|
Buying Development Property “and/or nominee” |
|
Buying Development Property “and/or nominee”
17 September 2005 By Tony Thorne
When people make an offer on a property, it's quite common practice these days for a person to state the purchaser as "persons name and/or nominee". The theory is that the property can then be purchased in a different entity when the property settles. The reason for entering into the contract this way is because the entity to be nominated wasn't in existence when the offer was made.
This use of "and/or nominee" in contracts seems to be accepted practice these days. However, I believe people are overlooking a potential GST problem where the property is purchased for development purposes from a vendor who is not GST registered.
The fundamental principal that is overlooked is that the phrase "and/or nominee" has no real legal meaning. It is simply a "conveyance in direction". Adding the phrase "or nominee" will not release the original purchaser from liability under the agreement.
GST on Property Purchased for Development
Generally, where a property is purchased for development purposes from a vendor who is not registered for GST, GST can be claimed based on one-ninth of the purchase price of the property under the "second hand goods" provisions.
However, the IRD may not be so kind as to allow the GST to be claimed where the nominated entity was not in existence at the time the property was purchased.
Potential GST Problem
If the IRD were to deem that the nominated entity was not in existence at the time of purchasing the property, the effect of the nomination would be that the person would be deemed to have purchased the property and for that person to have then transferred the property to the nominated entity.
If the nominated entity was the original purchaser as intended, GST would have been claimed on the purchase price of the property. However, where the nominated entity purchases the property from the person, no GST is able to be claimed. The reason for this is that if property is purchased from an associated person (which is extremely likely in this situation), the GST claim is limited to the GST included in the original cost of the property to the person. As the property was originally purchased from a vendor that is not GST registered, there would have been not GST in the original cost of the property, so there will be no GST available to be claimed to the nominated entity.
Accordingly, it is important that the nominated entity is the entity that enters into the contract.
A Company as the Nominee
Section 182 of the Companies Act 1993 allows a pre-incorporation contract to be ratified within a reasonable time after the incorporation of the company. A pre-incorporation contract only includes a contract that was purported to be made by the company before its incorporation or a contract made by a person on behalf of the company made in contemplation of its incorporation.
The contract that is ratified is as valid and enforceable as if the company had been a party to the contract when it was made.
As such, where a company is the nominated entity, it can purchase the property as if it actually entered into the contact originally. However, it is important that you have a particular type of company in mind and that the contract is legally ratified through a deed of nomination as soon as possible to avoid any potential issues.
A Trust as the Nominee
Unlike companies, there is no provision in any legislation that allows trustees to ratify a pre-settlement contract. As such, where a trust is the nominated entity, there seems to be a strong argument for the IRD to deem that the property is transferred from the person to the trust and to disallow any GST claim.
Of course, people generally do not want to incur the expense of setting up a trust before the contract is entered into which poses a problem.
Conclusion and Recommendation
There are two valid options. The first one is to go ahead and use the trust as the nominee and hope that the IRD take a more flexible view of the timing of the transactions.
The second option is use a company that is owned by a trust as the nominee.
I have heard that the IRD have disallowed a GST claim to a Trust in the situation I described above. However, I'm not convinced that this is the IRD's policy. In light of this, I do recommend that any "and/or nominee" property for development purposes is purchased by a company.
Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive or to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice.
|
|
To contact us:
Tony: (09) 571 0491 Erin: (09) 974 5507 tony@thorneaccounting.co.nz erin@thorneaccounting.co.nz
|
