A key tax risk facing those engaged in property dealing, development or building activity is the risk associated with treatment of GST on purchase.

GST Basics

The purchase and sale of property as part of an ongoing activity of property dealing, development or erecting buildings (ie acquisition for sale) is subject to GST. This means you can claim GST on purchase and pay it on sale. Generally, a purchaser bases their offer price on the presumption that they can claim GST, or adjusts for it.

Zero Rating Issues

The catch is that the ability to claim GST on purchase hinges on the GST status of the vendor. If the vendor is not registered for GST, then a GST claim is available. If the vendor is GST registered, then the purchase transaction is deemed “zero-rated”. This means GST applies at a rate of 0% and no GST can be claimed.

Example Let’s assume a property trader buys a property for $1.15m “including GST” and then sells it for the same amount. They assume that because the contract says “including GST” that they can claim the GST. Turns out the vendor is GST registered, which deems zero rating and denies the purchaser the ability to claim GST.

As you can see, a property purchased for $1.15m and sold for $1.15m loses the purchaser $150,000 due to the misunderstanding over GST. Investors who have a GST claim at stake need to pay special attention to this issue. Advice should be sought in writing from your professionals regarding this.

Status can be wrong for a number of reasons.

• The vendor makes a mistake or lies about their status to gain an advantage.
• The vendor does not disclose their status and you assume they are not registered.
• IRD interferes when the purchaser claims, and retrospectively deems the vendor to be GST registered – which can be very unfair to the purchaser.

IRD Interfering with Vendor GST Status (Retrospectively)

This is a real hazard for investors. IRD are increasingly looking at GST claims and investigating the vendor’s circumstances. The risk here is that a transaction that was thought to be undertaken with a nonregistered vendor, ends up retrospectively being a transaction with a deemed GST registered vendor. This leaves you, the purchaser, out of pocket for the GST that cannot be claimed.

Given the costs of recovery and the difficulty in holding companies and their directors to account, this again speaks to the importance of making sure that sale and purchase agreements are drafted in such a manner as to preserve your rights. At GRA we advocate clauses that allow you to pursue not only the vendor, but also the directors if the vendor is a company. We provide these clauses to our clients on request, as it encourages transparency on the vendor’s part.

Mortgagee Sales

This issue is further complicated if the property is bought as a mortgagee sale. For the most part, the default GST law is that mortgagee sales are subject to GST (even if the defaulting mortgagor themselves is not GST registered). However, if the bank can determine that the defaulting mortgagor is not GST registered, then they can apply an exception to the default rule and sell on a “non-registered basis”.