Customising Your Transaction Categories for Better Financial Insights

The construction and property development sectors have some of the most complex GST rules in New Zealand's tax system. With high-value transactions and specific provisions for land and buildings, understanding GST obligations is essential for businesses in this industry.

GST Registration for Construction and Development Businesses

Standard Registration Requirements

Like other businesses, construction and property development operations must register for GST if their taxable supplies exceed (or are expected to exceed) NZ$60,000 in any 12-month period. For businesses in this sector, taxable supplies include:

• Construction services
• Property sales (where undertaken as a taxable activity)
• Project management services
• Design and architectural services
• Engineering consultancy
• Equipment hire

Given the value of construction and development activities, most businesses in this sector will exceed the threshold and need to register.

One-off Projects and Registration

A unique consideration for property development is whether one-off projects require GST registration:

• Even a single development project may exceed the registration threshold
• The "taxable activity" test requires continuity, but this can be satisfied by a development project conducted over time
• If undertaken as a commercial endeavor (rather than purely for private purposes), one-off developments generally constitute a taxable activity

Developers should consider GST registration even for individual projects if they have a profit-making purpose.

GST on Property Transactions

Compulsory Zero-rating of Land

Since 2011, New Zealand has had special rules for land transactions. Under the compulsory zero-rating (CZR) rules:

• When land is sold between GST-registered persons, and the purchaser intends to use the land for making taxable supplies, the transaction is zero-rated (GST charged at 0%)
• The seller doesn't charge GST, and the purchaser doesn't claim an input tax credit
• This prevents "phoenix" fraud schemes where purchasers claim GST refunds but disappear before selling and paying GST

Both parties must confirm their GST status and the purchaser's intentions for the land before settlement.

Determining When CZR Applies

CZR applies when all of the following conditions are met:

• The supply includes land (as defined in the GST Act)
• The supplier and recipient are both GST-registered
• The recipient acquires the land with the intention of using it for making taxable supplies
• The recipient doesn't intend to use the land as their principal place of residence

Sale and purchase agreements typically include warranties and information requirements to establish whether these conditions are met.

GST on Residential Property

For residential property transactions:

• The sale of an existing home by a homeowner is generally not subject to GST (as it's not part of a taxable activity)
• The sale of a newly constructed home by a developer is typically subject to GST
• Long-term residential rental is exempt from GST
• Short-stay accommodation (like holiday homes) is generally subject to GST

The GST treatment depends on the nature of the property, the seller's activities, and the property's intended use.

GST for Property Developers

Development Costs

Property developers can generally claim GST on development costs, including:

• Land acquisition (if GST was charged)
• Construction services
• Professional fees (architects, engineers, surveyors, etc.)
• Building materials
• Consent and compliance costs
• Marketing and sales expenses

These input tax credits can significantly improve cash flow during the development phase.

Timing of GST Claims

Property developments often span multiple GST periods. Key considerations include:

• GST on costs can generally be claimed in the period when invoices are received (invoice basis) or paid (payments basis)
• For large developments, this can lead to substantial GST refunds during the construction phase
• Developers should maintain comprehensive records linking GST claims to specific projects

Sales and Output Tax

When completed properties are sold:

• GST typically applies to the full sale price (unless CZR applies)
• The timing of the GST liability depends on when the "time of supply" occurs
• For off-the-plan sales, the time of supply may be when deposits are received or when the sale and purchase agreement is entered into

This can create GST obligations before settlement, which requires careful cash flow management.

GST for Construction Businesses

Progress Payments and Time of Supply

Construction contracts often involve progress payments. For GST purposes:

• Each progress payment generally creates a separate time of supply
• GST must be accounted for on each payment when invoiced or received
• The Construction Contracts Act requirements for payment claims interact with GST invoice requirements

Construction businesses should ensure their payment claim documentation meets the requirements for valid tax invoices.

Retention Money

Retention money held back from progress payments has specific GST treatment:

• GST must generally be accounted for on the full progress payment, including the retention portion
• This means GST is paid to Inland Revenue before the retention is received
• When retention is finally paid, no additional GST applies as it's already been accounted for

This can create cash flow challenges that need to be factored into financial planning.

Materials and Subcontractors

Construction businesses can claim GST on:

• Building materials and supplies
• Subcontractor services
• Equipment hire
• Professional services related to projects

Maintaining valid tax invoices for all these expenses is essential for claiming input tax credits.

GST on Commercial Property

Commercial Leases

Commercial property leasing is subject to GST:

• Landlords charge GST on rent and outgoings
• GST-registered tenants can claim input tax credits on these expenses
• Lease agreements should clearly specify whether rental amounts are GST-exclusive or inclusive
• Lease incentives and fit-out contributions have specific GST implications

Commercial Property Sales

For sales of commercial property:

• GST typically applies if the seller is GST-registered and using the property in a taxable activity
• The CZR rules often apply, resulting in zero-rating
• The GST treatment should be explicitly addressed in the sale and purchase agreement
• Due diligence should include verification of the GST position

Going Concern Provisions

The sale of a business as a going concern can be zero-rated for GST if:

• The business is sold as a going concern
• Both parties are GST-registered
• There is an agreement in writing that the supply is of a going concern
• The purchaser intends to use the assets for carrying on the same kind of taxable activity

For commercial property, this typically requires an active business being conducted on the premises or tenant leases transferring to the purchaser.

Special GST Situations in Construction and Development

Change in Use

When the use of a property changes, GST adjustments may be required:

• If property developed for sale is instead retained for rental, an adjustment may be needed
• Conversely, if rental property is later sold, GST implications may arise
• The adjustment calculation depends on the extent of the change and the property's value

These adjustments can be complex and may require professional assistance.

Mixed-use Developments

For developments with both commercial and residential components:

• GST can generally be claimed on costs related to the commercial portion
• Costs exclusively related to residential units may have different GST treatment depending on the developer's overall business model
• Apportionment may be required for shared costs

The apportionment method should be fair and reasonable, based on factors like floor area or relative value.

Second-hand Goods Input Tax Credit

When purchasing second-hand goods (including land and buildings) from an unregistered person:

• GST-registered purchasers can claim an input tax credit based on the purchase price
• This is calculated as 3/23 of the purchase price
• Special documentation requirements apply instead of tax invoices
• For land transactions, the credit may be capped or restricted in certain circumstances

This provision helps maintain the integrity of the GST system when goods re-enter the GST net.

GST Compliance and Documentation

Land Transaction Documentation

For property transactions, specific GST documentation is essential:

• Sale and purchase agreements should clearly address GST treatment
• Vendors and purchasers must provide their GST registration status
• For CZR transactions, purchasers must confirm their intentions regarding the land
• Settlement statements should accurately reflect the GST position

Standardized clauses and warranties are typically used in property transaction documents to address GST requirements.

Tax Invoices for Construction Services

Construction businesses must issue tax invoices that include:

• The words "Tax Invoice" prominently displayed
• The supplier's name and GST number
• The recipient's name and address
• Date of issue
• Description of the goods or services (including the construction site address)
• The amount of GST charged or a statement that GST is included
• The total amount payable

Many construction businesses align their payment claims under the Construction Contracts Act with their GST tax invoices to streamline documentation.

Record Keeping

Comprehensive record keeping is particularly important in construction and development due to the high-value transactions and long project timeframes:

• Maintain all tax invoices for construction costs and professional services
• Keep contracts, variations, and correspondence related to GST treatment
• Document the basis for any apportionments or adjustments
• Retain property transaction documents including GST warranties
• Maintain records for at least 7 years from the end of the relevant tax year

GST Cash Flow Management

Accounting Basis

The choice of accounting basis can significantly impact cash flow:

• Invoice basis: Account for GST when invoices are issued or received (standard for larger businesses)
• Payments basis: Account for GST when payments are made or received (available for businesses with turnover under $2 million)
• Hybrid basis: Invoice basis for sales, payments basis for purchases

For developers with substantial upfront costs and delayed sales revenue, the payments basis may offer cash flow advantages.

Filing Frequency

The GST filing frequency also affects cash flow:

• Monthly filing allows for quicker refunds during development phases
• Two-monthly is standard but may delay refund claims
• Six-monthly filing (for businesses with turnover under $500,000) is generally less suitable for development projects due to the delay in processing refunds

Funding GST on Land Purchases

When GST applies to land purchases and CZR doesn't apply:

• The GST component can significantly increase the required funding
• While ultimately reclaimable, the GST must be paid to the vendor at settlement
• This creates a timing difference between payment and the GST refund
• Funding arrangements should account for this timing difference

Common GST Pitfalls in Construction and Development

Incorrect Application of CZR

A common error is incorrect application of the compulsory zero-rating rules:

• Failing to identify that CZR applies, resulting in GST being incorrectly charged
• Incorrectly applying CZR when conditions aren't met
• Not obtaining or providing the required information about GST status and intentions

These errors can lead to significant GST exposure and potential penalties.

Timing Issues

Timing issues frequently create GST problems:

• Not accounting for GST at the correct time of supply
• Claiming input tax credits before holding a valid tax invoice
• Failing to account for GST on deposits or progress payments
• Not recognizing when a supply has been made for GST purposes

Residential vs. Commercial Classification

The distinction between residential and commercial property can be challenging:

• Serviced apartments and short-stay accommodation may have different GST treatment than standard residential property
• Mixed-use buildings require careful analysis
• Changing the intended use of a development can have significant GST implications

GST on Specific Development Types

Subdivisions

Land subdivision developments have specific GST considerations:

• The sale of bare land lots is typically subject to GST if undertaken as a taxable activity
• Development costs like earthworks, roading, and infrastructure can be claimed as input tax
• The timing of GST obligations relative to sales can create cash flow challenges
• Special rules may apply when farmland is subdivided

Residential Development for Sale

For developers building homes for sale:

• GST generally applies to the sale of new homes
• Input tax can be claimed on construction and development costs
• Off-the-plan sales may trigger GST obligations before construction is complete
• Display homes have specific GST considerations if later sold

Commercial Development

For commercial property development:

• GST applies to both development costs and eventual sale or leasing
• CZR typically applies when selling to GST-registered purchasers
• Leasing rather than selling creates different GST cash flow patterns
• Fit-out contributions and incentives have specific GST implications

Professional Advice

Given the complexity and high values involved, professional advice is strongly recommended for construction and development GST matters:

• Engage tax professionals with specific experience in property GST
• Seek advice early in the development process to plan for GST implications
• Have sale and purchase agreements reviewed for GST issues before signing
• Consider obtaining GST rulings from Inland Revenue for complex or uncertain situations

The cost of professional advice is generally deductible and can prevent costly GST errors.

Conclusion

GST compliance in the construction and property development sectors requires careful attention to specific rules, particularly around land transactions and the timing of supplies. With high-value transactions and complex projects, the GST implications can be significant.

By understanding the key GST considerations for construction and development, businesses can ensure compliance while optimizing cash flow and preventing costly errors. Proper planning, documentation, and professional advice are essential components of effective GST management in this sector.

Remember that while GST adds complexity to property transactions, with proper systems and knowledge, it should ultimately be a pass-through tax rather than a cost to compliant businesses. The key is ensuring that GST is correctly accounted for at each stage of construction and development projects.