Get your GST matters right before settlement
Tax Alert - September 2017
By Sam Hornbrook and April Wong
It is no secret that GST can be complicated when it comes to land transactions. Over the past two months, we have seen two cases where parties have brought their issues to court over their sale and purchase agreement. The vendors lost in both cases. Given the substantial values involved, having certainty on the correct GST treatment of land is crucial. Parties should therefore understand explicitly what they have agreed to in their sale and purchase agreement well before settlement. Failing to do so can result in significant commercial implications. It is interesting to note in the two cases considered below, Inland Revenue were not at risk of losing out on GST under any outcomes and were not named parties to the cases. These cases were commercial disputes but had GST issues at their core.
Zero-rating of land transactions
To remove the risk to Inland Revenue from so-called “phoenix schemes”, the compulsory zero-rating rules came into effect in 2011 to treat certain supplies of land between GST-registered persons as zero-rated. A purchaser is required to notify the vendor of their GST position by completing a schedule to the written sale and purchase agreement. Vendors and purchasers are often happy to rely on the standard clauses contained in the standard Auckland District Law Society (ADLS) agreement for sale and purchase of land, but they can still lead to GST issues. In addition, we note that parties often neglect to fill in the accompanying schedule (Schedule 2, or Schedule 1 in auction cases) to this agreement, even though this may cause them grief come settlement time.
Y&P New Zealand Ltd and Wang & Zhang (Wang & Zhang case)
In Wang & Zhang, the vendor agreed to sell four adjoining properties for $2,430,000 “plus GST (if any)”. The purchaser had initially completed Schedule 2 on the basis that they were not GST registered, meaning that GST at 15% would be charged on the sale. The parties had not made any changes to the standard GST clauses. In particular, clause 14.5 of the agreement was left as standard, which required a purchaser to notify the vendor two working days in writing before settlement should their GST position change after signing the agreement and obliges the vendor to act upon that notification.
One day before settlement, the purchaser’s lawyers informed the vendor that they were now registered for GST. On the same day, the vendor’s lawyers proceeded to issue the purchaser’s lawyers an amended settlement statement showing the transaction at 0%. However, the vendor resisted settling and proceeded to cancel the sale of the properties altogether on the grounds that they wanted to settle at 15% GST. We note sometimes vendors may wish to not settle if other commercial factors have changed, as from a GST perspective, it would make no material difference to the vendor if the sale price showed GST at 15% or 0% in a “plus GST” contract. The purchaser took the issue to court and lodged caveats against the vendor’s four properties. On three occasions, the High Court, Court of Appeal and Supreme Court ruled in favour of the purchaser and agreed that the amended settlement statement constituted a “waiver” of the vendor’s rights to rely on the purchaser’s original statement that they were not GST registered.
YL NZ Investment Ltd v Ling (Ling case)
In the Ling case, we see the GST complexity arise because the vendor made a warranty that they were not registered for GST and this was subsequently challenged by Inland Revenue (who considered that the vendor was deemed to be GST registered). This denied the purchaser the ability to claim a second-hand input tax credit on the purchase price of $3.5 million (inclusive of GST).
The High Court held that the vendor had breached the warranty in clause 14.1 of the sale and purchase agreement by indicating that she was not GST registered at the time. The correct interpretation of clause 14.1 is not only whether the vendor is GST registered, but whether they are liable or deemed to be registered. As the vendor was liable / deemed to be GST registered at the time the sale and purchase agreement was signed, indicating otherwise on the agreement constituted a breach of the warranty in clause 14.1. The High Court therefore gave the purchaser judgment against the vendor for the amount equal to the GST second-hand input tax credit that would be otherwise claimable.
The devil is in the detail
A lesson to be learned from both these cases; it is not only crucial for parties to scrutinise what is included or excluded from the standard GST clauses included in the ADLS agreement for sale and purchase of land, but for parties to understand in depth what they are agreeing to.
Things could have gone very differently for the vendor in the Wang & Zhang case had the vendor’s lawyers stuck to their guns and not issued a revised zero-rated settlement statement. There was no contractual requirement for the vendor to accept a change in the purchaser’s notified GST status only one day before settlement for the vendor per clause 14.5. However, as the vendor’s lawyers had issued the amended settlement statement, the protection given by clause 14.5 was waived.
Things could have also gone differently for the purchaser in the Ling case. Though the High Court ruled in favour of the purchaser, being more proactive leading up to settlement could have saved the purchaser significant time and costs in having to seek legal recourse. The issue in the Ling case could have been avoided had the purchaser sought advice and introduced some non-standard GST clauses expressly dealing with the intended second-hand goods credit claim.
As there are many traps along the road to achieving a successful property settlement, we strongly urge you to contact the Indirect team at Deloitte for assistance with any upcoming land transactions prior to signing.
September 2017 Tax Alert contents
- New Zealand makes BEPS announcements
- Deloitte 2017 BEPS Global Survey
- Election 2017
- Do your contracts comply with the new Transfer Pricing Guidelines
- Inland Revenue targeting FBT – Are you ready?
- Get your GST matters right before settlement
- Survey shows room for improvement in the way New Zealand taxes business
- A snapshot of recent developments