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Another GST trap - IRD deems seller registered for GST

01 February 2019

Issues as to liability for GST under the standard agreement for sale and purchase of real estate are not uncommon. How the GST provisions in the agreement are completed will determine whether the seller or the buyer will be liable to pay GST to the Inland Revenue Department, or whether the transaction will be zero rated for GST and no GST will be payable at all. Issues over liability arise because the GST provisions are incorrectly completed, the parties do not take legal advice as to what the GST provisions in the agreement mean for them or accounting and tax advice for their specific situation.

Seller liable to pay $365,000 to buyer after settlement

The seller of a rural property was recently found to be liable to the buyer after settlement for nearly $366,000 (Ling v YL NZ Investment Ltd [2018] NZCA 133). This was the amount of a claim by the buyer for GST on a property purchased for $3.5m which was rejected by the IRD after settlement. The buyer made this claim because the seller stated in the agreement that she was not registered for GST. The purchase price of $3.5m was “inclusive of GST if any”.  The buyer’s claim for $366,000 as rejected by IRD because after settlement the IRD deemed the seller to be registered for GST and back dated the deemed registration to a date before settlement.  This meant the sale was from one registered party to another, the sale was zero rated for GST and no GST was payable by the seller to IRD and no GST could be claimed by the buyer after settlement.

As a result of the buyer’s rejected claim for GST of $366,000, the buyer sued the seller for that amount on the basis the seller had incorrectly warranted in the agreement that she was not registered for GST. The seller argued that the warranty was correct when she gave it because she wasn’t in fact registered for GST at that time. However, the Court of Appeal interpreted the seller’s warranty as meaning the seller was warranting she was either registered for GST or liable to be registered for GST at the date of the agreement.  As a result the seller received from the sale the net amount of about $3.134 m instead of the $3.5 m she was expecting. The buyer paid the net amount of $3.134 m – which is the net amount the buyer would have paid if the seller’s warranty had been correct.

The Court of Appeal noted that the purpose of the seller’s warranty is to avoid confusion as to the GST liability of the parties. If the seller’s interpretation of the warranty had been correct, buyers could not be certain as to whether they could claim the GST after settlement where sellers warranted they were not registered for GST. The buyer would be paying a substantially higher price if IRD deemed the seller registered for GST at a later date.

The cost of failure to take professional advice

As with many GST issues that arise, the seller might have avoided liability to pay $366,000 (not to mention the substantial lawyer’s and Court costs that she would have paid fighting the claim) if she had taken advice from an experienced tax accountant and lawyer. The price paid for that advice would pale into insignificance compared with the amount paid to the buyer and the legal costs incurred in this case.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott