Kid Gloves Needed


April 23 2014


GST schedule in Agreement for Sale and Purchase

GST is always something that you can’t trifle with, particularly when you’re completing the sale or purchase of a property. This article looks at the financial implications if you make a change after settlement, or if you make a change after the Agreement is signed but before the transaction is settled.

When a purchaser completes the GST schedule in an Agreement for Sale and Purchase, or provides a written statement about their GST status and intended use of the property, the seller is entitled to rely on that information to decide whether the requirements for zero-rating of the transaction are met. A GST-registered vendor must zero-rate a property sale when, at settlement time, the GST-registered purchaser intends to use the property for taxable supplies and doesn’t intend to use the property as their principal place of residence. This also applies if the property could be used by a relative of the purchaser.

If the GST treatment of the transaction is incorrect or changes before the settlement date, the consequences will depend on whether the mistake is discovered or the change made before or after settlement, and if the purchase price is plus or including GST. Let’s look at some scenarios below.

Claire, a GST-registered vendor, agrees to sell a property to Paula for $500,000. Paula provides Claire with a written statement that she (Paula) is registered for GST, she intends to use the property for taxable supplies and will not use it as her principal place of residence. On the basis of Paula’s statements, all the requirements for zero-rating have been met and Claire decides that the transaction is zero-rated for GST.

The mistake is corrected after settlement

At the time of settlement it transpires that Paula is not registered for GST.

The price is $500,000 plus GST (if any)

The GST treatment of the purchase price will change from being zero-rated for GST at $500,000, to $500,000 + GST = $575,000. Paula will be deemed to be registered for GST from the time of settlement and Paula, the purchaser, will have to pay to the IRD the GST of $75,000. Claire receives $500,000 after GST; but the cost to the purchaser (Paula) increases by $75,000.

The price is $500,000 including GST (if any)

The GST treatment of the purchase price will change from being zero-rated for GST at $500,000, to including GST at $500,000. Paula will be deemed to be registered for GST from the time of settlement and she must pay the GST of $65,217.39 to the IRD. Claire, the vendor receives $500,000 after GST; but the cost to the purchaser (Paula) increases by $65,217.39.

The situation changes before settlement

Before settlement Paula nominates Kate to settle the purchase and Kate is not registered for GST. The purchaser no longer meets the requirements to zero-rate the transaction.

The price is $500,000 plus GST (if any)

The GST treatment of the purchase price will change from being zero-rated for GST $500,000 to, plus GST $575,000. Claire returns $75,000 to the IRD. Claire receives $500,000 after GST; but the cost to the purchaser (Paula) increases by $75,000.

The price is $500,000 including GST (if any)

The GST treatment of the purchase price will change from being zero-rated for GST $500,000, to include GST $500,000, Claire returns $65,217.39 to the IRD. The cost to the purchaser is $500,000; but the vendor (Claire) receives $65,217.39 less.

There can be serious financial consequences for a purchaser who mis-states their GST position, or when a nomination takes place which changes the GST status of the purchaser. It’s imperative that the purchase price is correctly recorded as being plus, or to include, GST to take into account a change in the GST status of the purchaser.

We can’t emphasise enough the need to talk with us and your accountant before you sign an Agreement for Sale and Purchase.


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