Scary GST Stories
For land sold between a GST registered purchaser and a GST registered vendor, the rules that these transactions have GST automatically charged at 0% has been in place since 1 April 2011. So, a number of scary GST stories has emerged since then. I've come across a few situations where people have got themselves into costly problems by not getting the right advice up front and only seeking our help after the transaction happened.
One client called me to say that they had purchased a property from Transit NZ for $550 incl gst (if any). The client then on-sold the property for $580k and through that they had made a quick profit of $26k after paying GST on the profit. What they overlooked was the fact that Transit NZ was GST registered as they purchase properties to demolish and build roads. As a result, the initial purchase was zero-rated meaning that client could not claim and GST back on the purchase price. Yet, the client still had to pay GST on the sale proceeds so the deal actually ended up being a loss of $45k after GST. Ouch!
The moral of this story is to always double check if the vendor is GST registered and to get advice from us before you sign the contract.
Another client bought and sold a property on the same day for a $10k profit. They only included the $10k profit as sales in their GST return. 6 months later, the IRD audited the client and said that the full sale proceeds of $250k should have been included and that the client owed another $31k in GST. The IRD only allowed the GST on the purchase price in the later GST return meaning the client had $4k in penalties and interest to pay. That's a costly technicality but the IRD will pull you up on this.
The moral of this story is to include both the sales and purchases separately in your GST return if you trade a property on the same day.
We also recently took over a client who had previously purchased a property and claimed GST on the basis that is was a property trade. The property was not sold, was taken off the market and rented out (presumably until the market picked up again). The IRD audited the client and formed the view that the property was never intended to have been traded so made the client repay the GST that was claimed plus penalties and interest.
The moral of this story is that if you have claimed GST on a property that you have since taken off the market and rented out, that you should consider putting the property back on the market or paying back the GST that was initially claimed.
GST Questions when Buying
To get your GST situation correct when buying a property to trade, these are the questions you should ask yourself (or call us so we can ask them):
- Are you GST registered? If no, then you should make sure that purchase price is including GST (if any). If yes, then go to the next question.
- Is the vendor GST registered? If yes, ask yourself how much you would pay for the property if you couldn't claim back any GST. Make an offer based on that amont plus GST (if any). If no, then you can make your offer including GST (if any), just be sure to double check that the vendor is not GST registered.
Disclaimer: The above article is general in nature and we recommend you seek professional advice tailored to your specific personal situation.