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All That Glitters Is Not Gold

Nick Ashford examines the temptation of claiming GST on property purchases.

By: Nick Ashford

1 December 2015

Claiming GST on a property purchase may be extremely tempting and in many cases required. However voluntary registration and claiming of GST on a property purchase can often be shortsighted or simply incorrect.

If you are carrying out a continuous and regular GST taxable activity, and have, or are expecting to have more than $60,000 of turnover each year, then it is likely you will need to be registered for GST.

Where you are required to be GST registered and you are purchasing a property that is or will form part of your GST taxable activity i.e. business premises, commercial leasing, short term accommodation, property development etc., claiming GST may be required.

Potential Gain

If you have the option to register for GST, you really need to ask yourself: is the 15% claim on the property purchase worth more than potentially having to pay GST on the sale of the property? Are you willing to give up 15% on any potential gain in property value?

It is also important to note that providing residential rental accommodation is exempt from GST therefore it does not, and cannot constitute a GST taxable activity.

Claiming GST

A purchaser who believes they can claim GST when purchasing a property needs to ensure that:

  • The vendor is not GST registered, or the property is not being used as part of the Vendors GST taxable activity.
  • As the purchaser you will be registered for GST before settlement and intend to use the property in a GST taxable activity.

If a property forms part of a vendor’s GST taxable activity and will also form part of the purchaser’s GST taxable activity then the purchase will be zero-rated for GST purposes, i.e. as the purchaser you cannot claim GST.

Paying GST

Generally, a vendor who uses a property as part of a GST taxable activity will be required to pay GST when it is sold. However, the sale will be zero-rated and NO GST payable when:

  • The purchaser is registered for GST, or will be at the time of settlement, and,
  • The purchaser provides a warranty that they intend to use the property as part of their GST taxable activity, and it will NOT be used as their primary place of residence.

This can be a real trap for GST registered vendors. If, as a vendor you agree on a price including GST (if any) then the net amount you receive will be less if sold to someone not GST registered vs. someone who is, and intends to continue using the property for a GST taxable activity.

If, however, you agree on a plus GST (if any) price then the net amount you receive should be the same no matter what the purchaser’s GST status. Care needs to be taken in the auction terms and conditions in regards to this situation.

Holiday Homes GST

Caution and advice must be taken when purchasing a property used for short-term accommodation i.e. a rented bach. If you are a purchaser that is already GST registered, then the property can inadvertently get caught by GST legislation.

A purchaser or owner of a property, that was either purchased zero-rated or has had GST claimed, must take care when considering changing the use of the property. If the property was to cease being used as part of a GST taxable activity, for example it becomes a residential rental property or is used personally, then GST may need to be returned to the IRD based on the property’s current market value.

If you are tempted by a potential GST claim when purchasing a property then contact Nick Ashford from Withers Tsang & Co Ltd, as a GST claim now may result in a significant GST payment later.

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