GST mistakes

By Max Gunawan, Platinum Legal

Most people will not think much of GST; after all, it is a necessary tax component in most transactions that we engage with on a day-to-day basis, from eating out in a restaurant to buying a car. Yet, when it comes to property transactions, GST represents one of the areas that are most prone to errors.

The potential consequences are clear. Depending on the facts and the type of error made, a GST mistake can cost a person 15% of the value of the transaction. In addition, there is the cost and risks of litigating the dispute - and yes, these issues have been brought under Court review in different cases - see some examples below.

In the case of Y&P NZ Limited v Wang, the Court of Appeal considered a property transaction that was recorded as $2,430,000 inclusive of GST. The vendor was a GST registered entity. On the date of the agreement, the purchaser advised the vendor that they were not registered for GST. Before settlement, the purchaser became GST registered. This caused a situation where both parties are GST registered, and the transaction became zero-rated. The vendor lost the ability to charge GST in addition to the purchase price. If the entirety of the properties were used for taxable supplies, this would have translated to the vendor losing out on around $360,000. The Court sided with the purchaser's position, namely, that the purchaser was entitled to change their GST registration status using mechanisms included in the general terms of the ADLS sale and purchase agreement.

In another case, Ling & YL NZ Investment Limited, the Court of Appeal considered a property transaction that was recorded as $3.5 million inclusive of GST. The purchaser advised that it was GST registered, while the vendor advised that she was not GST registered. The vendor was reviewed by IRD and found to have been carrying out a taxable activity and was deemed to be GST registered. As the parties are both GST registered, the transaction was deemed to be zero-rated and the purchaser lost an opportunity to claim a tax input credit on the purchase price. The tax input credit was expected to be around $365,000. The Court of Appeal sided with the purchaser and ordered damages against the vendor.

Since those cases, ADLS has introduced a new clause that governs the treatment of GST where the purchaser has changed its tax position between the agreement date and the settlement date. This new clause is now contained in the most recent version of the ADLS real estate agreements. The new clause is favourable to the vendor, particularly where, as in the Y&P NZ Limited case, a purchaser's change in GST registration status causes a tax-adverse situation for the vendor.

While the clause introduces much needed clarity on a difficult and ambiguous situation, the potential for significant errors remain present. There is still considerable risk to both vendor and purchaser if they do not obtain tax advice before signing the agreement.

There is also considerable risk in stakeholders involved in the transaction. This includes real estate agents, accountants, and lawyers. Any mistake in this area is likely to translate to a claim for damages equivalent to, more or less, 15% of the transaction value. Advisers involved in property transactions should consider sharpening their knowledge in this area, and where appropriate, revisit their forms and processes to ensure that scopes of service are well defined in their terms of engagement.

If you have any questions about any matter raised in this post, please get in touch with us.

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