Cautionary tale of GST clauses in land transactions

By Sam Hornbrook & Tamara Payne

GST can be very complex when it comes to land transactions. The rules that require compulsory zero-rating of land transactions have now been in place since 2011, however issues still arise when either party does not correctly state their GST registration status and/or intention. Often when disputes arise in relation to GST issues they do not directly involve Inland Revenue, but are instead between the vendor and the purchaser.

A recent case (Holdaway v Ellwood [2019] NZHC 792) held that the vendor was liable to compensate the purchaser for a breach of contract even though the purchase price was stated as “inclusive of GST (if any).” In Holdaway v Ellwood, the vendor warranted in the agreement for sale and purchase that they were not GST registered, but in fact they were GST registered. Even though the purchaser also warranted they were not GST registered when the agreement was signed, they subsequently registered for GST and sought a GST second hand goods credit on the land.  The court awarded compensation that totalled an amount equivalent to the value of the denied second hand goods credit the purchaser would have been entitled to had the vendor not been registered for GST. Accounting and interest costs were also awarded. The fact that the purchaser’s GST status changed from unregistered at the time of signing the agreement to GST registered a week prior to settlement was held not to be a valid defence for the vendor. This case highlights the importance, especially for vendors, of making the correct warranties in relation to their GST registration status.

Details of the case

Background facts

• The agreement for sale and purchase was for rural land used to hold stock, sold for $355,000 inclusive of GST (if any).
• The vendor stated on the agreement for sale and purchase that he was not GST registered and did not intend to be GST registered. The vendor warranted this statement was correct at the date of the agreement.
• The purchaser stated on the agreement for sale and purchase that they were not GST registered and did not intend to be GST registered. The purchaser warranted this statement was correct at the date of the agreement.
• A week prior to settlement, the purchaser registered for GST on the advice of their accountant, however the purchaser did not make this known to the vendor.
• Settlement occurred, and consistent with the vendor’s warranty that he was not GST registered, no GST invoice was provided at settlement.
• Subsequently, the purchaser made a claim for a second hand goods credit on the understanding that the vendor was not GST registered. This second hand goods credit was denied by Inland Revenue as the vendor was in fact registered for GST.

High Court decision

The High Court held that the vendor was liable to compensate the purchaser for an amount equivalent to the second hand goods credit that the purchaser was denied. This was based on the fact that the vendor had breached the warranty given on the date of the agreement, because on the date of agreement and also the date of settlement, the vendor was registered for GST. This was therefore a breach of contract.

Despite the purchaser becoming GST registered after the agreement and breaching the obligation to notify the vendor of this change, at the date of the agreement the purchaser’s warranty was correct. At the date of the agreement being signed, the purchaser was not registered for GST and did not intend to be.

Had the purchaser remained unregistered, the vendor as a GST registered party would have been required to return GST at the standard rate on the sale of the land based on a GST inclusive price of $355,000. However, when the purchaser became GST registered, the sale would have become zero-rated. Therefore, the late registration of the purchaser did not put the vendor in a worse off position.

Further, as the vendor had stated they were not GST registered when the purchaser entered into the agreement, it was reasonable for the purchaser to contemplate the potential for them to claim the second hand goods credit if they became GST registered. Therefore the breach of warranty by the vendor meant the purchaser was not able to claim the GST second hand goods credit from Inland Revenue that they could have otherwise anticipated.

Conclusion

A focus on the detail is very important when it comes to land transactions. It is not only crucial for parties to scrutinise what is included or excluded from the standard GST clauses contained in the ADLS agreement for sale and purchase of land, but for parties to understand in depth what they are agreeing to.

This case highlights the importance of parties stating their correct GST registration status and intentions when entering agreements for sale and purchase of land. It is of particular importance to vendors who may find themselves compensating the purchaser for misrepresenting its own GST status.

As there are many traps along the road to achieving a successful property settlement, we recommend seeking advice from the Deloitte Indirect Tax team for assistance with any upcoming land transactions prior to signing.

June 2019 Tax Alert contents

• How are you affected by new individual tax assessment regime?
• IR and ATO release administrative approach to determining residence
• What’s the buzz with tax and charities?
• KiwiSaver – flexibility, suspensions, and those over 65
• Tax Bill returns from the Finance and Expenditure Committee with modifications
• Depreciation myths debunked
• GST legislation one step closer to enactment
• GST obligation changes for digital services to Singapore
• Correcting errors under s. 113 update
• Snapshot of recent developments