The rate of GST is changing on 1 October 2010 to 15%. Get this wrong and it could cost you dearly, especially if you are purchasing or leasing property. This short note covers a couple of important situations that could save you money, in terms of the New Zealand GST Transitional Rules. First we consider the situation where you purchase a property now, but the contract does not become unconditional until after 1 October 2010. This is likely to happen more and more frequently as the time gets closer to 1 October 2010, and will be something to watch out for if you are in the market for a house. This will only apply if you are purchasing from a registered vendor.
The second issue we look at is the treatment of rental payments, and how the transitional rules will affect these. For further help on this, see the GST Advisory Panel’s website at http://www.gstadvisory.govt.nz/.
Signing the contract before 1 October 2010, but the contract goes unconditional after 1 October 2010
In these situations there can be quite a lot of variance between types of vendors and purchasers from a GST perspective, not to mention the contractual provisions. Assume, however, that you are buying from a GST registered developer, and that you are not registered for GST yourself. Also assume that the deposit is being held in a stakeholder account (such as your lawyer’s trust account) until the contract goes unconditional.
If the time of supply for GST purposes is not triggered pre 1 October 2010 then you will have to pay more for the property than the amount appearing on your contract. This is so because the GST Act allows the vendor to increase the GST rate from 12.5% to 15%. The GST time of supply is usually triggered at the earlier of payment or an invoice. However, if a stakeholder holds a payment, then the payment to the stakeholder will not generally trigger the time of supply. As the stakeholder status will usually end when the contract goes unconditional, it is at this point that the time of supply will be triggered. The rate applicable at that point will apply to the contract.
You may want to trigger the time of supply earlier, but in many cases this will not be possible. The vendor may not want to trigger the time of supply earlier, as the vendor may be registered on an invoice basis, and that would cause the vendor cash flow issues.
The way around this is to insert a clause in the contract which states that the price will not increase, notwithstanding the change in the GST legislation. It is not enough to merely state that the price is GST inclusive. The vendor will still have to account for GST at the higher rate, but will have no recourse to the purchaser for that extra amount. The question then feeds into the price of the property, as the vendor may increase the price to take account of the increase in GST that it has to pay.
It is much better to know this before signing the contract, rather than finding it out on settlement when you have not made provision with the bank for extra funds. Also, if you give the contract to your lawyer to review before signing, he or she should pick this up for you.
How do the GST Transitional Rules work for long-term commercial rentals?
Long-term commercial rentals are usually chopped up into separate supplies from a GST perspective, and a different time of supply rule applies compared with the normal rule. In these cases the time of supply is the time each payment is due, or received, whichever is earlier.
In commercial rental situations an invoice is usually issued at the beginning of the year to cover the whole year. It this case, notwithstanding that an invoice has been issued for the whole year (which may have had 12.5% on it); the time of supply would not have been triggered for the 12 months’ supply. The lower GST rate will therefore only apply where the payment is either due or received before 1 October 2010, and the higher rate if after 1 October 2010.
There would seem to be a way to manipulate how much GST is paid in this context. For example, if you pay your rent on the first of the month, and it is due then, then the rental paid on 1 October 2010 will have GST at 15%. However, paying that rent one day earlier will ensure that you pay GST at 12.5%, and the cash flow costs should be negligible. However, care should be taken with this type of transaction to ensure that you do not fall foul of the anti-avoidance provision in the GST Act. The IRD have said that they will look at spikes in transactions to ensure that the rate rise is not unfairly exploited.
This is a short summary of the GST Transitional Rules, and there may be other situations where this could be relevant to your business.