Providing an incorrect warranty regarding GST registration proves costly

In a recent case, the High Court awarded summary judgement on appeal against a vendor for a breach of warranty in relation to the GST on the sale of land.

The vendor had agreed to sell their rural property for $355,000 inclusive of GST. The land was used for stock and there was no house on the property. Both the vendor and purchaser had completed the GST section of the agreement and had advised they were not GST registered and also included the warranty for the same. The purchaser sought tax advice and registered for GST a week before settlement. The purchaser did not ever advise the vendor that they had registered for GST, which was a requirement in their agreement.  The purchaser claimed a second-hand goods credit for the GST on the purchase of the land. Inland Revenue declined the claim and advised that the purchaser was in fact GST registered and, therefore, the sale would be zero rated and no second-hand goods credit could be claimed.

The purchaser took the vendor to court for breach of warranty and claimed the amount of the second-hand goods credit, as well as accounting costs. The vendor claimed that they could not have foreseen that the purchaser would breach their own contractual obligation to advise the vendor that they had become GST registered, and then claim a second-hand goods credit. The purchaser was unsuccessful in the District Court, but on appeal to the High Court they were awarded the second-hand goods credit, accounting fees, interests and costs.

This is a reasonably common issue and the GST implications should be understood by both parties when completing an agreement for sale and purchase. GST becomes exponentially more complex when the property being sold has been used for mixed or dual purposes. This is commonly seen for farms, lifestyle blocks and holiday accommodation. In order for the GST to be correctly applied, the vendor’s GST position must be understood by both parties. Including “plus GST (if any)” will not always fix the problem.  If in doubt, contact your tax advisor prior to completing the agreement for sale and purchase.  For personalised advice on all tax issues please contact Julia Johnston at Saunders & Co.

Click here to download our Tax Overview drop sheet written by Julia Johnston in March 2019.