New Rules for Zero-Rating Property Transactions for Property Traders

Posted on Monday, April 20 2015

In the past, there have been some taxpayers that would sell a property between associated companies and avoid paying the GST. The way this worked was the purchaser company would claim the GST but the vendor company would go into liquidation before paying that GST.

Clearly, the Government and the IRD didn’t like this so new rules were introduced on 1 April 2011 that made it compulsory for certain land transactions to be done on a zero-rated basis. This way there would be less risk that the IRD would miss out on their money from a property transaction involving GST.

While this might be good from the IRD’s point of view, it does raise some issues for property traders.

If a GST registered vendor sells a property to a GST registered purchaser that is going to use the property as part of a taxable activity, then the transaction must be zero-rated for GST. Here are some examples of the problems that this could cause so that you know what to be aware of:

Example 1

A property trader purchases a property from a non-GST registered person for $230,000 (they will claim $30,000 GST on this). They then onsell the property on the same day to another GST-registered property trader for $241,500 making a $11,500 profit ($10,000 profit excl GST).

However, as this is a transaction between GST registered entities and the purchaser is going to be using the property in its taxable activity, the sale price is actually recorded as $210,000 zero-rated. This property trader is now $20,000 short of cash as he must pay $230,000 now and only gets $210,000 in return. He won’t get his $10,000 profit on the trade until he files his next GST return when he will claim the $30,000 of GST on the purchase price which could take a few months.

Example 2

A property trader purchases a property for $230,000 inclusive of GST and intends to claim GST of $30,000 in the next GST return. It turns out that the vendor is GST registered so that transaction must be zero-rated. As the purchase price was including GST and the GST is nil, the property trader misses out of their GST refund but must still pay GST when that property is onsold. To avoid this, the property trader needed to enter into the sale & purchase agreement as $230,000 plus GST if any.

Example 3

A property trader sells a property for $200,000 inclusive of GST and intends to pay no GST as he believes that the purchaser is a GST registered entity that will be using the property in a taxable activity. It turns out that the vendor is not GST registered so the transaction cannot be zero-rated. As the purchase price was including GST, the property trader cannot recover the GST from the purchaser and must pay GST of $26,087 in the next GST return. To avoid this, the property trader needed to enter into the sale & purchase agreement as $200,000 plus GST if any.

Tony Thorne
www.thorneaccounting.co.nz

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Expert's Bio

Tony Thorne

Thorne Accounting has been providing specialised accounting and tax services to residential and commercial property investors since 2004. Our mission is to provide the highest quality tax and accounting services to property investors. We are constantly fine tuning the way we work with property investors so we can provide this superior service at competitive prices.

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