Deciding whether to buy or sell a property is the biggest financial decision many people make, so overlooking the GST implications of property transactions can be an expensive mistake.
When entering into a property transaction, both purchaser and vendor need to consider whether or not they should be registered for GST in respect of the transaction. Determining this ultimately comes down to whether the person is completing the transaction in the course or furtherance of a “taxable activity”.
The GST Act defines a “taxable activity” as any activity which is carried on continuously or regularly and involves, or is intended to involve, the supply of goods and services to another person for a consideration. Importantly, the activity does not have to be carried on for the purpose of making a profit, hence a person could be carrying on a “taxable activity” for GST purposes even though the activity would not constitute a “business” in the ordinary sense.
In relation to property transactions, the concept of a “taxable activity” is particularly relevant where the property is purchased and re-sold in a short period of time, especially if subdivision or development work is involved.
The landmark case on what amounts to a “taxable activity” in relation to property is the Court of Appeal’s decision in Newman v C of IR. Newman was a GST registered builder who completed a one-off subdivision involving splitting a single section into two, including some electrical and drainage work. The IRD ruled that the subdivision and subsequent sale of the property was a “taxable activity” and assessed Newman for GST on the sale. The case ended up going all the way to the Court of Appeal and the Court overturned the IRD’s assessment, ruling that the subdivision could not be regarded as a continuous or regular activity and therefore Newman was not carrying on a “taxable activity” in respect of the property.
In their judgment, the Court of Appeal took an overall view of the activity to determine that it was not repeated continuously or regularly, i.e. it was a one-off. The minimal development work was also considered relevant.
The IRD were forced to change their stance as a result of the Newman decision, releasing a policy statement expressing the view that a subdivision of land into two, involving no development work, will not by itself amount to a “taxable activity”. Although the statement did note that a “taxable activity” would be more likely to arise if a greater number of lots were created, the development work was more extensive, or there was a greater commitment of time and money to the project.
Despite the established principles, there appears to be a muddying of the waters in recent times as to the meaning of “taxable activity”. The IRD are now increasingly challenging the GST status of un-registered vendors when the purchaser makes a second-hand goods GST claim in respect of the property purchase. A second-hand goods GST claim is generally available when a GST registered purchaser buys from an un-registered vendor.
In some cases it appears the IRD are alleging a “taxable activity” exists in simple buy and sell transactions within a short time frame. Conversely, we sometimes see situations in which the IRD will seek to deny GST refunds on the basis that the taxpayer does not conduct a “taxable activity”.
The confusion around what comprises a “taxable activity” was recently exacerbated by the High Court in the recent case of YL NZ Investments v Louise Ling. The case involved a GST registered purchaser successfully claiming a breach of warranty by the vendor, as the vendor had warranted in the sale agreement that she was not GST registered. But she was retrospectively registered by the IRD after the transaction was completed.
While not directly relevant to the issue in the case, the Judge expressed the view that the vendor was “clearly carrying on a taxable activity” when she had merely bought and sold a property in a short period of time. The comment directly contradicts both the Newman principle and IRD’s policy, under which a one-off buy and sell transaction is not enough for a “taxable activity” to arise.
The IRD’s basis for deciding the vendor had a “taxable activity” is not known, although hopefully they considered more than the fact the property was bought and sold in quick succession.
The YL NZ Investments case also highlights the onus on vendors to ensure they correctly state their GST status on the sale and purchase agreement, or include an appropriate contractual remedy in the event that their GST status is overturned by the IRD.
To avoid an unexpected GST bill or lawsuit, vendors and purchasers should be fully aware of the GST implications of every property transaction they enter into and take steps to ensure they are appropriately protected in the event their GST status is challenged by IRD.
The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.