Sellers of commercial property should be aware that GST on the sale of their property may become payable before the purchaser has paid for the property under the time of supply rules contained in the Goods and Services Act 1985.
The issue arises when the sale of a commercial property occurs that is not a going concern. In the absence of a specific date in the agreement, the purchaser is liable to pay GST on the day they settle the property. The date on which a seller must account to the IRD for the GST on a sale is contained in the GST Act.
While a purchaser is required to pay for the GST content of any purchase on the possession date, this will not necessarily coincide with the seller's date to account to the IRD for the GST on the sale. The IRD have issued guidelines as to when payment needs to be made.
The IRD's position is that if a deposit is received by a seller (or the seller's real estate agent) upon an agreement becoming unconditional, even before an invoice is issued, the goods and services are deemed to be supplied in full on that date. This also applies when the agent releases the deposit, deducting their commission. As a consequence, the part payment of the purchase price by way of deposit will be sufficient to trigger the seller's obligation to account for GST if the contract goes unconditional. There is no requirement that the supplier receives all of the purchase price before the seller is to account for its GST on the sale.
In most property transactions, the contract will go unconditional well before the possession date. For the seller, this creates an unfortunate situation as the seller may need to account to the IRD for the GST in advance of receiving the purchase price from the purchaser. This could create cashflow problems for the unwary seller or incurring tax penalties for failing to account for the GST in the relevant tax period.
By way of example, a person sells a property for $2 million dollars. A real estate agent may or may not be holding a deposit of $100,000. The contract is conditional until the 30 January 2004. The settlement day is the 1 August 2004. While the contract is still conditional on either the seller or purchaser doing something, the seller is not considered to have received the payment because it has yet to be applied for the seller's benefit. However, once the contract becomes unconditional, the payment of or release of the deposit is regarded as being held for the benefit of the seller. This triggers the obligation of the seller to account for all the GST on the sale within that GST period. In this example the seller is liable to the IRD for $250,000 in their 30 January 2004 GST period. This is despite the purchaser has only paid $100,000 and the remaining $1.9 million will not be paid until the 1 August 2004.
There are solutions to avoid this problem. To avoid unwanted tax liability you should consult us before signing any sale and purchase contracts. We will provide you with expert advice and guidance on how to structure your sale to avoid this type of pitfall. If not, you could be in for an unwanted tax bill.