What the new changes to GST mean for the GST Registered Property Investor/Property Developer

Having just come to terms with the new depreciation rules, the GST-registered Property Investor with a large portfolio may have overlooked the effect of the new GST rules and the ins and outs that will now become compulsory.

From 1 April 2011 the GST changes for professional Property Investors and Developers are all about ‘use’ and ‘activity’.

Buying and selling of land between GST-registered persons (or businesses) will be rated at 0% for GST.  This means the GST will be removed from the sale price of land being purchased from and by a GST-registered person if it is put to ‘use’ as a taxable ‘activity’.

In brief the changes are designed to stop avoidance – typically where GST claims have been made by a purchaser but no GST has been paid by the vendor – the changes make this impossible.

Under the IRD rules ‘land’ means land, an estate or interest in land, options to acquire land, buildings, fixtures, business premises, ‘not  a supply of land intended to be used as a principal place of residence of the recipient of the supply or a person associated with them ‘.

This means if you are GST-registered and selling to another registered person for an activity attracting GST, the transaction will be zero-rated and you will be required to provide evidence to this effect.  In other words IRD will need you to advise them in writing of the other party’s GST registration details and a statement confirming that the purchaser’s activity will be using the property for business purposes.

If you own a rental property, are not GST registered, and want to sell it, no changes to this type of transaction are in the new rules; the activity is still GST-exempt.

In a situation where a business use is applied along with residential, an apportionment system applies and the purchaser will be required to pay GST on purchase for the part of the property that will be used as a dwelling, that being  the tax-exempt activity.

The onus is on the vendor to find out the true intentions of the purchaser.  Their GST status need to be ascertained and their purpose for purchasing needs to be established.  If the purchaser misrepresents their intentions and after purchase uses the property for a non-taxable purpose, they will attract the GST liability, not the vendor, if it can be shown that in good faith the vendor advised IRD of what they understood initially.

The IRD has also widened the definition of a ‘commercial dwelling’ by drawing a line between ‘dwelling’, being where you live and have exclusive rights of possession over and everything else.  Everything else is now a ‘commercial dwelling’ and as such is subject to GST.  The use of the property is the key and more revenue will flow from the inclusion of accommodation such as farm-stay, home-stay, holiday accommodation, serviced apartments and B&B establishments under the ‘commercial dwelling’ umbrella.

The standard forms for property transactions will need to reflect these changes so further details of intended use can be recorded and signed, witnessed etc and enable the vendor to produce evidence of GST registration of the purchaser, address details and their intentions to satisfy the IRD regulations.

It would be a good idea to have a chat with your accountant and Lawyer before the transaction to make sure that you have got all the documents needed and all the boxes ticked.

Brad Golchin, Accountant,

Wise Advice – Xero Gold Partner

Tel: (09) 639 1004

Website: www.wiseadvice.co.nz