CONFUSION REGARDING ZERO-RATING OF LAND
In previous Tax Updates, we have discussed the fact that all transactions involving land can be zero-rated after 1 April 2011 provided that:
• the transaction is between two registered parties;
• the purchaser intends to use the land for making taxable supplies; and
• the land will not be used as a principal place of residence of the purchaser or an associate.
For the new rules to apply, time of supply for the transaction must be on or after 1 April 2011. Thus, if the agreement was entered into prior to 1 April 2011 and the time of supply occurred after 1 April 2011, the transaction will be zero-rated by default.
It is important to note that, in those
circumstances, at the election of the supplier, the supplier can treat the transaction as if it were subject to the GST rules as they stood prior to 1 April 2011, i.e. subject to GST.
For the transaction to be zero-rated, both the vendor and purchaser must be registered for GST at the time of settlement of the transaction, not at the time of supply. This gives an opportunity for a newly formed purchaser to obtain GST registration prior to settlement, albeit that GST registration was not held at the time of signing the agreement.
In situations where, perhaps farmland is being sold that includes a residential dwelling, the residential dwelling is deemed to be a separate supply. We recommend that the usual dwelling and curtilage calculations are undertaken so that value can be attributed to the exempt portion of the supply should the remainder of the land transaction not be zero-rated for some reason prior to settlement.
At or before settlement of the transaction, the recipient of the supply must provide a statement in writing to the supplier that they are (or expect to be) GST registered at the date of settlement, that they have acquired the goods with the intention of using them for making taxable supplies, and they do not intend to use the land as a principal place of residence for them or a person associated with them.
How it affects you
Whilst the zero-rating of land was designed to simplify the GST consequences arising from a land transaction, the operation of the provisions is currently poorly understood by many dealing with these situations. We suggest that you obtain specialist advice to confirm that you are adopting the correct GST position for land transactions.
RECEIVERS PERSONALLY LIABLE FOR GST
In a case before the High Court, the receivers of Capital + Merchant Investments Limited were held to be liable for the GST arising from the sale of six properties sold by the receivers in undertaking their receivership duties for the Company.
The receivers had argued that the IRD was an unsecured creditor of the mortgagee and that there were no grounds for attributing personal liability to the receivers to pay the amounts of GST included in the sales and recovered by them. The receivers would then account to the mortgagor for the net proceeds, together with the GST paid on the sales. This would leave the IRD out of pocket to the extent of the GST on the property sales.
The IRD argued that the GST Act must be read to attribute liability to the receivers as the persons in effective control of the taxable supplies made by the Company.
The High Court noted that if the receivers collected the GST and complied with the direction from the creditor to pay the GST to the creditor as part of the net proceeds of the sale, then in absence of personal liability imposed by the GST Act, the receivers would also have facilitated a breach by the mortgagee of the mortgagee’s obligations under s 185 of the Property Law Act. As such, the receivers had no option but to pay the GST to the IRD as, if they did not do so, they would be in breach not only of the GST Act, but also the Property Law Act.
Section 185 of the Property Law Act provides the sequence in which the proceeds of a mortgagee sale must be applied. The sequence of the application of the proceeds of sale of a mortgaged property is mandatory, and even if the receivers were not liable under the GST Act, they would be required to account under the Property Law Act.
If the sales in this case had been made after 1 April 2011, then assuming the purchaser of the six properties was GST registered, the sales could have been undertaken as a zero-rated supply, thereby no GST would be payable. In this case, the receivers have paid the GST to the IRD and had then sought direction from the Court as to whether that amount should have been paid to the mortgagor in preference to the IRD.
How it affects you
Whilst this case dealt with a narrow set of circumstances in relation to a receivership, a trustee of a trust can also be personally liable for the payment of GST should the trust default in making payment. If you are involved in a mortgagee sale involving GST, we suggest that you obtain specialist advice to determine what your GST obligations are with respect to the sale.
POINTS OF INTEREST…
The Taxation (Annual Rates and Budgets Measures) Act received Royal Assent on 24 May 2011. The Act implements the first changes to Working for Families and KiwiSaver as announced in the Budget.
The National Average Market Values of Specified Livestock, Determination 2011, has been released. This sets the national average market values for specified livestock to be used for the 2010-2011 income tax year.
The Taxation (Earthquake Measures) Act 2011 has been passed by Parliament. The Act introduces measures to give practical assistance to those affected by the earthquakes.
TO THE POINT…
“[Government] can raise taxes because it can persuade a sizable fraction of the populace that somebody else will pay”.