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GST Claims - One Of The Pitfalls

08 October 2014

David wrote to me recently about his friend (I’ll call him Ray) who is a residential property trader. Ray had been caught out with GST recently.

Ray had bought a property for about $300,000 at a mortgagee auction. (As this was a residential property purchase I have assumed that the purchase price was inclusive of GST (if any). This is the normal case for a residential purchase.)

David told me that Ray had signed a contract “which you only see after you become the top bidder”. The contract had stated that the vendor was not registered for GST. Ray therefore presumed that he would be able to claim from IRD the GST of $39,130 on the purchase price of $300,000. Ray intended to on-sell the property for a profit a month or two later. As a GST registered trader, Ray would have to pay the GST on the sale price when he on-sold the property.

Unfortunately, after selling the property a month later, Ray’s claim for GST on his purchase price was declined. The claim was declined because the vendor was in fact registered for GST so that the sale to Ray was zero rated. Ray could not therefore claim back the GST. (A sale of land must be zero rated for GST if both the vendor and purchaser are registered for GST at the time of settlement, if the purchaser intends to use the property for making taxable supplies, and if the purchaser does not intend to use the property as his or her principal place of residence.)

If Ray had on-sold the property for, say, $320,000 he would have had to account to IRD for GST of $41,739 on the sale price. Because Ray could not now claim the GST of $39,130, his projected profit of $17,400 would therefore have become a loss of $21,700.

 

What should Ray have done differently?

David asked me what Ray could have done differently.

The first point to note is that you should always obtain a copy of the mortgagee’s auction agreement before you bid at an auction and check it very carefully. You should also take advice from your lawyer and accountant regarding the legal and tax implications of the agreement. How the GST details in the agreement have been completed can have critical significance when determining what GST is payable.

Mortgagee auction agreements are different to the standard agreement for sale and purchase. The terms of a mortgagee auction agreement are weighted in favour of the vendor (i.e. the mortgagee). For example, the vendor will not guarantee the chattels will be at the property or that the property will be vacant on settlement.

 

What can Ray do now?

With regard to Ray’s GST problem, checking the contract in this instance would not have helped Ray. The contract clearly stated that the vendor was not registered for GST, so Ray should have been able to claim the GST.

As David pointed out to me: “There is no public register of GST registration details”. You rely on the vendor’s GST status as stated by the vendor in the contract.

Ray may be able to claim against the vendor for the loss Ray has suffered because of the vendor‘s incorrect statement in the contract. Ray can make this claim because the contract contains a warranty by both the vendor and the purchaser that the GST details they have inserted in the agreement are correct.

The problem for Ray now is that Ray may have to pursue the vendor for the amount of his loss.

 

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. Find out more about us at www.nwm.co.nz