April 30 2012

A reminder: buyers beware of GST zero-rating

The Taxation (GST and Remedial Matters) Act 2010 (TGRM) was created to streamline administrative costs to the IRD and to prevent ‘phoenix’ GST schemes where land was transferred between associated entities and the purchasing entity received a GST refund before the vendor entity settled the liquidation. In some circumstances the vendor could avoid the payment of GST altogether. The TGRM effectively creates a GST-zero position as between GST registered parties in certain land transactions.

Under the new TGRM legislation, however, if a Sale & Purchase Agreement does not correctly record the GST position, heavy repercussions fall on you as the buyer. Before settlement you must provide a written statement to the vendor confirming your GST position and the vendor is entitled to rely on your statement. The REINZ Sale & Purchase Agreements now include those GST statements and those details should be completed at the time of forming the contract. Incorrectly treating a supply of land under the TGRM as zero-rated when GST is in fact payable can result in you having to fund an extra 15% of the purchase price, so it is important that these GST statements are properly completed. A property with a purchase price of $500,000 would have $75,000 GST for you to pay to the IRD, plus any use-of-money penalty interest if the GST is not paid on time.

Not all land transactions are zero-rated. A GST-registered person must zero-rate (ie: 0% rate as opposed to 15%) a whole or part supply of land if the supply, is made to another GST registered person, the recipient acquires the goods with the intention of using them for making taxable supplies, and the supply is not to be used as a principal place of residence of the recipient or their relative.

For example, sales of residential properties used for ‘short term’ rental purposes qualify for GST zero-rating as short term renting accommodation is a taxable activity. Similarly, the sale of a commercial property subject to a commercial lease is an instance where compulsory GST zero-rating should take place. To avoid nasty GST surprises get in touch with us before your Sale & Purchase Agreement is signed.