GST On Land Transactions - Compulsory Zero Rating

If your business is involved in the purchase of land you need to be aware of the Compulsory Zero Rating scheme. This scheme came into effect on 1 April 2011. It rules that GST on a transaction involving the sale of land will be assessed at the rate of zero per cent under the following circumstances:

• Both parties are GST registered and
• The property is not to be the purchaser’s principal place of residence and
• The land will be used for making taxable supplies

The sale of land need only form a part of the transaction.

With this scheme each party needs to be certain of the GST status of the other so they avoid any unexpected GST penalties. If you pay GST as a business purchasing land, you will not be refunded by the IRD. Also, the GST on the sale of land can change from zero per cent to 15 per cent between the time of signing and the settlement date.

You should also be aware that if the transaction has been mistakenly zero rated, you will be liable to pay 15 per cent GST after the contract is settled. However, if the transaction was not zero rated when it should have been, you may pursue remedies against the vendor but will not be able to get a refund directly from the IRD.

Vendors should be aware that they may be at risk if the agreement states that the purchase price includes GST. The vendor should insist on the agreement stating “plus GST (if any)”, even if both parties expect the transaction to be zero rated.

It is crucial that each party is aware of the GST status of the other throughout the transaction and the purchaser is perfectly clear in their intentions with regard to the property post settlement. It is possible for the status of the transaction to change between signing and settlement date and parties may unexpectedly be charged 15 per cent GST. This is because whether or not a transaction will be zero rated depends on the status of the parties as GST registered persons at settlement. Similarly, nominee purchasers should be investigated as to their GST status as the introduction of a nominee can change the status of the transaction

Article by Fortune Manning

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