates than building rates. In New Zealand, we continue to be able to depreciate these even though we cannot claim building depreciation.

Existing properties in Australia will be grandfathered. In future where a building is acquired, it will no longer be possible to apportion out the property, plant and equipment. However, where a property owner does spend money on these actual capital items, then they will still be entitled to depreciation.

2. Foreign residents and foreign temporary migrants – individuals who are foreign residents or foreign temporary migrants residing in Australia will no longer be eligible for the principal family home exemption from capital gains tax. When New Zealanders enter Australia, they generally enter as foreign temporary migrants (refer our “Tax Free Sunshine” paper on our Covisory website for the full background).
For foreign residents and temporary migrants moving to Australia from today’s date or acquiring a property after this date, they will no longer be eligible for the exemption. Those already in Australia with existing properties will be grandfathered until June 2019. However, it is not clear whether at June 2019 the properties will then be subject to capital gains tax from that point on subject to a valuation or the whole of the gain up to that point in time will fall to be subject to capital gains tax. More details to follow.

Naturally as Kiwi’s enter Australia as foreign temporary migrants, they are effectively permanently temporary. There is no comment yet from the Australian Government about whether New Zealanders will be specifically excluded from the removal of the principal residence exemption.

We will be arranging to have one of our Australian colleagues come to New Zealand in the next few months to run some specific updates for clients that are affected. In the meanwhile, if you are affected by these changes, please do not hesitate to contact us.

KYC – Know Your Client

The AML Act imposes obligations to ensure NZ businesses, NZ Banks and financial services are not helping facilitate criminal activity. Instead of taking people at face value we now need to know our clients. Are they who they say they are and where did their wealth come from?

  1. All parties to the transaction need to be correctly identified.
  2. This includes verifying identification documents such as a passport, drivers licence or other government-issued identification document.
  3. Other documents that provide proof of the address of the applicant must also be verified.
  4. Identify the source of wealth of the funds being used in the transaction.


For our KYC Form please click on this link.

For our Source of Wealth Form please click on this link.



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 (www.covisory.com)

Reflection: A Tool You Need

With another 31st December rolling on by Covisory turned 10 years old. Over the holidays my youngest 20+ child quizzed me on whether I had any resolutions for 2017. This led to some interesting conversations on the concept of reflection.

I’m not one of those people who each year makes resolutions. I freely admit that the cynic in me watches to see how long the resolutions of others will last in the coming year. We all know the routine firstly you fall for the line that it’s a new year so you need to make resolutions. You start with good intentions but as life encroaches, those resolutions either drift off into the too hard basket or are just forgotten.

These easy to make, on the spur of the moment, influenced by what is the latest trends are doomed to fail. Why? New Year Resolutions have on the most part no meaning. People expect to fail with them, there are no consequences on them if the result is not achieved.

Making resolutions is not the problem it is the built-in expectation to fail. If we live our business and personal lives without reflecting on our past experiences, we are bound to make the same mistakes. We cannot break through barriers by doing more of the same. Not only must we invest in action we also should work on deep and sustained reflection on an ongoing basis and not just once a year. Reflecting will not solve all the problems but it will help move you a tiny bit closer.

Let’s face it life is busy these days. We are all guilty of spending a lot of our time chasing the immediate reward, the near-term “goal” — in short, the expedient and the convenient. We are all obsessed with doing. What we are not so good at is stopping and taking a hard look at Why and What we are doing. Reflection may be a tool talked about in education but there is little application when we move into the workforce. Why not – are we afraid of what we will find?

If a business is not doing well it is easier to cast blame for problems on difficult customers or an investor. Alternatively, maybe we look to blame the government bodies regulating the industry, or competitors and who hasn’t blamed the computer or an application for our failures? We do not automatically ask in a situation what am I doing wrong or right? How could I improve? Our culture allows us to avoid personal responsibility – we are guilty of not owning problems or to finding ways to solve them.

If we do not take time out of our week, month or year to make room for the deep questions and thinking we fail to grow. We opt for the distracting items that fill our time. It is not about working harder. We need to work smarter and this means having the time for reflection so that we can make changes and improve on past performance.

Breakthroughs to a product, a company, a market or industry do not come from being busy and jumping between multiple tasks. Change comes from an opportunity to have structured periods of reflection. We need time to ponder, to question, to model, and to research. Reflection drives experimentation and sparks innovation. By reviewing the processes and results we add to our understanding, gain insight and allow companies to respond to change. By taking the opportunity to reflect we can make our businesses radically better.

In today’s culture, we as individuals and businesses are engineered to Do, we have not been encouraged to reflect. To add reflection to our lives allows us to embed concepts and theories into our practices. It fosters constant thought and innovation that provides the means to allow us to grow as both individuals and professionals.

Within Covisory ‘Reflection’ is a core component of how we operate both internally and when we work with customers. If you need assistance, we are always happy to support you with this process. Please Contact Us. With a new year before us let 2017 be the year to not only learn from our experiences but regularly reflect on those experiences.

I will leave you with the words of Margaret J. Wheatley an American writer and management consultant:

“Without reflection, we go blindly on our way, creating more unintended consequences, and failing to achieve anything useful.”

And Now for Something Completely Different…

My personal resonance with the above statement conjures up images of a goose-stepping John Cleese, one of the hilariously gifted Monty Python members and a skit entitled ‘The Funniest Joke in the World’. The joke was so funny that it was deadly. It ended up used as a weapon delivered across enemy lines by khaki-clad foot soldiers.

There are those reading this that will resonate with me – maybe a chuckle or two for old times’ sake. There are those who will have no resonance at all – either through a disregard for Monty Python’s slapstick humour or of an age where Monty Python is a reference accessed on You Tube.

It would not take Sherlock Holmes to determine that the author of this article is in the 50+ age bracket. As an age group, we should be applauded for surviving and prospering through 3 decades of unparalleled transformation and change. While empathy is scant from our finger tapping Facebook using Twitter communicating 20+ children the evidence of change is mind blowing.

My first steps in the noble profession of accounting were in the employ of a small accounting and audit firm in Oxford Circus in London. Computers were largely non-existent. Accounting was done through the manual entry of relevant numbers in aesthetically pleasing leather bound ledger books. These books were works of art. The first days of any new job were spent extrapolating the numbers from the ledger on to 8 column stationery. You became skilled in identifying where your Trial Balance didn’t balance. Gaining a thorough understanding of double entry and the picture the numbers were creating.

A particular memory was of a practitioner called Harry. Harry seemed ancient to us being in the 50+ age bracket back then. He only had one suit; identifiable by the biscuit stains that permeated the left lapel of the cross thread tweed. Harry looked after all the Chinese restaurants. The records arrived in boxes and in Chinese. He translated them to double entry and English. He delivered an accounting story that was accepted by the Revenue authorities. He was a skilled professional and worth a fortune to his clients. Harry made me realise that our noble profession is more about artistry and interpretation than computation and certainty.

From the leather bound ledgers of not so long ago to where we are today. Memories of collecting information in strict sequence to be delivered to a computational beast that took the place of balancing the Trial Balance. Moving onto the first laptop, the floppy disk (what happened to them?), the internet to cloud-based accounting packages like Xero. The way we do things has inextricably changed for the better. Making a trial balance was numerically satisfying but a poor and expensive use of human resource.

The art of accounting has not changed. At a fundamental level accounting is about the concepts of communication and value. Conventions have been developed to try and standardise how we communicate the interpretation of value. But it can never entirely succeed, it can never be standard. In fact, it is arguable that this standardisation has made things less understandable not more.

Value is dictated by circumstance. A major asset in your balance sheet can easily become a major threat to your business e.g. a large debtor develops financial problems. Business is done through the interaction of human beings using the language of money measured by numbers. It is not the compilation of the numbers that is important but the interpretation. It is being able to communicate well the business story the numbers are telling. Technology is doing the compiling to allow us to do the interpreting.

You cannot separate numbers from the human aspects of operating a business. We come in all shapes, sizes, personalities, belief systems and values. Human beings will never come standard. Over the years there have been many theoretically valid generic products that have failed due to the human element. The most valuable professionals engender trust through values of integrity and objectivity. They understand and relate on a human level while communicating their skills.

I have no doubt that Harry would be as valuable today as he was in his day. His thorough understanding and personal skills would just be engaged more productively. If we could bring Harry back, he would probably think that this modern day way of carrying on was nothing more than ‘The Funniest Joke in the World’….


We have seen a few cases recently where trust records such as trustee resolutions, financial statements etc have been disposed of. It appears these records have been destroyed along with the tax records for the trust after the 7 year retention period under the Tax Administration Act has finished. We want to remind everyone that apart from tax records all trust documents need to be retained for the trust, including all financial statements for the trust.

This is necessary especially if there are any queries about decisions taken by trustees in the past. Under the new anti-money laundering rules we are also seeing banks and other financial institutions request information about the original source of wealth transferred into the trust and this is hard to supply if all of the trust records have been destroyed.

Please contact Marcus Diprose if you need to discuss this further.