GST – Compulsory Zero Rating Rules

The introduction of the compulsory zero rating (CZR) rules for all land transactions between GST registered buyers and sellers of real estate has greatly simplified the IRD’s role in collecting GST but has significantly complicated the roles of everyone else who must work with the rules.

This typically includes both vendor and purchaser, their legal advisors, valuers, tax advisors and the agents who must draft the contracts.

In theory, the CZR rules are straight forward. In a case where both parties are GST registered and land is being transferred to a buyer who will use the land in their own GST taxable activity and not use the land as their primary place of residence, the sale is zero rated.

However, problems can and do arise when assumptions are made about a parties GST status or proposed use of the property.

Navigating the pitfalls becomes particularly complex with split supply properties, like GST registered lifestyle blocks or orchards where a portion of the supply includes the GST exempt curtilage and a remaining portion includes the taxable supply. Split supplies can also include commercial property, be it rural or rental where the supply of rented dwellings is included alongside the commercial property.

Negotiations for these properties can really only be properly conducted when all parties have a full, accurate and factual understanding of their GST positions and the apportionment of value between the exempt and taxable supplies.

Problems can occur when vendors have misunderstandings about the GST status of the land they own and may inadvertently provide incorrect information.

Buyers making offers inclusive of GST also need to be crystal clear on whether the vendor is GST registered, because an offer that is inclusive of GST can be inclusive but at the rate of zero rather than 15%.

Unfortunately, where GST mistakes become problems are often only discovered after settlement when returns are filed with IRD. At this stage, litigation becomes a very real risk.

So what are the practical ways to avoid the pitfalls? Firstly, GST registered vendors and buyers should understand they are placing themselves at risk if they commit an offer to paper without having a reliable disclosure of the other party’s GST position.

An agent’s role is to facilitate the gathering of the information required to enable the parties to properly negotiate the contract with full and accurate knowledge. It is not agents’ job ever to advise on GST.
With due respect to solicitors, they are also unlikely to be equipped with the detail needed to accurately advise on a client’s GST position unless doing so in consultation with the client’s tax advisor. So, get the lawyers and accountants talking!

Parties should be consulting with their tax advisers and ensuring they are ‘in the loop’ at an early stage, assisting the vendor to provide accurate information to the agent. Plus, when acting for the buyer, they should be advising their client on the implications of the rules and guiding them through the questions that may need answering before an offer can be properly constructed.

Negotiating real estate deals is often fast moving and certainly more exciting than talking tax. But, don’t let a desire to get the deal done override the need to get the facts around GST properly imbedded in the negotiation.

By Mark Withers, Withers Tsang & Co Limited Chartered Accountants