There is often confusion about how to deal with GST on a property transaction. Here is a general outline of the position but beware that you should get specific legal and tax advice in these situations.
"Sort of" getting it right on the Agreement for Sale and Purchase is not really an option. That's because if its not right its wrong, and the implications for the Vendor and Purchaser can be huge, depending on how wrong the agreement is.
The Agreement for Sale and Purchase form has just been updated to make the whole position more easily understood, but we'll talk about that more shortly.
Before we do that, lets set out some basics regarding GST on land transactions.
Firstly is the Vendor registered for GST?
To be able to register for GST, the Vendor must be using the land for making "taxable supplies" for GST purposes, and must not be using the land as a principal place of residence.
Leasing a building for commercial tenants is a taxable supply. So is short term letting where guests are paying a rate per night. Typically these arrangements are handled by a letting manager in a managed apartment complex, for example. Farming the land would be a taxable supply.
Long term residential letting however, is not a taxable supply for GST purposes.
If the Vendor is registered for GST two things must happen on the Agreement. The Vendor must state on the Agreement (now right near the top of the front page) that he (meaning he, she or it) is registered for GST, and again in Schedule 2 of the Agreement. The other thing that must happen is that the price should be shown as "Plus GST (if any)". That is critical.
If the Vendor is not registered for GST he must say so on the front page. Then there is no need to do anything in Schedule 2.
Secondly, is the Purchaser registered for GST?
If so the Purchaser must say so in Schedule 2 and answer ALL of questions 2 to 6 of Schedule 2.
If not, the Purchaser must answer "no" to questions 2 and 3 of Schedule 2.
So now lets look at different scenarios:
What if neither the Vendor nor the Purchaser is registered for GST?
In this case there is no GST implication to worry about. The Vendor should still answer "no" on the front page to confirm that he is not GST-registered.
The Purchase price on the front page of the Agreement can be recorded as "Plus GST (if any)" or "Inclusive of GST (if any)". If neither is crossed out the Purchase price includes GST (if any). If neither party is GST-registered it doesn't matter.
What if the Vendor is GST-registered but the Purchaser is not?
Here the Vendor MUST record the Purchase price as "Plus GST (if any)" otherwise he will have to pay GST out of the funds he does receive whether he likes it or not. He won't, so he will not be happy.
What if the Vendor is not GST-registered but the Purchaser is?
The Vendor can't say the Purchase price is "Plus GST (if any)" because he is not registered. So the Purchase price will be "Inclusive of GST (if any)". And the Purchaser will be able to claim the GST in his next GST return.
What if the Vendor and the Purchaser are both GST-registered?
This is more interesting. Clauses 14 and 15 of the Agreement are relevant here.
If the transaction involves the sale of a business such as a commercial building with tenants in place, or an apartment subject to a short term letting agreement then it will be regarded as the supply of a going concern and will be zero rated as per clause 15. Otherwise clause 14 of the Agreement will apply.
Clause 14 basically provides that if both parties are GST-registered, AND the Purchaser declares in Schedule 2 that he intends to use the property for "making taxable supplies" (which is legalese for such things as commercial letting, short term letting, a developer selling sections, someone running a business on the land), AND the Purchaser does not intend at settlement to use the property as a principal place of residence, then the transaction will also be zero rated. This is the "Compulsory Zero Rating" scheme you may have heard of.
However....
What if the GST status of one or other party changes between the time the Agreement is signed and the Settlement Date?
The Vendor's GST status is not likely to change but the Purchaser's might. This is addressed in clause 14.5 and if the Purchaser changes GST status he must notify the Vendor no later than two working days before settlement so that the correct position can be recorded on the settlement statement.
The relevant date is the GST status of the parties at the Settlement Date.
What about where one or both of the parties are GST-registered but part of the land is intended to be used as a principal place of residence?
This is common in farming situations. It is now dealt with under the new clause 14.6 of the Agreement, and the part of the property that is intended to be used as a home will be separated out because it is not a taxable supply and does not attract GST. The rest of it will, but if both parties are GST-registered then it will be zero rated.
What about where both of the parties are GST-registered but the Purchaser intends using the land half of the time for making taxable supplies (e.g. short term apartment letting) and half of the time for GST-exempt supplies (e.g. personal use of the apartment)?
Here the Purchaser will have to pay GST on half of the purchase price because he cannot claim zero rating for personal use - it is not a taxable supply and he cannot claim to be GST-registered for it.
What if the Purchaser nominates another party to buy the property and that nominee has a different GST status than what the Purchaser disclosed in Schedule 2?
Again, the relevant date is the Settlement Date. If the Purchaser nominates another party to settle the purchase then clause 14.5 will apply and the Purchaser must inform the Vendor no later than two working days before settlement so the settlement statement can be changed.
The changes just made to the Agreement for Sale and Purchase form seek to address these questions. But there are still risks, for example where a transaction is mistakenly zero rated.
We are happy to help wherever we can. Please call Russell Mawhinney on 4500000 or email on rem@prlaw.co.nz
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