Articles by Matthew Gilligan
On 1 April 2011, new GST rules came into force. Perhaps the change of most significance to many of our clients are the new rules around zero rating of land transactions.
These rules were brought in to address concerns the Government had about GST leakage where land was being sold from one GST registered party to another, with the GST registered purchaser making a GST claim that was funded by the IRD, only for the GST registered vendor to turn out to be insolvent meaning the IRD were not able to collect the GST from them.
As a result, new rules now apply to transactions involving the supply of land between GST registered parties. Put simply, any supply which involves land is zero rated for GST purposes, which means that GST applies at a rate of 0%. A registered purchaser does not pay nor claim GST and the registered vendor does not return it. This prevents the IRD from ending up in a situation where they are out of pocket.
If you are a vendor or purchaser of land, you need to be very careful. Consider the following situation from a purchaser's perspective:
You are buying a property for trading purposes. You are an experienced trader and have a GST registered trading trust through which you conduct your trading activity. You generally buy properties for around circa $230,000 and are accustomed to claiming GST in respect of these purchases, which then means the net cost to you after your GST claim of $30,000 is $200,000.
You find a new property that fits your criteria and eventually negotiate a price of $230,000 inclusive of GST anticipating a refund of $30,000. However, it transpires that the vendor is GST registered themselves and selling the property as part of their trading activity. Under the new rules you are not able to claim $30,000 GST, as the transaction is zero rated, meaning that the applicable GST rate is 0%. As the purchase price was $230,000 including GST and the GST is nil, the net cost to you is $230,000 and you will still have to account for GST on sale – unless you sell to another GST registered party buying the property for taxable purposes.
There is an addendum that has been added to the standard sale and purchase agreement but we are aware of instances where vendors are not filling this out or it is being filled out when it isn't required to be.
The result of all of this is that you should act with the utmost caution if you are a GST registered purchaser or vendor of land. Please contact us at GRA for specific GST and zero rating advice on your transactions as required. Make sure you do this before contracts go unconditional so that you have certainty around the GST treatment before you are committed.
Thanks John, You have been an excellent person and firm to deal with over the last ten years. Kerrie and I have really appreciated your advice. - Andrew and Kerrie - Brisbane, August 2018
Investing in residential property?
If you're investing in residential property, seeking to maximise your ability to succeed and minimise risk, then this is a 'must read'.
Matthew Gilligan provides a fresh look at residential property investment from an experienced investor’s viewpoint. Written in easy to understand language and including many case studies, Matthew explains the ins and outs of successful property investment.