Don’t get caught out by GST issues on sale of land

19 January 2021

As evidenced by some recent High Court cases, many taxpayers continue to enter into land transactions without due consideration of the GST consequences.

Findex is often provided with agreements for sale and purchase with either incomplete GST information or incorrect representations being made in the document. Considering the significance of these financial transactions and the involvement of high value assets, it is surprising the GST position is still not given the attention it requires.

In the cases of Ling in 2018 and Wang in 2019, each case involved a party to a land transaction that had made an incorrect representation as to their GST status. More recently in the High Court, Marr v Mills provided another example of a taxpayer getting the GST position incorrect and becoming involved in litigation as a result.

In Marr v Mills [2020] NZHC 3004, Ms Marr sold a property comprising a house, shop, workshop and on-site parking in the Auckland suburb of Royal Oak. The Mills purchased the property at auction from Ms Marr for $1.45 million “inclusive of GST if any”.

In the agreement for sale and purchase, Ms Marr provided a warranty that she was not registered for GST purposes. The Mills had contemplated using at least part of the premises for commercial purposes following settlement. In reliance on the representation from Ms Marr, and having obtained professional advice, the Mills were to become GST-registered and to claim a GST credit in relation to the commercial aspect of the property. The expectation was that the Mills would be able to use the GST refund as initial working capital for their business.

Ultimately, Ms Marr was in fact registered for GST purposes which meant the expected GST refund was not available for the Mills. The Mills successfully brought an action against Ms Marr in the District Court for breach of warranty which was upheld by the High Court. Although the Mills did not end up commencing their business, the Court held the GST refund in context was sufficiently foreseeable to warrant its award in damages. That was the financial position that the Mills were denied by Ms Marr’s breach of the warranty.

The lesson from the Marr case is very clear. It is important that professional advice is sought regarding the GST consequences of any land transaction that you are contemplating either as a vendor or purchaser. A bit of time spent up front to get things right can save a lot of time and financial stress further down the track.

If you would like to know more about the tax rules relating to land transactions and GST, please contact the Findex Tax Advisory team.

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January 2021.