Compulsory Zero-Rating Of Land

The compulsory zero-rating (CZR) of land rules have applied since 1 April 2011. The rules were introduced to combat a pattern of transactions where Inland Revenue (IRD) was paying GST refunds to land purchasers, but there was no corresponding GST returned by the vendor.

Although simple in principle, mistakes are being made. To recap, the rules require a transaction that wholly or partly consists of land to be zero-rated if:

  • The vendor and purchaser are both GST registered; and
  • The purchaser intends to use the land for the purpose of making taxable supplies; and
  • The purchaser or a person associated with the purchaser does not intend to use the land as a principal place of residence.

The reduced rate applies not to just the land component of a transaction, but to the entire supply. For example, if zero-rating applies to the sale of land and assets, the assets are also zero-rated. Also, the supply of “land” is not limited to the transfer of freehold title, but also includes an assignment of an interest in land. For example, if a business sells assets and an assignment of a lease (of land), zero-rating is likely to apply.

In practice, the standard form Auckland District Law Society (ADLS) agreement includes a statement that the purchaser completes for GST purposes and is used by the vendor to determine whether the sale should be zero-rated. The agreement also includes a question on the front page of the contract asking whether the vendor is registered for the purpose of the supply. A common error is for the question to be answered “no” because the transaction is the sale of a residential home irrespective of the vendor’s circumstances. If however, a property developer has built the house in the course of their taxable activity, GST will apply to the sale and the question should be answered “yes”.

A fundamental element of the contract is whether to express the price as “Plus GST (if any)” or “Inclusive of GST (if any)”. Disputes have arisen because a GST registered vendor understands the buyer is GST registered and the price is agreed as GST Inclusive. The rationale being that the transaction will be zero-rated and the price stated will be received ‘in the hand’ by the vendor. However, seeing an opportunity a purchaser might at the last minute, nominate a non-registered purchaser. The transaction does not then qualify for zero-rating and the vendor is required to pay GST at 15% to IRD, leaving the vendor ‘out of pocket’.

In practice, it is recommended the agreement includes warranties regarding the GST status of the parties and that vendors execute agreements on a plus GST basis. Contracting ‘plus GST’ provides the right to increase the cash price to fund an unforeseen GST liability, thereby preserving the net amount receivable.

A further pricing misconception is that a “GST inclusive” price means that GST is included at 15% and can be deducted for GST purposes. However, if the transaction is zero-rated, a GST inclusive price simply means there is GST, but the amount of GST is zero.

A GST registered purchaser might contract on a zero-rated basis, because they have failed to understand that they are not purchasing the land to make taxable supplies. For example, the purchase of a residential property by a GST registered purchaser is unlikely to qualify for zero-rating. In this situation, the purchaser would be liable for the GST that would have otherwise been payable by the vendor.

It is normal for a contract to be subject to ‘Solicitor’s approval’. Having a contract reviewed by your accountant is also worthwhile.