Is your home office subject to GST upon sale?

Wednesday 8 September 2021, 1:07PM
By Media Giant

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.

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