Is your home office subject to GST upon sale?

Interpretation Statement 20/05 – GST – Supplies of Residences and other Real Property (IS 20/05) replaced IS2824 “GST – Supplies of dwellings and other real property” recently. The IRD’s position in the IS 20/05 means GST registered landowners, who have used their homes for home-based offices, may have to pay GST on the sale of that home.

In summary, where a person’s home has been used in the person’s taxable activity (i.e. business purpose), the sale of that home may be subject to GST. For example, a GST registered sole trader that uses their private home as a home office or a GST registered farmer who has (legitimately) claimed 20% of the farmhouse for business use. The rule applies irrespective of how minor the taxable use is.

This change happened due to the discovery of a technical discrepancy with the removal of the “principal purpose” test. This means if a Principal Place of Residence has been used in a taxable activity by a GST registered owner, any sale of that residence is likely to be subject to GST.

Section 5(15) of the GST Act means the supply of a dwelling is generally treated separately from the supply of the rest of the land. As a supply of a dwelling, it is unlikely to be zero-rated as it is unlikely to meet the criteria under the compulsory zero-rating rules. Also, as a supply on its own, it is unlikely to meet the requirements of a going concern. 

The sale price between taxable and non-taxable use cannot be apportioned, meaning the entire sale is subject to GST. Although a taxpayer may have only claimed 20% of the expenses, the IRD’s position is that GST is payable on the full house, not just 20%. 

It is also irrelevant if the taxpayer has only claimed the expenses of running the home office, as opposed to the actual cost. It is a question of use, not what expenses have been claimed.

The IRD is expecting a Bill to be introduced to Parliament in September 2021 which should remove the cap on input tax deductions. If you have a transaction, the IRD has suggested applying for a Short Process Ruling.

Need help?

Here, at NZ International Tax & Property Advisors, we are a one-stop Chartered Accountant firm providing international tax, property tax & consulting, accounting and training services to locals, migrants/expats and businesses.

If you need assistance now or are interested in our services, we are offering free consultation for new clients to discuss their situation and how we can add value and assist. Follow the link to book a time here.

DISCLAIMER No liability is assumed by NZ International Tax & Property Advisors for any losses suffered by any person relying directly or indirectly upon the article. It is recommended that you consult your advisor before acting on this information.