Zero-rating of GST on Land Sales

The Compulsory Zero-Rating scheme (CZR) came into effect on 1 April 2011.  It provides that GST on a transaction involving the sale of land will be assessed at the rate of zero percent where:
  • that land is being sold from one GST registered person to another GST registered person (both parties must be registered for GST); and
  • it will be used for making taxable supplies; and
  • it will not be used as a principal place of residence.

Even if the land forms only a part of a transaction between registered persons, the whole transaction will still be zero-rated.  If a lease forms part of a transaction, it may also be zero-rated.

Under this scheme both parties to a sale and purchase transaction need to be certain of the GST status of the other, to avoid any unexpected GST bills or penalties.

However, a vendor may be registered for a purpose unrelated to the land being sold. For example, a GST registered plumber selling the family lifestyle block. On the face of it the vendor is GST registered. However, the question of whether or not a person is GST registered in the context of the supply needs to be asked. For example if this lifestyle owner HAS NOT been making GST claims for inputs and outputs from the lifestyle block they may be deemed as not GST registered for the purpose of each of the supplies above, and therefore CZR can’t apply and the schedules are ‘not applicable’.
What are my risks?

Purchasers should be aware that if the transaction has been mistakenly zero rated, they may be liable to pay 15% GST after it has settled.  If, on the other hand, the transaction was not zero rated when it should have been, a purchaser may have remedies against the vendor under the agreement, but will not be able to get a refund directly from the IRD.

Vendors will be most at risk if the agreement states that the purchase price includes GST.  It will generally be good practice in relation to these agreements for a vendor to insist on the agreement saying “plus GST (if any)”, even though both parties may expect the transaction to be zero rated.