GST Issues for Property Traders
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Articles by Matthew Gilligan
One taxation risk facing those of you engaged in property dealing, development or building activity, is the risk associated with treatment of GST on purchase.
GST Basics
To briefly summarise some basics, the purchase and sale of property as part of an ongoing activity of property dealing, development or erecting buildings (i.e. acquisition for sale) is subject to GST. This means in the ordinary course of events, a property purchased for dealing purposes generates a GST claim on purchase and GST payable on sale. In this ordinary course of events, a purchaser bases the price they are willing to pay on the presumption that they can claim GST, or adjusts for it.
Zero Rating Issues
However, the catch is that the ability to claim GST on purchase hinges on the GST status of the vendor. If the vendor is not registered for GST in relation to the sale of the property, then a GST claim is available. On the other hand, if the vendor is GST registered in relation to the property being sold, then the purchase transaction is “zero-rated” from a GST perspective. This means GST applies at a rate of 0% and no GST can be claimed.
Example
To illustrate the significance of this using some simple numbers, let's assume a scenario of a property dealer signing up to buy a property for $1.15m “including GST” and then subsequently selling it for the same amount. They assume that because the contract says “including GST” that they can claim the GST. Turns out the vendor is GST registered, which deems zero rating and denies the purchaser the ability to claim GST.
As you can see, a property purchased for $1.15 m and sold for $1.15m loses the purchaser $150,000 due to the misunderstanding over GST. Therefore, investors who are dealing with property with a GST claim at stake need to pay special attention to this issue. Advice should be sought in writing from your professionals regarding this. I say in writing because you may need to hold your professional to account if they get this matter wrong.
Extending from this, at GRA we guide our clients to include specific terms in the sale and purchase agreement to preserve the purchaser's rights to sue the vendor, should their stated GST status turn out to be incorrect.
Status can be wrong for a number of reasons.
• The vendor makes a mistake, or lies about their status to gain an advantage.
• The vendor does not state their status and you assume they are not registered.
• IRD interfere when the purchaser claims and retrospectively deem the vendor to be registered, which can be very unfair to the purchaser.
IRD Interfering with Vendor GST Status Retrospectively
This is a real hazard for investors. IRD are increasingly looking at GST claims and investigating the vendor's circumstances. The risk here is that a transaction that you thought was undertaken with a non-registered vendor, ends up retrospectively being a transaction with a deemed GST registered vendor due to investigation by the IRD. This leaves you as a purchaser out of pocket for the GST that you cannot claim, and having to sue the vendor.
Given the costs of recovery and the difficulty in holding companies and their directors to account, this again speaks to the importance of making sure that sale and purchase agreements are drafted in such a manner as to preserve your rights. We advocate clauses and allow you to pursue not only the vendor, but also individuals if the vendor is a company. We provide these clauses to our clients on request, as it encourages transparency on the vendor's part and draws the issue to their attention.
Mortgagee Sales
This issue is further complicated if the property is bought as a mortgagee sale. For the most part, the default GST law is that mortgagee sales are subject to GST (even if the defaulting mortgagor themselves is not GST registered). However, if the bank can determine that the defaulting mortgagor is not GST registered, then they can apply an exception to the default rule and sell on a 'non-registered basis'.
Summary
If you find yourself on the wrong end of this GST hook, then contact us at GRA on +64 9 522 7955 or via our website.
To briefly summarise some basics, the purchase and sale of property as part of an ongoing activity of property dealing, development or erecting buildings (i.e. acquisition for sale) is subject to GST. This means in the ordinary course of events, a property purchased for dealing purposes generates a GST claim on purchase and GST payable on sale. In this ordinary course of events, a purchaser bases the price they are willing to pay on the presumption that they can claim GST, or adjusts for it.
Zero Rating Issues
However, the catch is that the ability to claim GST on purchase hinges on the GST status of the vendor. If the vendor is not registered for GST in relation to the sale of the property, then a GST claim is available. On the other hand, if the vendor is GST registered in relation to the property being sold, then the purchase transaction is “zero-rated” from a GST perspective. This means GST applies at a rate of 0% and no GST can be claimed.
Example
To illustrate the significance of this using some simple numbers, let's assume a scenario of a property dealer signing up to buy a property for $1.15m “including GST” and then subsequently selling it for the same amount. They assume that because the contract says “including GST” that they can claim the GST. Turns out the vendor is GST registered, which deems zero rating and denies the purchaser the ability to claim GST.
As you can see, a property purchased for $1.15 m and sold for $1.15m loses the purchaser $150,000 due to the misunderstanding over GST. Therefore, investors who are dealing with property with a GST claim at stake need to pay special attention to this issue. Advice should be sought in writing from your professionals regarding this. I say in writing because you may need to hold your professional to account if they get this matter wrong.
Extending from this, at GRA we guide our clients to include specific terms in the sale and purchase agreement to preserve the purchaser's rights to sue the vendor, should their stated GST status turn out to be incorrect.
Status can be wrong for a number of reasons.
• The vendor makes a mistake, or lies about their status to gain an advantage.
• The vendor does not state their status and you assume they are not registered.
• IRD interfere when the purchaser claims and retrospectively deem the vendor to be registered, which can be very unfair to the purchaser.
IRD Interfering with Vendor GST Status Retrospectively
This is a real hazard for investors. IRD are increasingly looking at GST claims and investigating the vendor's circumstances. The risk here is that a transaction that you thought was undertaken with a non-registered vendor, ends up retrospectively being a transaction with a deemed GST registered vendor due to investigation by the IRD. This leaves you as a purchaser out of pocket for the GST that you cannot claim, and having to sue the vendor.
Given the costs of recovery and the difficulty in holding companies and their directors to account, this again speaks to the importance of making sure that sale and purchase agreements are drafted in such a manner as to preserve your rights. We advocate clauses and allow you to pursue not only the vendor, but also individuals if the vendor is a company. We provide these clauses to our clients on request, as it encourages transparency on the vendor's part and draws the issue to their attention.
Mortgagee Sales
This issue is further complicated if the property is bought as a mortgagee sale. For the most part, the default GST law is that mortgagee sales are subject to GST (even if the defaulting mortgagor themselves is not GST registered). However, if the bank can determine that the defaulting mortgagor is not GST registered, then they can apply an exception to the default rule and sell on a 'non-registered basis'.
Summary
If you find yourself on the wrong end of this GST hook, then contact us at GRA on +64 9 522 7955 or via our website.
Matthew Gilligan
Director
© 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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