You could get caught out by GST when buying a property – even if you are not GST registered

I am frequently asked by clients to assist with the GST implications of a proposed property purchase.  A lot of clients want to know whether they should register for GST for an upcoming property purchase and claim back the GST, or zero-rate the transaction.  Unless they are required to register for GST, most of the time my answer is “no”. There are a number of reasons for this – the first being that property generally increases in value and, therefore, they will likely end up paying more GST when they sell it if they do not sell it to a registered party who will use it to make taxable supplies.

A common example of how this situation might arise could be when looking at a property priced as “plus GST (if any)”.  I, myself, have been the recipient of GST advice from a real estate agent who advised me to GST register in relation to a lifestyle property so that the transaction could be zero-rated.  In my own circumstances, I was not conducting (and did not intend to conduct) any form of taxable activity from the property and nor would I be making taxable supplies.

It can be very tempting to GST register when the vendor of a property is GST registered and they want to sell on a “plus GST if any” basis.  This is because it is very difficult to work out what exactly you are paying for the property.  If the price is “plus GST (if any)” it is very hard for the purchaser to know exactly how much they are expected to pay for the property if they cannot zero-rate the transaction.  With residential/lifestyle properties, a sale price of “plus GST (if any)” does not necessarily mean that  the entire property attracts GST.

If it is a lifestyle property then the home is unlikely to form part of the taxable supply.  It is not even safe to assume that all of the land outside of the curtilage will be subject to GST.  The only way to know what proportion of the property is subject to GST is to ask the vendor.  In most cases, I have found that the vendor does not know how much is subject to GST.  So how can the purchaser know exactly what they are paying for the property?  This is when the purchaser might walk away and find another property priced inclusive of GST, or make a GST inclusive offer, meaning they still need to work out how much they are required to return to IRD upon sale.  It is also important to note that, generally, banks will not lend a GST amount.

Another reason I often advise clients not to voluntarily register for GST is that they generally are not undertaking a taxable activity, which is a requirement to be GST registered.  While it is very easy to complete the registration process for GST, there is nothing stopping IRD from reviewing the circumstances at a later date and de-registering people when they deem there is no taxable activity.  A taxable activity requires there to be an activity carried on continuously or regularly for the purpose of making supplies for consideration.

It is often hard to meet the requirements for a taxable activity where there is no real business being run, such as on a lifestyle block, as there are generally low levels of activity (if any).  In these cases, if IRD de-register someone from the original GST registration date, then all GST refunded will be repayable to IRD, along with interest and any penalties imposed.  If some time has passed since GST registration then the penalties and interest can amount to more than the initial tax.  If the property was zero-rated on purchase and the person is later de-registered for GST, then the GST proportion will also need to be repaid to IRD along with interest and any penalties.  IRD has become more active at reviewing GST registration in relation to lifestyle blocks and de-registering them.

If the above is not enough to put you off registering for GST then the compliance burden probably will.  Once registered for GST, you will be required to file returns regularly.  If you tire of the on-going compliance you can de-register but then you are required to pay GST on the market value of the assets that have been retained.  As set out above, it is normal that a property increases in value, so the costs generally outweigh the benefits.

If you are looking to purchase a property and are unsure of the GST or tax implications, make sure you seek specialist tax advice.

The above are just a few common examples of the GST issues that can arise when buying or selling property.  GST is far from straightforward and caution should be taken by taxpayers and professionals alike.  As a tax lawyer and specialist tax advisor, I am happy to work with clients both directly or alongside your trusted accounting professional.

The above is intended for informational purposes only and should not replace specific tax advice.  For personalised advice on all tax issues please contact Julia Johnston at Saunders & Co.