New GST rules for property purchases

Any property purchases after April 2011, to a GST registered purchaser, who intends to use the new land for purposes other than the principal place of residence, the GST on the sale is zero rated.

Always the one to make the most of an opportunity, Farmer Freddy is keen to make an offer on the neighbour's farm which has just come up for sale.

The neighbour's solicitor has prepared an Agreement for Sale and Purchase, which Farmer Freddy is carefully reading through when his daughter, Pebbles, walks in.

"What have you got there, Dad?" she asks.

"Just the Agreement for Sale and Purchase for my new farm!", he beams.

"So you're buying Old Bill's farm next door are you, Dad? Have you talked to your lawyer and accountant about it?" asks Pebbles.

"I don't think there is any need for that, Pebbles. It's the same form of agreement I've seen before - just the same as I signed when I bought the bach," Freddy replies.

"Oh yes," says Pebbles, with a grin on her face, after having a quick look at it. "And how much do you think you're going to be paying for your new farm, Dad?"

"Well, the purchase price says $2,300,000 inclusive of GST. So once I've claimed back the GST from the IRD, I'm thinking I'll be paying around $2 million," Freddy says, looking very pleased with himself.

"I'm afraid not," says Pebbles. "You're not aware of the new GST rules that came into force in April, are you Dad?"

"What new rules?" asks Freddy, getting nervous.

"Under the new Zero Rating Regime," Pebbles explains, "where a GST registered vendor - that's Old Bill - sells land, his farm, to a GST-registered purchaser - that's you, Dad - and the purchaser intends to use the land for making taxable supplies, like dairy farming, and the purchaser does not intend to use the land as a principal place of residence, GST on the sale is zero rated."

Freddy looks confused.

"Basically, Dad," she explains, "the new regime applies to this sale, so the purchase price of $2,300,000 includes GST at 0 per cent. You won't be able to claim anything back from the IRD and you'll actually be out of pocket by $2.3 m not $2m."

Freddy thinks hard for a minute. "Ok then, how about I just move into Old Bill's farmhouse so that these new rules won't apply?" he suggests.

"Nice try, Dad," replies Pebbles. "But the sale of the farmhouse will be split off from the sale of the farm and will be treated as a sale of residential property. It will be an exempt supply under the normal GST rules. The new regime will still apply to the sale of the farm itself."

"So what should I do then?" asks Freddy.

"You could ask Bill to drop the price to $2m inclusive of GST," Pebbles suggests. "That way, Bill is still going get the $2m he would have got under the old GST rules, and you'll be paying what you originally thought."

"Sounds like a good idea," says Freddy.

"Yes, Dad," Pebbles says. "It really is worth getting professional advice before you go buying land. The rules do change from time to time so you need to make sure you're not caught out."

"You may be right," Freddy says. "I'll give my accountant a call now. Thanks, Pebbles. You're worth your weight in gold!"


The content of this document is necessarily general and readers should seek specific advice on particular matters and not rely solely on this document.
If you would like more information on any of the topics in this document, please contact your usual Auld Brewer Mazengarb & McEwen adviser.


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