Zero Rating of Land Transactions
Posted: 16th May 2011
In November 2009, the Government released a discussion document,
which proposed a number of changes to the GST Act. These
changes were designed to address certain areas of risks that Inland
Revenue had identified and improve the operation of the GST system
more generally. The main risk to the tax base identified in
the discussion document was "phoenix" fraud schemes, typically
between associated entities, that involve Inland Revenue refunding
GST to one party with no corresponding payment being made by the
vendor. The vendor would then deliberately wind up their
business without ever making payment.
As a solution, a preference was expressed for a
zero-rating of land as it would give rise to fewer compliance
costs. As such from 1 April 2011 all transactions that
includes the supply of land are now zero rated for GST.
Key features of the changes
GST-registered vendors will be required to charge GST at
the rate of 0% on any supply to a registered person involving land,
or in which land is a component, if at the time of settlement:
- the recipient intends to use the goods for making taxable
supplies; and
- the supply is not a supply of land intended to be used as the
principal place of residence of the recipient or a relative of the
recipient. This would be exempt from GST (if a residence
makes up part of the supply it is treated as two separate
supplies)
Other features of the new rules include:
- a new definition of "land" which largely follows the
definition used for income tax purposes but which excludes most
commercial leases;
- an obligation for the purchaser to advise of their GST
registration status and intentions in respect of the land; and
- special rules to deal with situations when a supply is either
incorrectly zero-rated or incorrectly standard-rated.
We have had a number of questions regarding this change, often
these involve the sale of lifestyle blocks from a registered
person, to a non registered person. Note that in this case,
as both parties are not registered, GST will need to be paid by the
vendor on the sale.
If you have any questions regarding this, please call Martyn
Henderson on (09) 308 4050 or email at martyn.henderson@tbag.co.nz