Article author Grant Pearson is the Customs Appeal Authority for New Zealand, a member of the recently released second edition of GST in New Zealand author team, and practises as a barrister. Prior to his appointment as the Customs Appeal Authority, he was the senior tax partner in Duncan Cotterill. When GST was introduced in 1986, he was the Crown Counsel leading Crown Law’s Tax Section, since then he has continuously advised and represented clients on tax issues, including in the Privy Council and Supreme Court. (This article originally appeared in Taxation Today )
How to deal with dwellings
Before the compulsory zero-rating of land sales, homesteads and private assets would often require an apportionment when part of a land sale. For example, a farm sale required apportionment of the price between the homestead, which was not subject to goods and services tax (GST), and the farmland, which was. However, the pricing was generally not critical as the purchaser would pay GST to the vendor, the vendor would pay that money to Inland Revenue, and then the purchaser would claim the same amount as input tax. It was simply a money-go-round of offsetting transactions with a nil result.
Compulsory zero-rating of land sales between registered persons has cut out the money-go-round. Provided the parties meet the criteria for the offsetting payments, the transactions simply do not take place and result in the same outcome. As no GST is paid by the vendor, a superficial consideration tends to regard homesteads and the like as just part of the sale and there is no GST to pay on any of it. Generally, this is adequate to deal with uncomplicated transactions. However, it is important to understand some more detail, when complications arise.
There are separate supplies
The first potential fallacy to dispel is that there is only one supply. The concept of supply is critical in the GST regime, as s 8 of the Goods and Services Tax Act 1985 (GSTA 1985) taxes supplies made “by a registered person in the course or furtherance of a taxable activity carried on by that person”.[1] The sale of a private dwelling is generally not subject to the tax either because the vendor:
- used the dwelling privately not as part of a taxable activity, such as a homestead on a farm; or
- rented it as residential accommodation, which is generally an exempt supply.[2]
In either case, the vendor does not supply the dwelling to a purchaser in the course or furtherance of a taxable activity.
The GSTA 1985 has specific provisions that usually separate the supply of a dwelling and other land if GST would not apply if the vendor sold the dwelling on its own. However, aside from these special provisions, generally, if land is part of a sale then other assets that are part of the sale will be treated as one zero-rated supply.[3] The two provisions separating supplies in the present context are: [4]
- section 5(14) of the GSTA 1985 provides that the part of a supply that is subject to s 8 of the GSTA 1985, but is zero-rated, will be treated as a separate supply; and
- section 5(15) of the GSTA 1985, which provides that the supply of a “principal place of residence” is a separate supply. [5]
Accordingly, any private property will not come within the scope of s 8 as s 5(14) will separate off that supply. The supply of residential property will also be separated off regardless of whether it is private property, residential rental or, say, worker accommodation.
In the general run of cases the result is uncomplicated and provides an easy analysis of the transactions. The items that are subject to GST are zero-rated and the private assets, and the assets used to make exempt supplies, are treated separately and have not GST consequences.
What could possibly go wrong?
The problems that can arise with private and exempt assets usually relate to the vendor having used assets in a way that makes them subject to GST and the purchaser acquires them thinking otherwise. Putting dwellings to one side for the moment, likely circumstances are:
- the sale includes what the purchaser thinks is a private asset, say a vehicle, but it is in fact a business vehicle; or
- the sale includes what the purchaser incorrectly thinks is an asset used for making exempt supplies and is not subject to GST. For example, a building sold by a finance company, which was not principally used for providing financial services.
The purchaser in these instances would assume the vendor had no GST liability, and therefore, the purchaser could make a secondhand goods input claim if they were intending to use the asset to make taxable supplies. [6] Accordingly, the price they would pay will include a GST component. That is, a GST component in the sense that the dollar value of say a used vehicle purchased for commercial use will be the same whether purchased from a GST-registered person or not. A registered person would sell the vehicle for say $20,000 ($17,391.30 + GST of $2,608.70). The purchaser would receive a GST receipt and claim input tax of $2,608.70. Alternatively, they would pay a non-registered vendor $20,000 and claim input tax of $2,608.70 relying on a secondhand goods claim.
However, if the vehicle is part of a zero-rated sale (say, part of a farm), the purchaser will only pay $17,391.30 as the zero-rating means there is no GST input claim. That has been factored into the sale price. The vendor pays no output tax and the purchaser claims no input tax.
Purchasers acquiring an asset in a zero-rated sale involving land may have the opportunity for a GST input claim. That will apply if it is a separate supply, as it is a private asset. Section 8 of the GSTA 1985 does not apply to the vendor’s supply. If the purchaser intends to use it to make taxable supplies then they are entitled to a secondhand goods input claim.
In these cases, advisers should ensure the vendor provides a warranty that the asset is:
- not supplied by the vendor, for the purposes of s 8 of the GSTA 1985, in the course or furtherance of a taxable activity carried on by the vendor; and
- accordingly, a separate supply from the supply of other property pursuant to s 5(14) of the GSTA 1985.[7]
The price for those assets will be a GST-inclusive price, just as it would be if the assets were purchased separately, as the assets are for GST purposes.
In terms of risk management, accountants and lawyers should confirm that purchaser clients expect to receive all of the assets in a zero-rated sale priced to exclude GST, and understand they have to account for GST on disposal.[8] The exceptions are any assets for which the vendor has no GST liability, and they require advice and management. That will usually require a three-step process:
- treat them as a separate supply;
- price them on a GST-inclusive basis; and
- if the purchaser is using them to make taxable supplies, a secondhand goods input claim is required.
Dwellings require separate consideration for two reasons: the standard Auckland District Law Society (ADLS) forms have specific provision for them, as does the GSTA 1985.
* Grant Pearson is the Customs Appeal Authority for New Zealand, and practises as a barrister. Prior to his appointment as the Customs Appeal Authority, he was the senior tax partner in Duncan Cotterill. When GST was introduced in 1986, he was the Crown Counsel leading Crown Law’s Tax Section, since then he has continuously advised and represented clients on tax issues, including in the Privy Council and Supreme Court.
Dwellings — the potential for zero-rating is rare
The most common assets not subject to GST in zero-rated land sales are dwellings. As already noted, whether or not they are private or used for making exempt supplies they are a separate supply if they are “a principal place of residence”.[9] That usefully focuses on the fact that only in very rare instances will a dwelling be capable of being supplied as a zero-rated supply. To qualify, s 11(1)(mb) of the GSTA 1985 requires that that the purchaser: [10]
- acquires the goods with the intention of using them for making taxable supplies; and
- it is not a supply of land intended to be used as a principal place of residence by the recipient or associated person.
The usual run of dwellings supplied in zero-rated land sales will fail on one or both grounds. For example, a homestead will fail on the second ground, and likely the first unless there is a home office or the like, though s 10(18) may well apply.[11] A residential rental property will not meet the first or second ground, and owner/worker accommodation will be in a similar position. Accordingly, the supply of the dwelling is not zero-rated, and the vendor is simply responsible for any GST liability.
The most common exception would be where a vendor was in the course of constructing, say, a block of apartments and sells the partially completed block to another developer. The GSTA 1985 and the policy behind the zero-rating of land require a sale of this kind to be zero-rated.
How to draft ADLS forms and disclosure requirements relating to dwellings in zero-rated sales
Underpinning the principles relating to dwellings is s 5(16) of the GSTA 1985. The key principle in the provision is that if a registered person has claimed an input deduction in respect of “the supply of a dwelling”, any subsequent supply of the dwelling and land (or parts of them) is deemed to be a taxable supply. [12]
First, it is appropriate to reflect on the scope of s 5(16) of the GSTA 1985. There are many instances where proper and appropriate input deductions are claimed for dwellings. The supply of a dwelling is not exempt per se; builders and developers selling houses routinely make taxable supplies of dwellings. The circumstances in which dwellings are often not subject to GST include a supply of a private asset or an asset used to make exempt supplies. As noted, those sales do not come within s 8 of the GSTA 1985, as the vendor does not make the supplies in the course of making taxable supplies — the result is quite independent of the fact the supply happens to be a dwelling.
Accordingly, the routine application of s 5(16) is a builder or developer who may have decided to use a dwelling to rent out for the short or long term, or to live in pending sale or lease. Putting aside the obligations to make adjustments, or otherwise recognise the change of use, s 5(16) is a backstop provision that ensures the registered person who claimed input tax fully accounts for output tax on the dwelling.
Some naïve interpretations of s 5(16) claim the wording in the section — “claimed a deduction … in respect of the supply of a dwelling” (referring to the acquisition of the dwelling by the vendor) — means the provision only covers a dwelling acquired when whole and complete. Accordingly, the argument goes, a house transported to a site or built on the site is not included. Logically, if correct, houses that were unoccupied at the time of acquisition may not be covered.[13] However, the only realistic view is that s 5(16) covers all of the supplies that constitute a dwelling.[14] Further, the provision is worded to cover persons building dwellings, making it an obvious part of the section’s scope.
If a vendor has claimed input tax, they must consider the warranty in the ADLS forms, which provides:[15]
The vendor warrants that any dwelling and curtilage or part thereof supplied on sale of the property are not a supply to which section 5(16) of the GST Act applies.
If that is not true, then the vendor’s advisers should ensure the provision is deleted and the circumstances addressed properly. Usually, the position will be simply that the dwelling is a separate supply. It cannot be zero-rated because the purchaser is not going to use the dwelling for making taxable supplies and may use it for a principal place of residence. The vendor must account for output tax at the time of sale. From the point of view of the adviser, for the purchaser, in many cases, the GST information schedule will make it clear a dwelling does not qualify for zero-rating. However, specific notification in the GST information schedule, or separately prior to settlement, should be made in other cases — the standard schedule does not address multiple dwellings such as a homestead and workers accommodation.
In rare instances, such as the sale of a partially completed residential development to another developer, the provision warranting that s 5(16) of the GSTA 1985 does not apply should be deleted and the parties should clearly establish the basis for zero-rating applying.
Conclusion
Generally, when dealing with a dwelling that is part of a zero-rated sale the position is uncomplicated. However, usually the supply of the dwelling is a separate standalone supply for GST purposes. The dwelling is not zero-rated and it does not have GST attached as the supply is not in the course of taxable activity. Therefore, s 8 of the GSTA 1985 does not apply. It is not necessary to apportion the sale price.
If the sale is a taxable supply it will usually be one to which s 5(16) of the GSTA 1985 applies; it will not be zero-rated because the purchaser will not be using the dwelling to make taxable supplies. The vendor should delete the standard warranty that s 5(16) does not apply, and the parties should ensure the price is the standard price for a usual GST-inclusive private sale.
In the rare instances where dwellings go from a person supplying them in the course of taxable activity to another party intending to do the same (such as one developer to another), then:
- the vendor should delete the s 5(16) warranty;
- both parties should ensure the proper notifications are in place to ensure the transaction is properly zero-rated; and
- the pricing should be exclusive of GST.
Footnotes
[1] Goods and Services Tax Act 1985, s 8(1).
[2] See Grant Pearson, Mark Keating and Craig Macalister GST in New Zealand (Thomson Reuters, Wellington, 2016) at Chapters 14.4, 26 and 28.
[3] Section 11(1)(mb) of the Goods and Services Tax Act 1985 zero-rates supplies that are “wholly or partly” land, and s 5(24) includes the provision of services as part of the supply; and see Grant Pearson, Mark Keating and Craig Macalister GST in New Zealand (Thomson Reuters, Wellington, 2016) at Chapter 15.6.
[4] Note that s 10(18) of the Goods and Services Tax Act 1985 also provides for apportionment where the supply is not wholly a taxable supply.
[5] Note that this is the definition used to create the exemption for residential rental supplies. It also applies to dwellings and reversionary leasehold interests: refer to Grant Pearson, Mark Keating and Craig Macalister GST in New Zealand (Thomson Reuters, Wellington, 2016) at Chapter 14.5.
[6] See Grant Pearson, Mark Keating and Craig Macalister GST in New Zealand (Thomson Reuters, Wellington, 2016) at Chapter 17.6.
[7] The wording of a warranty will require professional consideration in each case. In some instances, the warranty will be that none of the supply is zero-rated, and in others there may be multiple categories such as zero-rated, s 5(14) supplies, and s 5(15) supplies of a dwelling.
[8] In principle it should make no difference whether that is in a sale subject to GST to a purchaser who will not use the assets for making taxable supplies, a zero-rated sale, or a deemed supply on deregistration. The purchaser acquires the asset without paying GST or deducting GST, and is in the same position as a party that paid and later deducted GST.
[9] Goods and Services Tax Act 1985, s 5(15), and footnote 4 above.
[10] Goods and Services Tax Act 1985, s 11(1)(mb).
[11] A home office component is likely apportioned under s 10(18) of the Goods and Services Tax Act 1985.
[12] See Grant Pearson, Mark Keating and Craig Macalister GST in New Zealand (Thomson Reuters, Wellington, 2016) at Chapter 9.20.
[13] See subparagraph (a)(ii) of the definition of “dwelling” in s 2 of the Goods and Services Tax Act 1985,
[14] Section 33 of the Interpretation Act 1999 provides singular includes the plural, and a narrow interpretation would simply deprive the provision of effect. In Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289, the Court mandated a purposive approach to tax legislation.
[15] For example, Auckland District Law Society Particulars and Conditions of Sale of Real Estate by Tender – Fourth Edition 2012 (4), clause 15.3.
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