Understanding your tax obligations
If you are buying or selling land (with or without a home on the section), it is important to have an accurate understanding about your tax obligations and whether GST will be applicable to your transaction.
GST is not typically applicable in residential sale and purchase transactions but, if you are GST-registered and the sale is part of your taxable activity, GST may apply.
Potential GST outcomes
If the buyer and seller are both GST-registered, the transfer of land is part of a taxable activity (for example: farming, or a commercial building), and the property is not used as a private residence, the transfers are typically zero-rated for GST (meaning GST is charged on the transaction at a rate of 0%).
If the buyer is GST-registered and the seller is not GST-registered, and the buyer intends to use the land as part of a taxable activity, the buyer may be able to claim GST.
If the seller is GST-registered (and claimed GST) and sells the land to a buyer who is not GST-registered, or does not intend to use the land as part of a taxable activity, the seller may need to return GST to Inland Revenue following the sale.
There can be additional complications where some part of the property is used for private purposes, and some part is used for a taxable activity. In this instance, some of the purchase price may be subject to GST, but some part of it may not.
Warranty as to GST status
The standard sale and purchase of real estate agreement contains a statement on the front page – ‘the vendor is registered under the GST Act in respect of this transaction and/or will be so registered at settlement.’
If you are GST-registered and the sale is a taxable supply, you will need to complete schedule one in the agreement. As a seller, you will need to tick either ‘yes’ or ‘no’ to this statement. You must provide a warranty that the answer you provide is correct and will remain correct as at settlement. If it later transpires that your answer was incorrect, you have breached a warranty and could be liable to the buyer for any losses they have suffered because of this breach. For example, if you provided a warranty that you were not GST-registered in relation to the transaction, the buyer may presume that they may claim GST from Inland Revenue following settlement if they will be GST-registered and intend to use the property for taxable supply. If you were, in fact, GST-registered, the buyer will not be able to do that, therefore you may be required to reimburse 15% of the purchase price to the buyer due to your breach of warranty.
If you are the buyer, the agreement contemplates your GST status potentially changing throughout the transaction. For example, you may initially sign the agreement in your personal name (and you are not GST-registered) and later you nominate a GST-registered company to complete the purchase.
The purchase price will be expressed as either ‘plus GST (if any)’ or ‘inclusive of GST (if any),’ which dictates how much you need to pay on settlement, depending on your GST status. It should be clear to all parties whether the buyer will be GST-registered on settlement date, as this can have GST implications for both parties.
Purchase price allocation
If GST is applicable to the transaction, you should consider whether you should agree with the other party on a purchase price allocation; completing a purchase price allocation is highly recommended in some situations since GST may be claimable on some items, but not others.
If the buyer and seller agree on a purchase price allocation in the agreement, this allocation must be used by both the seller and buyer when completing their respective tax returns. This provides certainty to both parties. The purchase price allocation can therefore have tax consequences for both buyer and seller, so it is important to get accounting advice on this allocation before signing the agreement.
Where to from here?
If GST is (or may be) applicable to your transaction, it is important that you get legal and accounting advice before signing the agreement. A mistake in the agreement cannot always be fixed by your professional advisers after signing; it could result in an unexpected GST bill, which can be very costly. We and your accountant will work together to ensure that the sale and purchase agreement accurately reflects your GST position and that you fully understand any potential tax consequences before signing the agreement.
[1] Purchase price allocation is where the price is allocated between the land and any buildings, and other fixtures, fittings, chattels or improvements.
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Copyright, NZ LAW Limited, 2022. Editor: Adrienne Olsen. E-mail: [email protected]. Ph: 029 286 3650
