The week before last,
the Government released the Taxation (GST and Remedial Matters)
Bill, which seeks to bring into law some of the proposals outlined
in the November 2009 discussion document entitled GST: Accounting
for land and other high-value assets.
The discussion document proposed that a
domestic reverse charge would apply to transactions involving land
between GST-registered parties whereby the vendor would not be
required to account for GST on the sale, and the purchaser would
make an GST output claim for the purchase in the GST return in
which they could make a GST input for GST on the purchase.
The effect of this would be that no GST
would have been refunded to the purchaser.
This was driven by scenarios whereby
the IRD were forced to refund GST to a purchaser of land
immediately upon the transaction's time of supply, but the vendor
either delayed accounting for the GST (usually through a mismatch
of GST registration bases) or did not return GST (e.g. they were
insolvent and secured creditors stepped in front of the IRD).
To be fair, in the midst of the
property development industry meltdown, this outcome did occur
regularly, leaving the IRD, and the Government, seriously out of
pocket on some very large transactions.
Following the submission process, the
Government has instead simplified the process by deciding to adopt
zero-rating for any supply to a registered person involving
land.
This means that there would be zero GST
on many land transactions in the future.
The new provisions will impose
obligations on the vendor and purchaser whereby the vendor will be
required to obtain the purchaser's registration details and will
need to confirm with the purchaser the purchaser's intentions in
relation to the supply (i.e. are they going to use it as part of a
GST-taxable activity?).
The reason for this is that zero-rating
will not apply if the registered purchaser does not intend to use
the land for making taxable supplies or if the property has been
purchased as a principal place of residence of the purchaser or
their relative.
Provided that the vendor takes
sufficient steps to inquire as to the purchaser's registration
status and use of the land, the vendor will not be liable for tax
on the supply in the case of mistake or misrepresentation by the
purchaser.
While the vendor will not be required
to account for output tax for a zero-rated supply, disclosure of
the zero-rated transaction in the GST return will still be required
in the GST return.
For the purchaser, they will have an
obligation to provide correct information to the vendor and to the
extent that incorrect information is provided by an unregistered
purchaser, they will be deemed to supply the goods and services to
themselves and be liable to pay GST on the supply at the standard
rate.
The proposed amendments will apply from
April 1, 2011.
The proposed changes should simplify
the GST consequences arising from land transactions, particularly
when the time of supply occurs significantly prior to
settlement.
However, there will need to be a change
of mindset to match this change of rules, and as always, we would
recommend seeking professional advice when undertaking significant
transactions like land sales or purchases.
Scott Mason is a Tax Consulting
Principal at WHK Dunedin; www.whk.co.nz/dunedin/
If you would like to discuss any of the above, please
contact; donna.harkness@whk.co.nz