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Some of the GST implications on property transactions

I recently talked with an eminent Waikato Accountant about some of the issues around GST and property transactions.

The following information provided on some of the areas that he identified is a graphic reminder of what we must do, when transacting properties.

Documentation

The IRD and the courts for that matter are focusing on the documentation. That means that when buying or selling property, it does not matter what your intention was, or what the parties intended, the documentation is the key. You need to get down on paper exactly what it is that you are trying to achieve, and you need to get that document checked by an Accountant and a Solicitor prior to signing it.

Now, while Real Estate Agents do a good job, we should not expect them to understand the complexities of the GST legislation, and the taxation regime. It is vital you get contracts checked by your Accountant and your Solicitor.

On every substantial property deal, the IRD are now doing a lot of research. They have the people on the ground to do the research, but more than that, they are not only focusing on what you are doing as a purchaser, but they are also focusing on what is happening to the vendor. If you are claiming GST, has the vendor paid it etc. Documentation is the key.

Time of supply

You must get the claim in for the correct GST period. If your timing is wrong, penalties will be enforced as an unacceptable tax position. This will result in a penalty of 20%. All invoices must be dated correctly. Everything must coincide. You used to be able to get away with it before, but no longer.

You need to be aware that the Commissioner now has no right to waiver for errors. If you make a real honest mistake, other than a mathematical error, in the past you could readdress it, but that is no longer the case. It has to be right the first time, as the Commissioner has no discretion to waiver penalties.

Valid tax invoice

You must have a valid tax invoice. A conditional contract is not a tax invoice when it goes unconditional. An unconditional contract will constitute an invoice, but not a tax invoice. You must get a separate tax invoice. As a matter of course, have stated in the agreement that the vendor will produce a tax invoice, say within 5 days.

Now this is a really important area. Most of us presume that once you have signed a Sale and Purchase Agreement, this would be sufficient documentation to do the tax. It is not: you must get a separate tax invoice.

Deferred property settlements

This is a big one in the industry. This is where a vendor is on a "payments basis." and the deal is for more than $225,000 GST inclusive, and settlement is deferred for 12 months or more, the GST on that transaction has to be returned on an "invoice basis." You need to put into the agreement, (apart from the deposit) the full GST must be paid straight away on the whole deal.

Now apparently, some clever people were selling property for settlement in 5 years or more years, not paying the GST, and then skipping the country. The IRD are administering the law to the letter of the law, and you need to be aware of this.

It is important to realise that the commencement of the 12 month period for a deferred settlement is taken from signing of the contract, and not when the agreement becomes unconditional.

Also, you are no longer able to do an "amended GST form" anymore either. Once you complete your GST form and put it in the mail, you are committed, and there is no way back.

Going concerns and zero rating for GST purposes

  • The supply must be a going concern.
  • The parties must agree in writing that the supply is a going concern.
  • If both parties do not agree in writing, then it is not.
  • Both the purchaser and the vendor must be registered for GST at the time of supply.
  • Where an agreement is signed as "Joe Bloggs" or nominee and the agreement is completed by the nominee, that nominee must be registered for GST at the time of supply.
Therefore, where a trust is subsequently formed to purchase a property, there cannot be a sale of a going concern, as the trust was not registered for GST at the time of the transaction.

Going concerns are a minefield, but effectively it includes a property where the business can continue, eg. avocados, kiwifruit etc. In the case of grazing blocks, the stock and plant must stay, and there must be a full schedule of all stock and plant. If it is a dairy grazing block, then agreements with dairy grazers must be transferred with the property, and attached to the contract.

It is important that you have the documentation. The IRD policy now is that they are to see all the documentation related to the transaction.

The Accountant reminded me that the tax act is a very thick book, and takes a lot of reading. The GST act is a very skinny book, but it is the GST act that has got the teeth to bite you.

Summary

GST on property transactions for anybody is really important. The key points to be taken are:
  • Don't sign a Sale and Purchase Agreement without talking to your Accountant and Solicitor first.
  • Ensure that you get down on paper exactly what the deal is.
  • Make sure that you have appropriate documentation and paperwork to go with the transaction, ensuring that everything is done according to the time schedule required.
  • If you are buying a deferred settlement property be very careful.
  • With going concerns make sure that you have all the documentation right, and you meet the statutory requirements.
I am not an Accountant, and neither are you, so ensure that you obtain professional advice before signing any contract.


 

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