Timely reminder to check GST details on land deals
Solicitors and accountants need to ensure clients get their GST details correct when signing property transactions. The recent Court of Appeal decision, Ling v YL NZ Investment Ltd  NZCA 133, proved a costly lesson for the vendor when she got this wrong.
Sale and purchase agreement stated vendor not GST registered
Ms Ling, the vendor, was not GST registered when she signed the standard REINZ-ADLS agreement for sale and purchase of real estate in July 2015. The purchase price was recorded as $3.5 million inclusive of GST. Ms Ling circled “No” alongside the statement:
“The vendor is registered under the GST Act in respect of the transaction evidenced by this agreement and/or will be registered at settlement: Yes/No".
So far, so good.
The sale transaction settled in June 2016. The purchaser, YL NZ Investment Ltd, was GST-registered and sought to claim a secondhand goods input tax credit of $365,869.
Vendor was liable to be GST registered when agreement was signed
Things started to go astray when Inland Revenue queried the purchaser’s GST claim. Inland Revenue then wrote to Ms Ling, informing her that she was registered retrospectively from May 2015.
Shortly after, Inland Revenue rejected the purchaser’s GST claim on the grounds that the transaction should have been zero rated; the vendor (Ms Ling) was carrying on a taxable activity and was liable to be GST registered when the sale and purchase agreement was signed.
Purchaser sues for breach of warranty
The purchaser sued Ms Ling for breaching her warranty that she was not GST registered.
In the High Court, and later on appeal to the Court of Appeal, Ms Ling argued that she had not breached her warranty because she was not, in fact, registered - either when she signed the agreement or at settlement; she may have been liable to be registered, but she was not in fact registered. Therefore, she argued, there was no breach of warranty.
The High Court (and subsequently the Court of Appeal) was not persuaded by Ms Ling’s argument. The definition of “registered person” in the Goods and Services Tax Act includes a person who is liable to be registered.
As a result, Ms Ling had breached the warranty given in the sale and purchase agreement. She was ordered to pay the purchaser $390,044 (being the equivalent sum for the GST credit, together with accountants’ fees and interest) plus solicitors’ costs.
Advisers must be actively involved
The Ling case illustrates the importance of solicitors and accountants taking a proactive role when clients buy or sell property. Inland Revenue will always look closely at each party’s GST status if a secondhand goods credit is involved. Advisers therefore need to take a hands-on approach to ensure their clients do not unwittingly expose themselves to serious financial risk.
Reduce the risk of getting it wrong
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