The week before last, the Government released the Taxation (GST and Remedial Matters) Bill, which seeks to bring into law some of the proposals outlined in the November 2009 discussion document entitled GST: Accounting for land and other high-value assets.
The discussion document proposed that a domestic reverse charge would apply to transactions involving land between GST-registered parties whereby the vendor would not be required to account for GST on the sale, and the purchaser would make an GST output claim for the purchase in the GST return in which they could make a GST input for GST on the purchase.
The effect of this would be that no GST would have been refunded to the purchaser.
This was driven by scenarios whereby the IRD were forced to refund GST to a purchaser of land immediately upon the transaction's time of supply, but the vendor either delayed accounting for the GST (usually through a mismatch of GST registration bases) or did not return GST (e.g. they were insolvent and secured creditors stepped in front of the IRD).
To be fair, in the midst of the property development industry meltdown, this outcome did occur regularly, leaving the IRD, and the Government, seriously out of pocket on some very large transactions.
Following the submission process, the Government has instead simplified the process by deciding to adopt zero-rating for any supply to a registered person involving land.
This means that there would be zero GST on many land transactions in the future.
The new provisions will impose obligations on the vendor and purchaser whereby the vendor will be required to obtain the purchaser's registration details and will need to confirm with the purchaser the purchaser's intentions in relation to the supply (i.e. are they going to use it as part of a GST-taxable activity?).
The reason for this is that zero-rating will not apply if the registered purchaser does not intend to use the land for making taxable supplies or if the property has been purchased as a principal place of residence of the purchaser or their relative.
Provided that the vendor takes sufficient steps to inquire as to the purchaser's registration status and use of the land, the vendor will not be liable for tax on the supply in the case of mistake or misrepresentation by the purchaser.
While the vendor will not be required to account for output tax for a zero-rated supply, disclosure of the zero-rated transaction in the GST return will still be required in the GST return.
For the purchaser, they will have an obligation to provide correct information to the vendor and to the extent that incorrect information is provided by an unregistered purchaser, they will be deemed to supply the goods and services to themselves and be liable to pay GST on the supply at the standard rate.
The proposed amendments will apply from April 1, 2011.
The proposed changes should simplify the GST consequences arising from land transactions, particularly when the time of supply occurs significantly prior to settlement.
However, there will need to be a change of mindset to match this change of rules, and as always, we would recommend seeking professional advice when undertaking significant transactions like land sales or purchases.
Scott Mason is a tax consulting principal at WHK Otago.
