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GST and Zero Rating

If you trade residential properties, then you will have to register for GST once you have a continuous taxable activity.  This means that you can claim GST on purchase costs that have GST but you also have to pay GST on the sale. 

If you do a one-off trade, then this is often not a continuous taxable activity.  Therefore you would not be required to register for GST.  But there can be a fine line, and it is often difficult to determine, if the trade will be a one-off or if you are likely to do numerous property trades, thus becoming continuous.  I suggest seeking professional advice from a property accountant on this subject and the best approach is to be honest.  If you trade further properties, then you will most likely be required to GST register.

For long term residential property investors, there is no GST, so the above comments are just for property traders.

Zero rating – Over the last year we have heard about a lot of mistakes around the Compulsory Zero Rating (CZR).  Real Estate agents commonly get this wrong and a few recent forum posts on www.propertytalk.com even show lawyers and non property accountants getting this wrong.  If both the vendor and purchaser are GST registered, then the sale will be zero rated for GST.  Therefore if you are a GST registered purchaser and the vendor is GST registered, you should be making any offer for the GST exclusive amount, plus GST (if any).

So for example, you are GST registered and purchasing a section from a developer.  The developer is advertising the section for $240,000.  You want to offer $230,000.  You would therefore work out the GST exclusive value $200,000 ($230,000 / 1.15) and offer on the contract $200,000 plus GST (if any).  As the developer will be GST registered, the sale is then Zero Rated, so you would pay $200,000 but can’t claim back the GST, and the vendor would receive $200,000 but have no GST to pay to IRD.

Following the example above, some recent mistakes I have heard of are the contract being written at $230,000 inclusive of GST.  This sale would still be Zero Rated, and Zero Rated at the $230,000.  So the purchaser would effectively be paying $230,000 + GST, or $264,500.  This would be a $30,000 mistake and this can often be the difference between a good , profitable trade and a bad one.

Therefore it is very important to ensure you know whether a vendor is GST registered or not when you are buying trading properties.  I recommend that you talk to your lawyer about inserting a clause in the sale and purchase agreement to ensure that the vendor is unable to change their GST status once the contract is signed.  Many traders and educators use a standard clause that your lawyer should be able to provide you.

Second hand goods claim – If you are buying from a vendor who is not GST registered (this will often be the case, as they are just personal house owners), then as a GST registered trader you will be able to make a second hand goods claim.  You can only do this on the payments basis for GST (i.e. claim the GST once you pay for it).  The property trader would then claim the GST back in the next GST period and get the GST back as a refund.  This is the purchase price divided by 23 * 3, so for example if a trader purchased a property for $230,000, they would get $30,000 GST back.  IRD will generally audit large GST refunds, so we often get clients to just claim the land/building purchase in that GST period, to keep the GST return very simple for the IRD audit. 
 


GST on rental income if trading properties

We have taken on a client in the past whose old accountant has returned GST on rental income for the last 6 years.  The client owes or has paid around $12,000 in GST per year, totaling $70,000 approximately over the 6 years.

If you are trading properties and registered for GST, you should not be returning GST on rental income!  For properties purchased before 1/04/11 it is best practice to use Lundy adjustments.  For the client above, using the Lundy adjustments reduced the GST adjustment down to approximately $2,000 per year or $12,000 for the 6 years.  Overall we hope to save at least $50,000 and are in the process of reassessing the old GST returns with IRD.  Again, if you are involved in property transactions, it is essential that you use a specialist property accountant who is fully aware of property tips and tricks.

If the property was purchased after 1/04/11, new rules have come in that generally require more GST to be paid back to IRD.  But the first adjustment required is not until 31 March of the year after.  For example, if you purchased a section, built a house in May 2013 and tried to sell it, then couldn’t, so rented it out, the first adjustment period would be for May 2013 to 31/03/15, with the GST adjustment due in the 31/03/15 period.



Profit on Trading Property