Goods and Services Tax (GST) – Compulsory Zero Rating on Land & Property Transactions
The Compulsory Zero Rating (CZR) rules were introduced in 2011 and require a 15% GST-able transaction to be zero-rated if:
- The transaction involves land (any interest in land will do);
- The vendor is GST-registered; and
- The purchaser (or recipient (e.g. nominee) acquires the property to carry on a taxable activity and not as a principal place of residence. The residence exception covers associates of the purchaser.
Under CZR the status of one party can affect the GST outcome for the other party – this is a unique feature of the rules. Particular care is required if a nominee receives the transfer of title as the GST status of the nominee will be relevant in determining if CZR applies or not.
CZR applies at settlement and it is therefore important to check the GST status of each party before settlement because this can change from the time the agreement is signed to the settlement date.
CZR trumps optional going concern treatment. GST for the purposes of a going concern is option and must involve the supply of a taxable activity or part of one capable as a separate operation.
Issues encountered in CZR:
- A common issue is where the GST-registered vendor caps the price of the sale of a property on a GST inclusive basis believing the transaction to be zero-rated under the CZR at the time of signing. Subsequently this changes because the purchaser nominates a nominee who is not GST registered for GST.
- GST position changes after settlement – If a supply is incorrectly zero-rated under CZR and this is discovered after settlement, the purchaser is liable under the GST for GST at 15%. Inland revenue can force the purchaser to become GST-registered in order to account for GST on the transaction. It is important to revise the terms of the agreement to account for this situation before entering into an agreement for sale and purchase.
- Ongoing adjustments are required if the taxable/exempt use of the land changes after the time of acquisition. E.g. if it is acquired for taxable purpose but later changes to exempt use.
- Situations where a purchaser claims a secondhand goods GST deduction but it later transpires that the vendor was GST registered. The front page as to the vendor’s GST status in the standard Agreement for Sale and Purchase must be accurately completed and confirmed before settlement.
- Auction sales and purchases: Problems arise where the purchaser is registered and bids on an inclusive basis. The GST-registered purchaser will need to negotiate the impact of CZR and include contractual terms.
- A GST registered vendor must always price the deal on a ‘plus GST basis. The vendor must also obtain the purchaser’s written statement covering the purchaser’s GST status and intention as to whether the property will be used as a residence or not.
The GST status of the agreement (and incidental pricing) must be checked prior to signing the Agreement for Sale and Purchase.
For more information, please contact us.