Most Read Contributor in New Zealand, September 2016
From 1 April 2011, the GST rules for
"land" have changed. Contracts for the sale of
land need to be amended to deal with these changes.
What began as a move to crack down on "phoenix" frauds
has resulted in GST being effectively turned off for supplies
between registered persons involving land. But this comes
with significant compliance requirements.
This Brief Counsel explains what you need to know before
entering into agreements under the new rules.
The new rules are compulsory
Supplies wholly or partly consisting of land must now be
zero-rated where the land is:
supplied by a registered person to another registered person
who acquires it with the intention of making taxable supplies,
not intended to be used as a principal place of residence of
the purchaser of the supply or a person associated with
"Land" is very broadly defined
"Land" is defined broadly to include an estate or
interest in land, a right that gives rise to an interest in land,
an option to acquire land or an estate or interest in land, or a
share in the share capital of a flat-owning or office-owning
company as defined in the Land Transfer Act 1952.
Importantly, mortgages, leases of dwellings, and (although not
entirely clear from drafting) interests in land where there is not
a significant (more than 25%) prepaid lump sum component are
excluded from the definition of land. For example, commercial
leases for office, retail and industrial premises are excluded,
although the grant of a ground lease with a large upfront payment
may be included.
Even with the exclusions the breadth of the definition of land
will mean the new zero rating provision will reach far beyond the
mischief of phoenix company frauds and will apply in contexts you
may not expect.
There is no de minimus threshold before zero rating
applies. Once a "land" component is identified,
zero rating will [apply] to the non-land components of a
transaction as well.
The application of the new provision is determined at
The issue for vendors will be whether they should zero rate in
GST returns filed before settlement given that zero rating under
the new provision will not be determined until
Purchasers will be required on or before settlement to provide a
statement in writing, which can be included in the agreement for
sale and purchase as a warranty, to the vendor stating that, at
are, or expect to be, a registered person
are acquiring the goods with the intention of using them for
making taxable supplies, and
do not intend to use the land as a principal place of residence
for them or a person associated with them.
The vendor is entitled to rely on this information in
determining the tax treatment of the supply. Vendors should
contractually bind purchasers to provide this information promptly
(certainly before the GST return is required to be filed).
Preferably the information will be included as part of the
agreement for sale and purchase.
Vendors have an obligation to retain the name and address of the
purchaser, the registration number of the purchaser, a description
of the land and the consideration for the supply. This
information goes beyond what vendors currently need to know to zero
rate transactions as a going concern, and contracts need to be
amended to address this.
What happens when things go wrong?
A major benefit for vendors from the new rules is that if, after
settlement, it is found that the zero rating criteria are not met,
Inland Revenue will look to the purchaser directly to pay the GST
In order for this rule to apply, it is important that vendors
have taken all necessary steps to collect the requisite information
and statements from the purchaser.
A more difficult question is who will bear the GST burden if the
vendor becomes aware prior to settlement that a statement provided
by a purchaser is incorrect and the supply should not have been
zero rated. Under the wording of the new legislation (in
particular the new credit and debit note provisions) it appears
vendors may become liable in such situations, despite the provision
entitling them to rely on the statements. This risk can be
Purchasers should also be wary of an option available to vendors
to apply the current GST rules to supplies made on or after 1 April
where the agreement is entered into before 1 April, an issue that
can again be dealt with contractually.
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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