GST changes to purchase agreements

By - , Build 177

Before changes to GST rules in 2011, there were some dodgy land deals. The problem is, this didn’t stop the headache for builders. The new ADLS/REINZ standard sale and purchase agreement form should fix this.

AS MOST will know, the GST rules changed in April 2011 to bring in compulsory zero rating in many cases where supplies of land are concerned. The changes were intended to protect the tax coffers. Prior to the change, land transactions were subject to GST at 15% – the supplier would charge GST, and the purchaser would claim back the GST. Only problem is – the system was prone to fraud.

History of phoenix fraud

What clever operators did was to set up phoenix companies – ones that would appear then disappear as it suited the owners. Usually, these nefarious operators would already have a company that owned land, but the company either had no other assets or was already in trouble.

The company would then sell the land. The purchaser – also a nefarious operator – would claim 15% on the cost of the land, and Inland Revenue (IRD) would pay out on this. However, the vendor would not return the GST, and when IRD came knocking, they could not find anyone or any cash. No-one knows how much money IRD missed out on, but it could have been a lot.

From 2011, GST zero rated on land sales

Consequently, government changed the rules in April 2011. From that time, most sales of land between registered persons have been zero rated, but there is some confusion about what this means.

Most people think it means that GST does not apply to the sale, which is not right. GST does actually apply to the sale, but only at 0%.

Builders caught out by old agreement

One problem with the rule change was the way the standard ADLS/REINZ sale and purchase agreement – which documents virtually all land sales – was written. The problem with the form was that it allowed the purchaser to change the price that was agreed after the vendor was locked in. And yes, you guessed it, the purchaser would reduce the price by doing some very quick manoeuvring.

To make it real, take an example. Say you, as the builder, decide to buy some sections off the developer for some spec homes. From the developer’s point of view, they have two types of customers. You, as the builder, and also some mums and dads buying sections for themselves.

Mum and dad sales – not GST registered

Now the developer does not want to worry mums and dads about GST. All the developer wants is for them to turn up with the cash on the day. The developer therefore sells it to them on a GST-inclusive basis. What the developer is saying is, ‘Look mums and dads, I will take care of the GST, don’t you worry about it at all.’

The price may be, say, $350,000 including GST. If the developer sells to mum and dad and then the developer returns GST on the sale price, they end up with $304,307 with the rest being paid to the IRD.

Back to top

When both GST registered, GST zero rated

However, if you as the builder sign one of these deals on a GST-inclusive basis, thinking your building company can claim back the GST, the transaction will be zero rated. This is because your building company and the developer are both GST registered. The developer will get to keep the entire $350,000, which is not a good outcome for you, and this is where the manoeuvring came in.

What you may do in that situation is quickly nominate yourself individually in your own name, an unregistered person, to complete the transaction. This would mean the developer has to charge GST at 15% and ends up only keeping $304,307 out of the deal. You then sell the land to your building company at $350,000 on the same day, and the building company can claim the GST back because it has purchased from an unregistered person.

New standard sale and purchase agreement form

In November, however, ADLS/REINZ brought out a new standard sale and purchase agreement form. This says that, in a situation where you nominate someone with a different GST character than the named purchaser, GST will be charged on top of the price, and it will no longer be GST inclusive.

In other words, in the example given, after the manoeuvring, instead of you paying $350,000 and claiming back the GST, you will now pay $402,500. This means the developer still ends up with $350,000.

You can then still sell from your own name to your building company and claim this GST back, but you are in the same position as if you did not do any manoeuvring with a cost of $350,000 exclusive of GST.

The moral of the story

Get someone to review the contract before signing it. Not doing so can be costly.

Back to top

Note

This is intended as an overview and, as always, there is no substitute for obtaining high-quality advice before making actual decisions. Contact your advisor or local Baker Tilly Staples Rodway office.

Download the PDF

More articles about these topics

Articles are correct at the time of publication but may have since become outdated.

Advertisement

Advertisement