It was over a year ago that the New Zealand government issued its tax policy with the intent of reducing GST risk. The current follow-up document recently released and headed for legislation incorporates some changes that investors need to be aware of.
Associated Transactions
A glaring omission in this new document is the removal of disallowing GST input claims for real estate transactions involving an unregistered vendor. The test for association between parties was proposed to be the same regardless of whether or not the seller is registered. Fortunately, this provision is no longer included which is good news for property investors buying from an unregistered vendor.
Domestic Reverse Charge System
The domestic reverse charge system refers to the purchaser returning and claiming GST for land transactions. This applies only to transactions between GST registerd parties. If a registered vendor sells a piece of property for the agreed upon purchase price plus GST, that party must claim the output tax whilst the purchaser claims the input tax. The idea is that this regulation will reduce instances where the GST is not paid to the IRD and also prevents the IRD from paying out the tax.
Nomination Transactions
Real estate transactions involving nominations will eliminate any possibility of there being two supplies considered. Currently there is some speculation that nomination transactions actually involve more than one supply and this new proposal considers the party ultimately nominated to be regarded as the sole recipient.
Change in Use Rules
The government is proposing that input tax deductions be brought into line with actual use. Right now a purchaser can claim GST if the principal purpose of buying the asset relates to an activity that is taxable. Adjustments are necessary if the asset is then applied to a non-taxable concern. The new proposal requires that the claim be paid at the time of purchase and will only require adjustment if the asset is used for a different purpose than originally planned.
Mortgagee Sales
This part of the document applies to sales that take place prior to the mortgagee taking possession of the property. An "in substance" sale will be subject to the same regulations as a mortgagee sale in terms of GST owed. This is clearly a way to ensure that the IRD is able to collect GST even on transactions where there is no formal sale to a mortgagee.
Commercial Dwellings
New definitions for commercial dwellings are in store. The government is expected to make the definition of those properties which fall within the GST regime much clearer, ending debate regarding homes used for holidays or as serviced rentals. Short-term renting of real estate will be considered a commercial concern when there are no tenants continually occupying the residence.
It is not expected that these proposed to the GST regime will go into effect until 2010 after facing several rounds public submission and Parliament legislation. As these changes will affect investment property owners, it is essential to stay informed.
Author Resource:
Paul Easton is working with Gilligan Rowe & Associates are New Zealand Accountants and are a specialist Accountant firm and experts in property and family trusts.
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