Lifestyle blocks - GST registration not always the right thing to do

29 September 2016

Hannah had dreamed for some time of living in the country, growing her own vegetables and raising some chooks. By chance Hannah came across the private sale of a lifestyle block for $600,000 plus GST. She decided to realise her dream and buy it. The property included an old rundown house, a small orchard and a large shed. Hannah had visions of spending her weekends tending her chooks and her vegetable garden and using the shed to make jams and chutneys from her vegetables and the fruit from the orchard. She would sell her eggs, jams and chutneys to family and friends.

Seller suggests registration for GST to reduce the price

The seller told Hannah that there would be no GST payable on the value of the house and its surrounding section because the house and its section (valued at $300,000) were exempt from GST. The seller also told Hannah the sale could be zero rated for GST if she registered for GST. This would mean that Hannah would not have to pay GST of $45,000 on the land value of $300,000. Registration for GST would result in a considerable saving for Hannah. Hannah was very excited. The purchase of the property was becoming even more attractive to her. Hannah wanted to secure the property before anyone else did so she signed an agreement without taking any professional advice.

Must be a “taxable activity” to register for GST

Hannah’s lawyer had some expertise in tax and GST matters. She cast a different light on the GST implications than that cast by the seller. She confirmed the house and its surrounding land would be exempt from GST. However, Hannah would have to carry on a “taxable activity” to be entitled to register for GST. Hannah’s lawyer explained that a taxable activity is one which is carried on continuously or regularly and involves the supply of goods or services for payment. It includes a business but does not include a private recreational pursuit or hobby. There does not necessarily need to be an intention to make a profit for a taxable activity to exist. Hannah’s lawyer thought the activity Hannah intended to carry on would not be a taxable one and therefore Hannah should not register for GST and zero rate the transaction.

Registration for GST where there is no “taxable activity”

Hannah asked her lawyer what would happen if she registered for GST despite her lawyer’s advice and allowed the purchase to be treated as zero rated for GST. Hannah’s lawyer said that the IRD might pursue her for the GST she should have paid as well as interest and penalties on the GST. The amount payable to IRD could end up being much more than the original amount of GST that should have been paid. What’s more, if Hannah was in fact entitled to register for GST but decided to cease selling eggs, jams and chutneys in future, she would have to deregister for GST at that time. When Hannah deregistered for GST she would have to pay GST of 3/23 of the market value of the land to IRD at the time of deregistration.

Doing the right thing

Hannah decided that the right thing to do was to pay $645,000 for this property (including the GST). This was more than Hannah would have been prepared to pay if she had known the correct position before she had signed the agreement. Hannah wished her excitement and enthusiasm for the purchase had not overcome the voice in her head telling her to take professional advice first.

Please email me at [email protected] 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