GST Zero-Rating Horror

The GST zero-rating rules have now been in place since 1 April 2011 where a property transaction between two GST registered parties is automatically zero-rated for GST. We're now coming across more horror stories that I'd like to share so that GST property traders can avoid the same mistakes.

The first case is where our client purchased a property in a mortgagee sale. The mortgagor stated that the mortgagee was not GST registered which turned out to be incorrect. My client was disallowed the GST claim and is now out of pocket by around $70k through no fault of their own.

The GST clause inserted into the S&P agreement by the lawyer allowed my client to seek compensation from the vendor although this could be an expensive process with no guarantee that the vendor has any assets. One issue here is that the GST clause did not include any personal guarantee from the personal signing the S&P agreement.

I've also heard of Vendors blatantly lying about their GST status so GST registered purchasers need to be very wary when buying property.

So, for all GST registered property traders and developers, I recommend inserting the clause on page 3 of this newsletter into any S&P agreement. The effect is to reduce the purchase price by the GST amount if the liability of the vendor for GST passes to the purchaser and makes the person signing the contract personally liable.

The second case was an Australian resident that called me. She had just purchased a property but didn't realise that the vendor was GST registered and that the purchase price was "plus GST".

This meant that the purchase price was effectively 15% more than what she has anticipated. The contract was already unconditional so I recommended that she cancel the transfer of her deposit and hope that it would be too difficult and expensive for the NZ based vendor to sue an Australian based Purchaser.

The issue here was that the Australian resident did not seek advice from a lawyer or accountant before going unconditional on the contract which is especially risky for anyone not familiar with the GST rules in NZ. Whenever any non-GST registered person purchases a property, they should ensure that the purchase price is "including GST" to avoid problem such as this.

Disclaimer: The above article is general in nature and we recommend you seek professional advice tailored to your specific personal situation.