What is CZR?

From 1 April 2011 it became compulsory for certain land transactions to be compulsory zero rated (CZR). This means that GST will be charged at the zero percent. The regime will apply to almost all transactions involving land that are made between GST registered parties. There are some limited exclusions.

It is clear that the transfer of land itself or any interest in land is caught by the new regime. It will also cover any rights that give rise to an interest in land, an option to acquire land and shares in a flat owning company. It does not include the transfer of a mortgage. It will only catch commercial leases where more than 25% of the total rent is paid up front. If payment is made in this way a lease will be caught by the CZR regime.

When is CZR assessed?

We are used to the GST assessment of the transaction being made as at the time of supply. Under the CZR it will be assessed again at the settlement date. It will be extremely important to consider any changes in the intervening period carefully to determine that GST is properly dealt with. The addendum that has been prepared by ADLS/REINZ for use for the standard agreement for sale and purchase is simply a base line document. It is not intended to cover all circumstances.

The Purchaser’s Statement/Addendum

Importantly, the GST tax treatment of these transactions is now determined based primarily on the purchaser’s intentions at settlement. The purchaser is required to provide a statement in writing to the vendor where CZR applies. The statement must say whether at the date of settlement:

• They are or expect to be a registered person;
• That they are acquiring the land with the intention of using it for making taxable supplies at settlement;
• That they do not intend to use the land as a principal place of residence.

The addendum has been created by ADLS/REINZ for use in the standard form agreement for sale and purchase includes each of these statements.

The vendor is entitled to rely on the information provided by the purchaser in determining the tax treatment of the supply.

Nominees

Nominees will be caught by these new rules. A sale transaction will be treated as a single supply from the vendor to the nominee.

Especially given the prospect of nominees there may be changes in the GST position between the time of signing, the time of supply and the settlement date.

Pricing

From the vendor’s perspective the best practice will be to make all prices “plus GST” so that, if it transpires that GST is in fact payable to the Inland Revenue Department, the vendor is able to recover the GST from the purchaser. An example would be where a purchaser intending to GST register where it was thought CZR would apply, does not do so before settlement. If the transaction is priced “plus GST” the vendor can collect the GST from the purchaser on settlement. If it is priced “inclusive of GST” the vendor cannot, yet might need to account to the IRD for the GST.

2 Free Chapters from our Facebook for Business eBook! Click here for instant download

These new rules will apply whenever the transaction is between GST registered parties and the purchaser intends to use the land for making supplies that are subject to GST. This is determined at the time of settlement. The purchaser will need to provide a written statement as to their intentions on or before settlement.

Transitional rules apply if the agreement is entered into before 1 April 2011 and the GST time of supply is triggered on or after this date. The vendor can opt for compulsory zero-rating if they wish to. Existing agreements should be checked and discussed with your accountants.

An addendum is being prepared for the ADLS/REINZ agreement for sale and purchase of land to address these changes.

There are also changes where a nomination occurs. These become one transaction for GST purposes, essentially a sale from the vendor to the nominee.

2 Free Chapters from our Facebook for Business eBook! Click here for instant download

Tax Freedom Day

For a full time trader, after adding additional Government taxes such as GST on private expenditure which is not claimable on the business, such as food, clothing, fuel, alcohol, tobacco, holiday accommodation etc. and Local Body rates, the trader taxpayer could likely have to work effectively for well in excess of 5 months of every year for the Government before they start working for themselves, which is generally described as their “tax freedom day”.

As a comparison, the average New Zealander’s average tax freedom day has been estimated to be June 1st after 151 days working to pay taxes. These figures above, can climb even higher if the taxpayer is a provisional taxpayer personally, or is operating through a structure which even by default rather than selection, falls into the provisional tax net, and should they be caught by shortfall penalties and/or use of money interest (UOMI), which can be part and parcel of the provisional tax regime. This is when the real ‘fun’ starts.

What is Provisional Tax?

Just as salary and wage earners pay tax throughout the year, a taxpayer who earns income which does not have tax deducted at source is also required to make payments of tax in the same period the income is being earned. These provisional payments, as with PAYE, represent a payment of tax on account of the year’s tax liability, and are payable by those with residual income tax (RIT) which exceeds $2,500.

Provisional tax is generally paid in three instalments due on or before the 7th day of the 4th, 8th, and 12th months of the taxpayer’s year. For example for those taxpayers with a standard 31 March balance date, provisional tax is due on 7th July, 7th November, and 7th March. If there is an amount of tax still payable after allowing for any provisional tax paid and for any other tax credits, this is the terminal tax. For taxpayers with standard 31 March balance dates, terminal tax is due on the following 7th February. If the taxpayer’s return is linked to a tax agent, the terminal date is extended to 7th April.

New provisional tax payers are not obliged to pay provisional tax because they would have not had RIT for the previous year. However if their RIT for this first year is more than $2,500, they will be hit with UOMI. Investors involved only in the buy and hold strategy, should generally not be troubled by the penalties from provisional tax, because for approximately the first 6 years of ownership of each property, tax losses will be experienced, mainly resulting from depreciation.

Then from the break even point forwards, the profits are easily budgeted and without unexpected peaks in income, provisional tax can be accurately calculated. However provisional tax can be troublesome for certain traders.

Other Problem Areas which can hurt

There are two methods of calculating provisional tax. The standard method, being 105% of the taxpayers’ residual income tax for the previous year, payable in three equal payments.

This method can be referred to as the “safe harbour method” for taxpayers (particularly property traders, other than a trustee), because taxpayers can be safe from shortfall penalties providing they pay the due tax on time. Individual taxpayers who have RIT of $35,000 or less, and adopt the safe harbour method, are not subject to Use of Money Interest (UOMI) where the provisional tax paid is less than the actual tax liability for the year provided: (i) the tax is paid by due date; and (ii) the individual does not hold an exemption certificate from Resident Withholding Tax on interest and dividends.

The alternative method, is the estimation method. Under this method, the provisional taxpayer estimates their residual income tax for an income year and pays on the basis of their estimate. This estimate can be revised at any time up to the third instalment date. Taxpayers in this regime are vulnerable to shortfall penalties of 20%, if they do not take reasonable care when making their estimates and pay less than the minimum amount of provisional tax. They will also suffer UOMI calculated at 13.08% per annum as shown in the example below.

This will apply even where the amount paid by the third instalment date exceeds 105% of the previous year’s residual tax. An example of the danger of this method, is a trader taxpayer who has paid their 3rd provisional tax payment on say 7th March based on their earlier estimate. Then for example on 15th March they have an unplanned trade sale, which settles before 1st April produces a sizeable profit.

They will face a hefty shortfall penalty calculated on the 3rd provisional tax payment unless they can show as at 7th March the estimate was reasonable, together with UOMI on provisional tax underpayments going all the way back to the first instalment date of 7th July. The following table will illustrate the effect.

Profit on transaction on 15th March 06 = $20,000 x tax of 33% = $6,600 Penalty taxes 20% are potentially payable on $6,600 = $1,320 Plus UOMI Payable 7 July 2005 $2,200 at 13.08% p.a. for 123 days = $ 97 Payable 7 November 2005 $4,400 at 13.08% p.a. for 120 days = $ 189 Payable 7 March 2006 $6,600 x 13.08%p.a. for 337 days to 7 February 2007 = $ 797 Total Payable = $9,003 Total penalties and UOMI = $2,403

Summary on how to resolve these problems

This demonstrates the difficulty for the trader trying to hit a moving target, and just how expensive their total tax bill may be, including income tax and GST, plus if they get it wrong, shortfall penalties as well as UOMI. In this example, it would have been far more advantageous to have had better planning and deferred the property settlement until after 1 April being the new tax year. A Tax Pool specialist company could also be consulted in attempt to purchase tax for an earlier date to eliminate the penalties and reduce the interest. Trust structures, together with sound accountancy and tax advice can ameliorate the situation.

Disclaimer: This information is educational material only and should not be relied upon exclusively. The reader is directed to seek professional advice before proceeding. It is essential to seek specific professional advice pertinent to the individual’s requirements as circumstances and conditions may vary.

2 Free Chapters from our Facebook for Business eBook! Click here for instant download