27 September 2017

The compulsory zero-rating (CZR) rules for land sales came into effect on 1 April 2011.

The CZR rules require the supply between two registered persons that wholly or partly consists of land to be zero-rated if certain requirements are met at the time of settlement.

The main requirements include that the purchaser is acquiring the land for making supplies that are subject to GST and not as the purchaser’s principal place of residence. In addition, the purchaser is required to provide a written statement warranting their GST registration status and the use to which they intend to put the land. The vendor is entitled to rely on this statement when determining whether zero-rating of the transaction is required. This statement is included in the standard sale and purchase agreement for land, along with other terms as to GST treatment of the sale.

When the CZR rules apply, a vendor must include the zero-rated supply in their GST return, but they do not return any output tax for the supply. In turn, the GST-registered purchaser does not claim an input tax deduction for the purchase.

As these rules have been in force for over six years, you would expect their application to be well understood. However, this is an area where we are constantly seeing both vendors and purchasers getting it wrong. The difficulty vendors and purchasers are having is reflected in a number of recent court cases involving disputes over the application of the CZR rules. As the price tag attached to land is generally significant, the consequences of getting the GST wrong can be huge. In fact, getting it wrong cost the vendor in a recent case over $390,000 in damages plus interest payable to the purchaser. In another case, settlement of a land transaction has been delayed well over a year as the parties dispute through both the High Court and Court of Appeal (with an appeal to the Supreme Court declined) on whether the transaction should be zero-rated or subject to 15% GST.

We recommend that you talk to your Findex adviser before entering any agreement to sell or purchase land, as once the agreement has been signed, it may be too late to remedy any problem with the GST treatment.