The rules applying to GST on land transactions have changed, meaning vendors can say goodbye to GST on certain land transactions.

The change has primarily come about as a result of ‘Phoenix’ fraud schemes which saw the Inland Revenue Department refunding GST to a purchaser where no corresponding GST payment had been received from the vendor (as the vendor company had usually been wound up). The ultimate result of these schemes was that IRD were losing millions; and they were not happy about it!

Consequently a number of legislative changes have shifted the liability for accounting for GST on a transaction from the vendor to the purchaser. From 1 April 2011 GST registered vendors are required to charge GST at a rate of 0% on any supply involving land to a registered purchaser, if at the time of settlement:

• the purchaser intends to use the goods for making taxable supplies; and
• the sale is not a supply of land intended for use as a principle residence of the purchaser or a relative of the purchaser.

In order to identify whether the purchaser fits these criteria (and whether the transaction can be zero rated) the purchaser must provide a written statement to the vendor at or before settlement confirming that they:

• are (or will be by settlement) registered for GST; and
• will be acquiring the goods with the intention of using them for making taxable supplies; and
• will not be living on the land.

To assist the purchaser in making the required statement the Auckland District Law Society Inc has prepared an addendum to be used in conjunction with the standard agreement for sale and purchase of real estate. If possible it is recommended that the addendum is completed at the same time as the agreement.

The information provided in the statement is on a prospective basis, in that it is the best prediction of the purchaser’s circumstances at the time of settlement. The vendor is entitled to rely on the statement made by the purchaser and is not required to make any further enquiries regarding the purchaser’s circumstances.

If the purchaser does not provide the vendor with the required statement or the statement leads the vendor to believe that the transaction is not of a type that can be zero rated then GST should be charged at the standard rate (15%).

In the event that the purchaser’s circumstances change prior to settlement (but after the time of supply) or directly following settlement leading the parties to discover that GST has been charged incorrectly, there are a number of options available including issuing a credit note or simply paying the GST. There are also additional provisions which apply where the land is only part of the supply and your solicitor will be able to assist you in determining the correct tax treatment in each of these circumstances.