GST on the sale of land between registered persons is being reduced from 15% to 0%. What are the transitional rules that registered persons should be aware of?
The rules relating to GST on the supply of land between registered persons is being changed. Broadly, rather than charging GST at 15%, the rate is being changed to 0%. There is much by way of technical detail to understand regarding these changes. This article very briefly considers the transitional provisions that will need to be taken into account. It is necessarily technical. If you have any questions about it, please contact your usual Parry Field lawyer.
The Finance and Expenditure Select Committee (“FEC”) recently reported back on the Taxation (GST and Remedial Matters) Bill. This Bill contains significant amendments to the GST Act, perhaps the most significant since the changes made in the year 2000. It is important to be aware of the provisions relating to the zero rating of land contained in the Bill.
This article focuses on some of the transitional issues that advisors should be aware of.
What is being proposed?
From a conceptual level what is happening is that the rate of tax on a specific supply is being reduced from the standard rate (of 15%) to the zero rate; the supply in question relates to most supplies involving some land (but there are some exclusions). Now, many of you will be familiar with the general transitional rules. We have just been through a rate change from 12.5% to 15%, and it is similar transitional issues that arise in the present context. But first, let us start with the draft law as it stands after the FEC amendments.
The draft Bill after FEC amendments
New section 11(1)(mb) is being inserted. This provides that where there is a supply of land from a registered person to another registered person, then the supply can be zero-rated for GST purposes. However, the section does not apply if the person acquiring the land or a close relative of theirs intends to use the land for their principal place of residence. Also, the definition of land has been narrowed, and the intention is to exclude commercial rental payments. There is much detail in these provisions that I won’t go into in this blog.
New transitional provisions
In addition, a new transitional provision has been included in the Bill. A supplier may choose to standard rate ( at 15%) the supply if a binding agreement was entered into before 1 April 2011 for which the time of supply is triggered after that date. If no such choice is made the transaction is automatically zero-rated.
Note that if the time of supply is triggered before 1 April 2011, then there is no option to zero rate (unless the supply is of a going concern). The new zero rating provision will only apply to situations where the time of supply is triggered after 1 April 2011. This can be quite confusing, because the new section 11(1)(mb) will apply if at the time of settlement the requirements of the section are complied with. However, this will only apply to transactions where the time of supply was triggered after 1 April 2011, as the changes only apply to transactions on or after that date. Care should therefore be taken when advising on these types of transactions, as the law advisors would be looking at post 1 April 2011 would not necessarily be the law applying at the time of supply.
Before going any further, note that new section 11(1)(mb) only impacts on supplies between registered persons. Therefore any questions that arise should relate to cash flow only, rather than a final GST cost. Or so it would seem.
If the supplier opts to standard rate the supply, then very little should go awry. Essentially the current rules will apply, with some modifications for nominees etc.
This does raise one issue, and that is, as the recipient, one would not be aware of the GST treatment of the supply until a settlement statement is provided. This may be close to the time of settlement, and if it turns out that the supply is actually standard rated, and the contract is a “plus GST” contract, then the purchaser will need to come up with the extra cash. It is therefore advisable to establish exactly the footing of the contract from a GST perspective well before settlement.
It may be prudent to include in your contract a clause as follows:
“The Parties agree that the vendor will elect to apply GST at the standard rate pursuant to the Goods and Services Tax Act 1985, if that Act allows for such election.”
What if the new transitional rule does not apply?
Leaving this issue aside, what happens if the supplier makes no election? The position is that at the time the contract was entered into both parties believed that GST will apply at 15%. However, by the time of settlement the law has changed, and GST therefore applies at 0% (assuming the time of supply is triggered on or after 1 April 2011). Note, the transitional rules are only relevant where a contract is entered into before the end of June 2011, and the time of supply is triggered on or after 1 April 2011.
The old transitional rules in a “plus GST” contract
Assuming the contract was “plus GST, if any” then there should not be too much of a problem. The GST charged will be 0%, and the purchaser will need to come up with a lower purchase price than expected. The vendor will receive less than expected, and if the vendor was banking on using the amount to clear the mortgage, and then later return the GST from other funding, then this may cause some problems for the vendor. However, that is an unlikely scenario.
The old transitional rules in an “inclusive of GST” contract
If the contract is expressed as inclusive of GST, then this creates a bit of a quandary for the GST registered purchaser. Before, they thought they were paying 15% GST, and presumably, were going to recover that GST from the IRD. Now the GST is 0%, but if the price was GST inclusive, then they still have to pay the same amount. The purchaser is out of pocket by the amount of GST, and the vendor gains this as a windfall.Enter section 78 of the GST Act. This section provides that where there is an alteration in the law reducing or increasing GST on any supply of goods and services, then its provisions would apply. Note, this is not the same as an amendment to the rate of tax charged under section 8. If there was a rate change then sections 78A etc would come into play, as these apply specifically when there is a rate change only.
Section 78 applies when “…the rate of tax in relation to a supply of goods and services is … reduced.” In the present situation the rate is going from 15% to 0%, and the section therefore applies.
Section 78 further provides that where the rate is reduced then either the supplier or the recipient may deduct from the agreed price the amount of the reduction of that tax. This makes good sense, and allows the unfair situation that arose in the GST inclusive context to be ameliorated.
Further, it has been clarified that this section applies even in a GST inclusive context by the removal of the words “or where the alteration in the law has been taken into account” during the rate change amendments.
Therefore, unless the contract specifically provides otherwise, the purchaser can ask the vendor to reduce the price by the amount of GST. Of course, there is nothing stopping the vendor from inserting a provision in the contract stating that the price cannot be reduced notwithstanding section 78. Persons acting for purchasers should be aware of this issue, and should carefully review contracts to see if there is such a clause contained in the contract. Missing the clause could cost your client 15% of the purchase price, so care needs to be taken. Also note that this section could apply until the end of June, three months after the rate change law comes into force.
The above discussed issues caused by the transitional rules are not the only changes that advisors should be aware of in relation to the supply of land. The rules are also being amended to ensure that where nominees are being used that the GST Act will follow the economic substance of the supply, rather than the contractual reality. This can cause issues, but they are beyond the scope of this article.
Finally, please note that this is only intended as a general guide, and should not be relied on as legal or other advice in specific circumstances.
Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have. Please contact Kris Morrison at Parry Field’s Christchurch office (348 8480) for help with tax matters. Please note that this is only a high level overview of the rules, and there may be specific situations where a different outcome is reached. Therefore, please don’t rely on this as legal advice.