Property sale and purchase agreements
Important to get the GST component right
Generally speaking, GST on a property sale and purchase between two GST-registered entities results in a ‘GST neutral’ position for both the seller and the buyer. It’s essential that the sale and purchase agreement contains the correct wording, particulars and information in respect of the GST position of the parties to the agreement.
If, however, the parties to the agreement have not correctly recorded their respective GST positions, it can result in a situation where a GST liability is triggered. This can mean the seller would effectively receive a 15% reduction of the contracted purchase price (as they may have to return 15% of the purchase price to Inland Revenue). Or, a buyer may end up having to pay an additional 15% on the purchase price if the agreement turns out to be ‘plus GST’.
It’s vital that the GST position of buyer and seller is recorded accurately in order to avoid a possible nasty surprise at settlement.
Correctly recording the GST position
The front page of a standard ADLS/REINZ agreement for sale and purchase requires a seller to warrant to the buyer as to their GST status. This is a matter of fact and the seller will either be registered for GST or they won’t be. They will either be required to return GST on the purchase price, or they will not.
Logically, this affects the purchase price a seller is willing to accept.
The parties must also elect whether or not the transaction will be plus GST (if any), or inclusive of GST.
It is important to note that if no election is made as to the GST status of the transaction, then the agreement will deem the contract price to be inclusive of GST.
Recording the GST particulars
Any further GST information must be included in the GST Schedule to the agreement. This information is used to determine whether or not a GST obligation will exist, or not, for both the seller and the buyer.
It is not always known at the time of signing the agreement whether or not a buyer will be GST-registered or not. Often a buyer will nominate another party to complete the purchase, or may sign the agreement in the name of a non-registered GST entity and plan to nominate a GST-registered entity before settlement, or vice versa.
This means that a seller does not always know with absolute certainty whether the ultimate purchaser of the property will be registered for GST or not.
The agreement contains mechanisms to amend the GST information before settlement. Therefore, it’s possible for a buyer to sign a contract in the name of a GST-registered entity, then nominate a non-GST registered entity to complete the settlement.
Why does this matter?
If a seller is registered for GST and the contract price is treated as being inclusive of GST (whether by means of an election by the parties, or the parties neglecting to make an election as to the GST status of the transaction, or a buyer opting to change their GST status) this will usually mean that the seller will need to return the GST on the purchase price to the IRD.
Should GST be payable on a transaction as a result of any of the situations discussed above and the purchase price is recorded as plus GST (if any), the buyer would be liable to pay the GST to the seller as part of the property transaction.
Many real estate agents will facilitate the signing of the agreement, and many buyers and sellers may enter into contracts entirely unaware of the GST implications, and the workings and treatment of GST under the agreement, without accounting or legal advice. The consequences of this can be that a GST liability is triggered which the parties were unaware of and hadn’t anticipated at the time of signing the agreement.
What should you do?
Regardless of your experience level in buying or selling property, commercially or residentially, it is imperative that you get professional advice to guide you on navigating the minefield that GST can be.
Often, GST is taken for granted as being ‘not applicable’ or ‘zero rated’ or ‘not relevant to you’ and, sometimes, this is the case. In fact, in most situations, it is the case.
The GST situation, however, can catch out even the most experienced and knowledgeable property people. Your professional advisors are here to work with you in making those decisions.