The new GST Rules information has been supplied by Thompson + Partners Ltd - Chartered Accountants, Palmerston North
New GST rules were introduced 20 December 2010 and apply to land sales on or after 1st April 2011. These changed were enacted under the Taxation (GST and Remedial Matters) Act 2010. The key feature of the changes is that GST registered vendors of "land" are required to charge GST at the rate of 0% on any supply of land to a GST registered purchaser provided certain conditions are met.
The new Section 11(1)(mb) provides that a GST registered person must zero-rate a supply if the supply wholly or partly consists of land, and:
- Is made to another registered person; and
- The recipient acquires the goods with the intention of using them for making taxable supplies; and
- The supply is not a supply of land intended to be used as a principal place of residence for the recipient or a person associated with them
- In general terms these rules will capture most Motel/Hotel Sales.
To be a zero-rated supply, the above conditions for zero-rating must be satisfied at the time of settlement of the transaction (section 11(1)(8B)). If any of these conditions are not satisfied at the time of settlement, then the supply should be taxed at 15%.
If the conditions are satisfied the entire transaction is zero-rated, for example land, buildings, goodwill, fixtures and fittings etc.
The new disclosure requirements (section 78F) seek to assist the vendor in identifying this information in order to apply the correct GST treatment. Thus, if a supply wholly or partly consists of land, section 78F(2) requires the purchaser to provide, at or before settlement, a written statement to the supplier whether at the date of settlement:
- They are, or expect to be, a registered person; and
- They are acquiring the goods with the intention of using them for making taxable supplies; and
- They do not intend to use the land as a principal place of residence for them or a person associated with them under section 2A(1)(c) (their relative).
This information must be provided to the vendor in writing. Recently most standard sale and purchase agreements have been updated to include an GST Addendum to capture this information. In most cases it is as simply a matter of ticking (or not) the relevant criteria on the Sale & Purchase GST Addendum.
- Recording Keeping: A vendor must now maintain certain records to enable the particulars of the supply to be ascertained, including; name and address of the purchaser, GST number of the purchaser, a description of the land and details of the consideration for the supply.
- Incorrect GST Treatment: If the supply has been incorrectly zero-rated the Act provides a number of ways to remedy the breach.
- Pre- 1st April 2011 Contracts: For transactions entered into prior to 1st April 2011, but with a time of supply on or after that date, the vendor has the option of treating the transaction under either the old GST rules or the new rules (section 11(1)(8C)).
- Owners Dwelling Included: the GST Act treats the place of residence as a separate non-taxable supply, therefore outside of the zero-rating rules altogether. The owners dwelling would not have GST charged because it is exempt and the balance of the motel would be zero-rated. The purchaser is able to confirm that they do not intend to use the land as their principal place of residence as this statement is only in relation to the taxable component of the supply.
In general terms these rules will capture most Motel/Hotel Sales.
- GST registered vendors should try to resist agreeing to prices inclusive of GST based on the assumption that the transaction will be zero-rated, as this may turn out not to be the case. In such event, the vendor would have to return GST out of the sale price, and will therefore receive less than expected from the sale.
- If you are a GST registered vendor selling any land then you need to get the appropriate statements from the purchaser as set out in the Act before you decide whether to zero-rate or standard-rate the transaction. If the purchaser does not provide the required written statement, then you should be standard-rating the transaction (presuming that the contract price is stated to be 'plus GST (if any)').
- Even if you, as vendor, have cause to believe that the statements provided by the purchaser might not be accurate, you are still entitled to rely on these statements and zero-rate the sale. It will be the purchaser's problem to rectify the GST issues.
- If you are a purchaser, you need to ensure that any statements you provide are accurate. Otherwise you may be required to pay the GST and any IRD use of money interest and penalties.
We suggest that you contact your Chartered Accountant and/or Solicitor to get advice on your particular situation prior to entering into land sales agreements.
Disclaimer - The above commentary has been carefully prepared, but it has been written in general terms only. The commentary should not be relied upon to provide specific information without also obtaining appropriate professional advice after detailed examination of your particular situation. Thompson + Partners Ltd Chartered Accountants. PO Box 1339 Palmerston North Phone (06) 356 5301
About the Author
Malcolm McCrae is the principal of McCrae Real Estate Limited, MREINZ, REAA Licensed Agent
Malcolm (AREINZ) is a Licensed Agent REAA and has over 33 years experience selling real estate, the last 15 years specialising in the motel industry. Allied Member of the Motel Association of New Zealand and Approved Consultant of Hospitality New Zealand.