Complusory Zero Rating

A recent proliferation of webinars on the new agreement for sale and purchase and GST has raised some interesting points. Zero rating will still apply to the sale of a taxable supply but the sale and purchase of land now requires the parties to examine their GST positions and determine whether the transaction is compulsorily zero rated. It will be simple when neither party is registered for GST, or when both are and they meet the remaining requirements of:

  • The purchaser intending to use the land for making a taxable supply; and
  • The purchaser not intending to live on the property.

The system relies on warranties given by the purchaser and by the vendor in the agreement. Each party warrants that the GST information supplied is correct. Some interesting outcomes arise if the warranties are breached.

Scenario 1 – vendor not registered

Let’s say both parties have warranted the CZR rating applies. The price is plus GST. It turns out that the vendor is not GST registered.

The vendor does not need to account to the IRD. The purchaser may be able to claim GST using the second hand goods regime if the price is described as GST inclusive. However, if the price is plus GST no claim can be made.

The purchaser in this position would have been better off to make the price GST inclusive, despite the commonly held view the best practice is to use plus GST.

Scenario 2 – GST payable but warranties breached

What say the price is “plus GST” and the parties have warranted that CZR applies. After settlement it becomes evident the purchaser had breached the warranties given so CZR does not actually apply.

If the price is plus GST the vendor can chase the purchaser for that GST using the terms of the contract, but who must account to the IRD. The vendor would usually but section 5(23) of the Goods and Services Tax Act covers the situation. If compulsory zero rating is intended to apply and it turns out the criteria are not met, the purchaser must pay the GST that the vendor would otherwise have paid. The purchaser is treated as if they were the supplier.

Irrespective of the contract terms, this section of the GST Act imposes an obligation on the purchaser to meet the vendor’s tax liability.

Difficulties can be exacerbated if the agreement provides for a long settlement date but the time of supply is made earlier. Because one party’s taxable position is determined by another’s profile, the risk is difficult to manage. That may be reason enough to the manage the time of supply and kick it out to settlement when the agreement is long term.

The best advice we can give is take specific taxation advice before signing your sale and purchase agreement.

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