From 1 April 2011, the GST rules for “land” have changed. Contracts for the sale of land need to be amended to deal with these changes.
What began as a move to crack down on “phoenix” frauds has resulted in GST being effectively turned off for supplies between registered persons involving land. But this comes with significant compliance requirements.
This Brief Counsel explains what you need to know before entering into agreements under the new rules.
The new rules are compulsory
Supplies wholly or partly consisting of land must now be zero-rated where the land is:
supplied by a registered person to another registered person who acquires it with the intention of making taxable supplies, and/or
not intended to be used as a principal place of residence of the purchaser of the supply or a person associated with them.
“Land” is very broadly defined
“Land” is defined broadly to include an estate or interest in land, a right that gives rise to an interest in land, an option to acquire land or an estate or interest in land, or a share in the share capital of a flat-owning or office-owning company as defined in the Land Transfer Act 1952. Importantly, mortgages, leases of dwellings, and (although not entirely clear from drafting) interests in land where there is not a significant (more than 25%) prepaid lump sum component are excluded from the definition of land. For example, commercial leases for office, retail and industrial premises are excluded, although the grant of a ground lease with a large upfront payment may be included.
Even with the exclusions the breadth of the definition of land will mean the new zero rating provision will reach far beyond the mischief of phoenix company frauds and will apply in contexts you may not expect.
There is no de minimus threshold before zero rating applies. Once a “land” component is identified, zero rating will [apply] to the non-land components of a transaction as well.
The application of the new provision is determined at settlement
The issue for vendors will be whether they should zero rate in GST returns filed before settlement given that zero rating under the new provision will not be determined until settlement.
Purchasers will be required on or before settlement to provide a statement in writing, which can be included in the agreement for sale and purchase as a warranty, to the vendor stating that, at settlement they:
are, or expect to be, a registered person
are acquiring the goods with the intention of using them for making taxable supplies, and
do not intend to use the land as a principal place of residence for them or a person associated with them.
The vendor is entitled to rely on this information in determining the tax treatment of the supply. Vendors should contractually bind purchasers to provide this information promptly (certainly before the GST return is required to be filed). Preferably the information will be included as part of the agreement for sale and purchase.
Vendors have an obligation to retain the name and address of the purchaser, the registration number of the purchaser, a description of the land and the consideration for the supply. This information goes beyond what vendors currently need to know to zero rate transactions as a going concern, and contracts need to be amended to address this.
What happens when things go wrong?
A major benefit for vendors from the new rules is that if, after settlement, it is found that the zero rating criteria are not met, Inland Revenue will look to the purchaser directly to pay the GST and penalties.
In order for this rule to apply, it is important that vendors have taken all necessary steps to collect the requisite information and statements from the purchaser.
A more difficult question is who will bear the GST burden if the vendor becomes aware prior to settlement that a statement provided by a purchaser is incorrect and the supply should not have been zero rated. Under the wording of the new legislation (in particular the new credit and debit note provisions) it appears vendors may become liable in such situations, despite the provision entitling them to rely on the statements. This risk can be mitigated contractually.
Purchasers should also be wary of an option available to vendors to apply the current GST rules to supplies made on or after 1 April where the agreement is entered into before 1 April, an issue that can again be dealt with contractually.