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GST CHANGES TO COMMERCIAL PROPERTY AND BUSINESS TRANSACTIONS

Do they affect you?

From 1 April 2011 the GST landscape for land transactions underwent significant change. New compulsory zero-rating (CZR) rules now apply to all transactions between GST registered parties involving land. CZR will apply to most transactions involving commercial property or businesses.

So why the change?
CZR was introduced to reduce GST leakage through “phoenix” arrangements. These arrangements typically involved a commercial property being sold from one GST registered party to another (usually related). The GST registered purchaser would obtain a GST refund. The GST registered vendor would be left with no assets and therefore no way to pay the GST. The IRD was therefore out of pocket. This is rumoured to have cost the taxpayer millions of dollars each year.

So what is the change?
Under CZR a transaction that wholly or partly consists of land is zero rated if:
The vendor and purchaser are both GST registered; and
The purchaser intends to use the land for the purpose of making taxable supplies; and
Neither the purchaser nor a person associated with the purchaser intends to use the land as a principal place of residence.
These criteria are tested on settlement. The purchaser is required to make a statement to the vendor confirming the criteria which the vendor can rely on. If these criteria are met, CZR will apply and GST will be charged at 0%. The vendor will not need to pay the GST and the purchaser will not be able to claim the GST, so countering any “phoenix” arrangement. If these criteria are not met, then the normal GST rules would apply which could mean the purchaser is left with an unexpected cash flow issue.
If the transaction is subsequently found to be incorrectly zero-rated the IRD has the power to force the purchaser to become GST registered and pay the GST (at 15%). Previously the vendor had to pay for the GST and recover this from the purchaser, which could be a costly process.
CZR has the potential to apply to any transaction that involves land, no matter how small the land component. A commercial property transaction is an obvious example. Not so obvious is a transaction involving a business, or business assets, which includes an assignment of a lease for, say, $1.00. Note, if the transaction is for a residential property between parties that are not GST registered then CZR (or GST) will not apply.

Does this affect me?
If you are involved in a transaction that has a land component and you are registered for GST, then CZR could affect you.
This is not all that bad though, as the removal of the GST component through CZR is welcome. Purchasers pay and vendors receive a price effectively without GST which assists cash flow and cash is hard to come by right now.
Pricing is very important if you want to retain that cash. Best practice is for any transaction involving a commercial property or a business to be priced on a “plus GST (if any)” basis. If you are selling, there is the right to add GST to the price if CZR does not apply, so you are not out of pocket. If you are purchasing, it is important that you meet the CZR criteria at the start and at the end of the transaction. If you don’t then you could be required to pay GST at 15% hence being completely out of pocket or with cash flow issues as you wait for a GST refund ……as well as a GST audit.
While the new rules are beneficial when used correctly, close attention to detail in contracts is required and careful planning is essential. If you get it wrong, CZR can cost you.