Avoid unexpected GST Liabilities on the Sale of Land
Kevin House, Partner
Failure to include appropriate vendor protections in sale and purchase agreements could cost vendors dearly. Vendors entering into GST inclusive sale and purchase agreements (believing the transaction to be zero rated for GST purposes) need to be aware of a purchaser’s ability to nominate a non-GST registered entity to complete the purchase – leaving the vendor with an unexpected GST liability.
GST on a transaction involving the sale of land will be zero rated where:
- that land is being sold from one GST registered person to another GST registered person; and
- it will be used for making taxable supplies; and
- it will not be used as a principal place of residence.
The ADLS/REINZ sale and purchase agreement contains provisions in its second schedule relating to the GST status of the parties. If the vendor is GST registered it is important that this schedule be correctly completed by both parties. Where the conditions noted above are present, it will become compulsory for the transaction to be zero rated for GST purposes.
The standard agreement, however, contains no prohibition on a purchaser nominating a non GST registered entity after signing. The consequence of such a nomination may alter the GST status of the transaction. If the purchase price is GST inclusive the purchaser will still be obliged to pay the same amount, however, the vendor will be required to account for 15% of the purchase price to the IRD. Following settlement, the purchaser may transfer the property to a GST registered associated party which may claim back a second hand GST credit, achieving a windfall of 15% of the purchase price at the expense of the vendor.
Contrary to popular belief, deleting the “and/or nominee” wording on the front page of the standard agreement will not prevent the purchaser nominating. The right of nomination is a common law right. A purchaser may nominate whether this is provided for in the agreement or not. In order to restrict the ability to nominate, an express provision must be included prohibiting nomination.
The above risk may be averted, however, in the following ways:
- Ensure that where the parties contemplate a GST zero rated transaction that the purchase price is stated as plus GST;
- Include a clause that provides that should the transaction be unable to be zero rated that the purchaser shall pay GST on the purchase price;
- Prohibit nomination without the consent of the vendor.
Failure to protect your interests as a vendor can leave you exposed. If in doubt, seek professional advice.
The information contained in this paper is necessarily of a generalised nature and specific advice should be sought in relation to any particular situation. Further information and assistance in relation to this article can be gained by contacting senior personal property lawyer Kevin House.