Zero-Rating Land Transactions

Background

In November 2009, the Government released the discussion document, GST: Accounting for land and other high value assets, which proposed a number of changes to the GST Act to deal with certain GST base risks and improve the operation of the GST system more generally. The main risk to the tax base identified was ‘phoneix’ fraud schemes, typically between associated entities, that involve Inland Revenue refunding GST to one party with no corresponding payment being made by the vendor because the vendor deliberately winds up their business making payment.

The discussion document recommended a domestic reverse charge as a possible solution to the problem. However, most submitters expressed a preference for zero-rating as it would give fewer compliance costs. This option has been adopted in the new legislation since, under this mechanism, the accounting obligations of the parties would in most situations remain virtually unchanged from the previous legislation.

Key Features

GST registered vendors will be required to charge GST at the rate of 0% on any supply to a registered person involving land, or in which land is a component, if at the time of settlement:

• The recipient intends to use the goods for making taxable supplies; and
• The supply is not a supply of land intended to be used as the principal place of residence of the recipient or a relative of the recipient.

Other features of the new rules include:

• A definition of “land” which largely follows the definition used for income tax purposes but which exclude most commercial leases;
• An obligation for the purchaser to advise of their registration status and intentions on respect of the land; and
• Special rules to deal with situations when a supply is either incorrectly zero-rated or incorrectly standard-rated. 

Application Date

The new rules will apply to goods supplied on or after 1 April 2011.

For transactions entered into before 1 April 2011 but for which the time of supply is on or after that date, the supplier has the option of treating the transaction as being governed by either the current GST rules or the new rules (section 11(8C)). 

Source: All of the following information has been extracted from IRD Tax Information Bulletin Vol 23 No. 1. Please click for more detailed analysis.