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GST Changes for Land Transactions - getting it right!

Published: 20-04-2011 Author(s): Riaan Geldenhuys, Eugen Trombitas Pages: 39
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Published: 20 April, 2011
Pages: 39
From 1 April 2011 most sales of land between GST-registered persons will be zero-rated for GST under new rules for compulsory zero-rating of land transactions (the CZR). The measure has been introduced to deal with abuse of the GST system through “phoenix fraud”, which typically involves no output tax being paid by the vendor but a GST refund being paid out to the purchaser.
 
The impact of the new regime is significant and immediate:
  • It alters the cash flow on CZR transactions by 15%; and
  • In some cases, it is possible to zero-rate transactions concluded prior to 1 April 2011.
As always, new tax rules mean different things to different people. GST-registered purchasers will notice that they no longer have to fund the GST until they get a refund from the Inland Revenue (IR). Vendors will realise that the GST treatment and resulting cash flows from the sale depends entirely on the status and intentions of the purchaser (or their nominee). Bankers and lenders will notice the impact of CZR on the value of their security. Receivers and liquidators also need to take note of the new rules.
 
In this booklet we will:
  • Highlight the impact of CZR in certain circumstances;
  • Help you to identify some of the risks and opportunities inherent in CZR transactions;
  • Indicate some methods to reduce risk and harness opportunities;
  • Discuss the new GST Addendum to the REINZ/ADLS Agreement for the Sale and Purchase of Real Estate; and
  • Briefly discuss other topical GST issues involving nominations, GST recovery and changes to the definitions of “dwelling” and “commercial dwelling”.
We will not cover every aspect of the new rules. It does need to be stressed the rules are complex in some situations. We expect their application to be clarified over time by the courts. Certain standard practices will develop and standard model agreements (and clauses) will be drafted.
 
As always, the devil is in the detail. If you are involved in a land transaction (or a transaction with a land component) you will be well advised to think about CZR throughout the life cycle of the transaction, from setting a price, through to settlement, and even beyond settlement. We have included a useful CZR checklist in Appendix 2.

To simplify this process we will cover the basic CZR requirements and provide a GST run sheet for land transactions. All references in this booklet are to sections in the Goods and Services Tax Act 1985 (the GST Act) unless indicated otherwise. The main sections relevant to the application of CZR (including definitions) are set out in Appendix 3 at the end of this booklet.
 
References to B2B are references to business-to-business (ie one GST-registered party to another) and references to B2C are to business-to-consumer (GST-registered party to consumer).
Riaan Geldenhuys Eugen Trombitas
Riaan Geldenhuys
Director
PwC		 Eugen Trombitas
Partner
PwC

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