Little known changes to GST
From 1st April, 2011, where the Vendor and Purchaser in a Land transaction are GST registered and the purchaser uses the land for a taxable activity, then the transaction is deemed to be zero rated for GST purposes. What is the significance, you may ask? Well, if you are a property trader or property developer, it is very significant. A lot of traders/developers use their GST refund to renovate the property and develop the land. This rule has the effect of stopping that practice. For those purchasers who want to ensure that the transaction is not with a GST registered person, they need to have an Addendum to their Agreement for Sale and Purchase – Covering the vendor GST status completed and signed by the Vendor. This will give them some guarantee that the Vendor is not GST registered. Still be aware of the fish hooks especially if you think the Vendor may be insolvent or you are purchasing the property from a Mortgagee sale as you will caught not able to claim the GST on your purchase and having to pay GST on the future sale.
Change of Use Adjustment
For those traders/developers who have been caught in the property slump and have decided to rent out their trading stock (residential houses), they needed to do a periodic adjustment in their GST returns, which usually works out to be less GST to pay, than if they had declared GST on the rent received. This was called the Lundy adjustment, certainly not named after the infamous Palmerston North murderer, but after a case taken to court by the Tax Review Authority – Lundy Trust vs. Inland Revenue. I digress, if you are a trader/developer in property and you want to do a change of use adjustment for properties purchased after the 1st April, 2011, then your adjustment is a lot more onerous and you need to consult an Accountant.
There is also good news for Vendors in respect of Nominee Purchasers. It is common for Purchasers to nominate another Purchaser to complete settlement. Pre 1 April 2011 the Purchaser needed to be registered for GST at the time of supply which was the date the Agreement became unconditional. That position could become problematic for Purchasers who have not planned for GST prior to confirming the contract unconditional.
The Rules provide that when addressing GST you are to look at the position of the payer of the goods (i.e. Nominated Purchaser) and the Vendors status as at settlement date. This means that a Purchaser can nominate a third party to complete settlement and delay registration up until settlement. Again this is good news for all parties because it simplifies the process for Nominated Purchasers and minimises any risk to Vendors.
Posted on Wed, 1 June 2011
by Shawn O'Grady