GST and Commercial Property Transactions

June 28, 2018

in Property

We are seeing increasing examples of the incorrect treatment of GST between vendor and purchaser in respect to commercial property transactions.

This is particularly so where the property is a residential investment being sold and purchased between two parties who are both GST registered.

Due to incorrect advice received at the time from other professionals or simply a lack of understanding often the transaction is conducted in such a way that the purchaser is disadvantaged by the incorrect treatment of GST on the transaction.

Essentially where a property is purchased between two GST registered entities and the purchaser acquires the land with the intention of using it for making taxable supplies (i.e. does not intend to use it as a principal place of residence) the transaction must be treated as zero rated for GST purposes under the CZR regime.

This is not an optional situation – Inland Revenue have made it clear that the zero rating of that transaction is compulsory hence the term CZR (compulsory zero rating).

The difficulty is where the vendor purports to charge GST and the purchaser unwittingly or on incorrect advice pays GST on the transaction. In such circumstances the purchaser is significantly disadvantaged as IRD will not allow the purchaser a refund on the GST paid.

Essentially the purchaser’s only option is to try and recover that GST from the vendor which may be difficult or costly.

We have also had a number of property trader clients who purchase a property on the understanding that the vendor is not registered for GST and therefore has an expectation of a GST credit on the purchase. However by the time settlement arises the vendor has either altered or corrected its GST status to registered meaning the contract and transaction must be treated as subject to the CZR regime.  In such circumstances, the purchaser may have agreed to a purchase price on the expectation of a GST refund which is no longer available.

Unless there are appropriate conditions in the contract preventing such a situation occurring the purchaser has no recourse against the vendor because assessment of status under the CZR regime is made at settlement not at the time of contract.

In all cases we strongly recommend clients take full advice and if there is any doubt as to the GST treatment and if the purchaser is dependant on a certain GST status as at settlement that appropriate conditions are inserted into the contract.

If you require any advice or further information on the matters dealt with in this publication please contact the lawyer at Farry and Co. who normally advises you, or alternatively contact:

Paul Farry
pfarry@farry.co.nz
09 353 6671

 

The information contained in this publication is intended as a guide only. It does not constitute legal advice and should not be relied upon as such.  Professional advice should be sought before applying any of the information to particular circumstances.  While every reasonable care has been taken in the preparation of this publication, Farry and Co. does not accept liability for any errors it may contain.

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