Understanding GST Penalties and How to Avoid Them

Property transactions often involve significant sums and complex GST considerations. Understanding how GST applies to property is crucial for both buyers and sellers in New Zealand.

When Does GST Apply to Property?

Not all property transactions are subject to GST. The key determining factors include:

Registration Status

GST only applies if the seller is GST-registered (or required to be) and the property is used in their taxable activity. Private sales by non-registered individuals generally don't attract GST.

Property Type and Use

Different property types have different GST treatments:

• Commercial Property: Generally subject to GST when sold by a GST-registered entity
• Residential Property: Usually exempt from GST, even when sold by a GST-registered entity
• Farm Land: Subject to GST when sold by a GST-registered farmer
• Development Properties: Generally subject to GST when sold by developers

Going Concern

If a property is sold as part of a "going concern" (an operating business), the transaction may be zero-rated for GST purposes. This means GST is charged at 0%, and the buyer doesn't need to fund the GST component of the purchase price.

Residential Property and GST

The supply of residential accommodation in a dwelling is exempt from GST. This means:

• Residential rental income is not subject to GST
• Sales of existing residential properties are generally GST-exempt
• You cannot claim GST on expenses related to residential property (such as repairs, rates, insurance)

However, there are important exceptions to be aware of:

New Residential Developments

If you're a property developer building new residential properties for sale, these sales are generally subject to GST. As a developer, you can claim GST on your development costs but must charge GST on the sale.

Short-Term Accommodation

If you provide short-term or commercial accommodation (like hotels, motels, or Airbnb for less than four weeks), this is treated as a taxable supply subject to GST, not as exempt residential accommodation.

Mixed-Use Properties

For properties with both commercial and residential components (like a shop with a flat above), you'll need to apportion the GST treatment based on the relative values or areas of each part.

Commercial Property and GST

Commercial property transactions are generally subject to GST when the seller is GST-registered. This includes:

• Office buildings
• Retail premises
• Industrial buildings
• Warehouses
• Vacant land intended for commercial development

When purchasing commercial property, the buyer typically pays the GST on top of the purchase price, unless the transaction is zero-rated (e.g., as a going concern).

Input Tax Credits

If you're GST-registered and purchase commercial property for use in your taxable activity, you can generally claim an input tax credit for the GST component of the purchase price. This can represent a significant cash flow advantage.

Zero-Rating of Land Transactions

Since 2011, certain land transactions between GST-registered parties must be zero-rated for GST. This applies when:

• The purchaser is GST-registered
• The purchaser intends to use the land for making taxable supplies
• The land is not intended to be used as a principal place of residence by the purchaser or their relatives

Zero-rating means the seller doesn't charge GST on the sale, and the buyer doesn't claim an input tax credit. This eliminates the cash flow impact of having to fund the GST component of the purchase price.

To comply with zero-rating requirements:

1. The purchaser must provide a written statement to the vendor confirming their GST registration and intentions for the property
2. The vendor must zero-rate the transaction based on this statement
3. Both parties must keep records of the transaction and the zero-rating qualification

If the purchaser's circumstances change and they end up using the property for non-taxable purposes, they may need to make GST adjustments.

Sale of Going Concern

A property can be sold as part of a "going concern" when:

• The property is part of a business that will continue operating after the sale
• All the necessary assets for continued operation are included in the sale
• The business is a going concern at the time of transfer
• Both parties are GST-registered
• The parties agree in writing that the sale is of a going concern

Common examples include:

• Tenanted commercial buildings with existing lease agreements
• Hotels or motels sold as operational businesses
• Farms sold with livestock, equipment, and milk or wool contracts

The advantage of a going concern sale is that it's zero-rated for GST, meaning no GST is charged. This can significantly reduce the funding required by the purchaser for the transaction.

Farm Land and GST

Farm land transactions have specific GST considerations:

• Sales of farm land by GST-registered farmers are generally subject to GST
• Farm dwellings are treated as residential property and exempt from GST
• The value of the farm dwelling needs to be apportioned from the total farm value
• Farm land sold as a going concern may qualify for zero-rating

For mixed-use farm properties, you'll need to separate:

• The farmhouse (exempt from GST)
• The farm land and buildings used for farming (subject to GST)
• Any other residential accommodations on the property (exempt from GST)

GST on Development Projects

Property development activities typically attract GST considerations:

Land Subdivision

If you're subdividing land as part of a business or profit-making scheme, the sales are generally subject to GST. You can claim GST on development costs such as:

• Survey fees
• Resource consent costs
• Legal fees related to the subdivision
• Infrastructure costs (roads, power, water, etc.)
• Construction costs if building on the subdivided sections

One-Off Developments

Even a one-off property development may be subject to GST if undertaken with a profit-making purpose. Inland Revenue considers factors such as:

• Scale and complexity of the development
• Amount of time, effort, and resources committed
• Use of professional services and advice
• Marketing and sales approach
• Financing arrangements

GST Registration for Developers

If you're undertaking a development that will exceed the $60,000 threshold, you should register for GST before incurring significant costs to ensure you can claim GST on all eligible expenses.

GST and Leasing Property

The GST treatment of leased property depends on the property type:

• Commercial Leases: Subject to GST (the landlord charges GST on rent, and a GST-registered tenant can claim it back)
• Residential Leases: Exempt from GST (no GST is charged on rent, and the landlord cannot claim GST on related expenses)

For mixed-use properties, you'll need to apportion GST based on the commercial and residential components.

GST Adjustments for Property

Various situations require GST adjustments for property:

Change of Use

If you change how you use a propertyÔÇöfor example, converting commercial premises to residential or vice versaÔÇöyou may need to make GST adjustments to reflect the change in taxable status.

Private Use Adjustments

For properties with mixed business and private use, you'll need to make adjustments based on the proportion of each type of use.

Second-Hand Goods Credit

When purchasing second-hand property from a non-GST registered seller, a GST-registered buyer may be able to claim a second-hand goods credit, even though no GST was charged on the purchase.

GST Risks in Property Transactions

Property transactions often involve large sums, making GST errors particularly costly. Common risks include:

Incorrect GST Treatment

Applying the wrong GST treatment (standard-rated, zero-rated, or exempt) can lead to significant financial consequences. For high-value transactions, seek professional advice to confirm the correct approach.

Failure to Document Properly

Ensuring agreements clearly specify GST treatment and that required statements (such as for zero-rating) are properly documented is essential for compliance.

GST Timing Issues

Property transactions can span GST periods, leading to complications in when to report and pay GST. Understanding the timing requirements based on your accounting basis is crucial.

Tips for Managing GST on Property

Seek Professional Advice

The GST implications of property transactions can be complex and have significant financial consequences. Getting expert advice from an accountant or tax specialist with property experience is highly recommended.

Be Clear in Agreements

Ensure sale and purchase agreements clearly state whether prices are inclusive or exclusive of GST and specify the intended GST treatment (standard-rated, zero-rated, or exempt).

Plan for Cash Flow

For transactions subject to GST, plan for the cash flow impact. This is particularly important for purchases where you'll pay GST but may not receive the input tax credit until your next GST return.

Keep Comprehensive Records

Maintain detailed records of property transactions, including documentation supporting the GST treatment applied. This is crucial for both compliance and protecting your position in case of an audit.

Conclusion

GST on property transactions in New Zealand can be complex, but understanding the basic principles and seeking professional advice when needed will help ensure compliance and optimal GST outcomes. The significant values involved in property make it particularly important to get the GST treatment right, as errors can have substantial financial implications.

Remember that GST rules for property can change, so staying informed about current requirements is essential for property investors, developers, and businesses involved in property transactions.