When you buy or sell a property, you will need to make some decisions about GST.
Firstly, on the front page of the sale and purchase agreement, there is a place to indicate whether the price is “plus GST (if any)” or “includes GST (if any)”. Later, before settlement, your lawyer will probably ask you if you are GST registered, and maybe even suggest you talk to your accountant about it. We think that getting this right from the start (at the time the original agreement is signed) is best. Getting it wrong, can be very expensive.
If GST is not applicable, then it makes no difference – both options (“Includes GST” and “Plus GST”) will have the same effect. This is probably true if you are buying or selling your family home, or residential rental unit. But if GST does apply, then the difference between the two options can be very large and has the potential to put either the buyer or seller out of pocket in a big way.
If you are a buyer, and you sign a contract “Plus GST (if any)”, and it later turned out that GST applies, then the vendor would have the right to come back you and ask for another 15% on top of the agreed purchase price. If you are a seller, and you sign a control “Includes GST (if any)” and it turns out that GST applies, then you must pay the GST content of the price over to Inland Revenue regardless of whether that was built into your original calculations.
You may have heard that there is no GST on land transactions, so what’s all the fuss about? Well, it is true that there is no GST on most land transactions – residential property is exempt from GST, and other property is probably zero-rated for GST if both the buyer and seller are GST registered at the time. There are, however, opportunities for problems here:
* Not all “residential” property is exempt. For example, it may not be exempt if its use has been for Airbnb or some other business purpose.
* It is not always clear whether one or other party is, or should be, GST registered. Knowing this is essential when evaluating whether a non-exempt property can be zero-rated.
* A transaction may be exempt for one party but not the other. For example, a private owner selling their family home to a person who intends to undertake a property development; the transaction would be exempt for the vendor, but subject to GST for the purchaser.
These rules are too complex to explain in detail here. If you are entering into a property transaction, and you are at all uncertain – please give us a call or drop us an email. We would rather ensure that everything is clean up front, than be asked to help try to sort out a problem later.
The material on this website is for the benefit and information of clients. The items are in the nature of general comments only, and are not to be used, relied or acted upon without seeking further professional advice. Hounsell Accounting Limited accepts no liability for any errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice