New GST Regime
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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.
Matthew Gilligan
Managing Director and Property Services Partner
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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Hi Salesh, I just wanted to send you an email on behalf of GRA to say how fantastic we have found your company to date. As you know, Ben and I joined GRA a couple of months ago and have just found you so amazingly helpful in getting our new property set up correctly and sorted out. We have what I would consider a rather complicated structure as a result and it’s a fantastic feeling to know that we are getting everything done in the best way possible. We have just had approval to put a minor dwelling on the property which will make a massive difference in terms of cash flow and obviously value, something we would never have even thought of without GRA and which we are very excited about. During the buying process we attended a seminar with Matthew and from the outset thought he was fab. We therein signed up for property school and found this nothing short of fantastic. The content was relevant, up to date and comprehensive, but more importantly it was taught in a way that we could actually understand and really get value out of. I wanted to mention also, that everybody GRA have recommended to us has been just so efficient and absolute masters at what they do. A wonderful network of people that we feel very lucky to now be able to call on. From Kris Pederson and Bryan Rist who put our mortgage together to the insurance guys they then referred us to, I’m super impressed. Within GRA, Ellery has probably turned things around for us faster than I’ve ever known before, something which we appreciated so very much when it came to crunch time. She’s always a pleasure to deal with and again, we’re stoked. We’ve just settled on the property today and are about to go and get the keys. I’m pretty pumped and hence this email is probably rather excitable. So, a massive thank you to you Salesh, the partners for such a fabulous 6 weeks at property school and everyone at GRA for their help. May this be the start of our property empire. Thanks again, - A & B - July 2015
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