Fishhooks aplenty for lawyers in property transactions
Tax law is not everyone’s cup of tea. But loath it or love it, there are some tax rules that every solicitor involved in property conveyancing must know as a bare minimum:
- the GST rules that relate to real property
- how the bright-line test applies to real property, and
- whether RLWT must be collected by the vendor’s solicitor.
The REINZ-ADLS standard agreement was updated in November 2019 with the release of the 10th edition. Alterations to the GST clauses have resulted in changes to the GST liabilities of the parties.
Find out more by reading the extract below taken from the New Zealand Lawyers' Tax Companion.
REINZ–ADLS standard agreement
The Auckland District Law Society (ADLS) and the Real Estate Institute of New Zealand (REINZ) released the tenth edition of the REINZ–ADLS agreement for sale and purchase of real estate in November 2019.
The standard form is used mainly for residential property sales but is also used for sales of commercial property (including farming and commercial property).
The front page of the standard form agreement allows for the parties to specify whether the transaction is “plus GST (if any)” or “inclusive of GST (in any)”. If this section is left untouched, the purchase price is deemed to be inclusive of GST (if any) — but see further below under the heading Inclusive of GST (if any).
In cases where the agreement is completely silent as to GST, the price will include GST. See Tri-Star Customs and Forwarding Ltd v Denning (1998) 18 NZTC 13,982,  1 NZLR 33 (CA).
Plus GST (if any)
If the agreement for sale and purchase provides that the price is “plus GST (if any)”, the purchaser will be required to pay any GST impost in addition to the purchase price stated in the agreement. This pricing clause has the advantage of clearly identifying/fixing the purchase price net of GST.
Inclusive of GST (if any)
An “inclusive of GST (if any)” clause effectively fixes the total purchase price for the purchaser. For this reason purchasers may prefer the use of a “GST inclusive (if any)” clause.
With residential conveyancing transactions, the default is usually inclusive of GST.
Note that in situations where the GST status of the purchaser changes in the time period between signing the agreement and settlement, and this change in status affects the parties’ ability to zero rate the transaction, the purchase price then becomes “plus GST (if any)”, even if the parties have expressed the purchase price as “inclusive of GST (if any)”.
This is the effect of cl 14.8, which acts to protect the vendor from an unexpected GST impost in circumstances where the purchaser’s change in status affects the vendor’s GST liability. If the vendor has already accounted for GST to Inland Revenue, cl 14.8 requires the purchaser to pay the GST (together with any default GST) to the vendor “immediately upon demand served on the purchaser”.
The words “inclusive of GST (if any)” do not deem the vendor to be GST-registered, nor do they mean that the transaction is subject to GST. See Newman v C of IR (1994) 16 NZTC 11,299 at 11,231 and Case T22 (1997) 18 NZTC 8,124 at 8,140.
“Purchaser or nominee” clause
In the tenth edition, the words “and/or nominee”, appear after the space left for the insertion of the name of the purchaser. This allows the person signing the sale and purchase agreement (as purchaser) to nominate another party to settle the contract. The use of a “purchaser or nominee” clause can provide some flexibility when selecting an appropriate ownership vehicle.
When a contractual purchaser nominates another person (a nominee) to receive the land from the contractual vendor, the supply will always be treated as being made by the supplier to the nominee: s 60B(6). This applies to any transaction that wholly or partly consists of land.
The nominee provision does not apply to situations involving supplies made to or by agents, as these situations are governed by s 60 of the Goods and Services Tax Act. Also, the rule does not apply to assignments or novations.
The nomination rules in s 60B affect the tax invoice requirements. In normal circumstances, a taxpayer must have a tax invoice to claim an input tax deduction. In transactions involving nominations, a nominee may not have the requisite tax invoice as it may have been issued to the purchaser. In these circumstances, the nominee must maintain records that would allow the name and address of the supplier, the date of payment for the supply, a description of the goods and services supplied, and the consideration for the supply to be ascertained.
GST registration status
Vendors must indicate on the front page of the agreement whether or not they are GST registered.
If the vendor has stated they are GST registered, schedule 1 of the agreement (“GST information”) must be filled out by both parties. This includes confirmation from the purchaser as to their GST status (ie registered or not registered) — both at the time of entering into the agreement and at settlement. The purchaser must also confirm whether they intend to use the property for making taxable (ie “GSTable”) supplies.
If any of the purchaser’s particulars in the agreement are incomplete, or have altered between the date of the agreement and settlement, the purchaser has to notify the vendor of this “as soon as practicable” before settlement. (This is a change from the previous version of the agreement, where the purchaser had to notify the vendor no later than two days before settlement.) The purchaser also warrants the correctness of all particulars at the time of notification.
When filling out the GST information, both parties need to consider not only if they are currently GST registered, but also if they are liable to be GST registered. For example, the person may be carrying on a taxable activity that exceeds the registration threshold of $60,000 but not realise that they are required to be GST registered, or not realise they have exceeded the threshold, or simply may have neglected to become registered.
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 $3.5m inclusive of GST. 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 so registered at settlement: Yes/No”.
The purchaser company was GST-registered and sought to claim a secondhand goods input tax credit, but Inland Revenue queried the purchaser’s GST claim. Inland Revenue then wrote to the vendor informing her that she was registered retrospectively from May 2015. Because the purchaser company could not claim back the GST as a secondhand goods input tax credit, it sued Ling for breaching her warranty that she was not GST registered.
The High Court, and later the Court of Appeal, confirmed that the definition of “registered person” in the Goods and Services Tax Act includes a person who is liable to be registered. As a result, 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. See Ling v YL NZ Investment Ltd  NZCA 133.
The vendor, Ellwood, warranted in the sale and purchase agreement that he was not registered for GST. In fact, he was so registered. One week before settlement the Holdaways (the purchasers) registered for GST. Relying on the vendor’s warranty that he was not registered, the purchasers lodged a claim for a secondhand goods input tax credit. Inland Revenue declined their claim because the vendor was registered. The High Court, on appeal, granted the purchaser’s summary judgment claim for damages for the amount of the GST credit they would have been entitled to together with the accounting expenses they had incurred.
See Holdaway v Ellwood (2019) 29 NZTC ¶24-008.
The registration status of the parties is also of crucial importance for zero-rating.
Clause 14 deals with zero-rating. Given the requirement for both vendor and purchaser to be GST registered, the clause focuses on the GST status of the parties at the time the agreement is entered into, and at settlement. The compulsory zero-rating regime is discussed at ¶2.24.
The old going concern provision (s 11(1)(m)) still exists, but this is used primarily where a business is sold without land. In order for a sale to be zero-rated as a going concern:
- there must be a taxable supply (ie the supplier must be GST-registered or liable to be GST-registered and the supply is not an exempt supply)
- the recipient must be GST-registered
- all of the goods and services necessary for the continued operation of the taxable activity (or that part of the taxable activity) are supplied to the recipient
- the supplier carries on the taxable activity up to the time of transfer to the recipient
- the parties must agree in writing that the supply is of a going concern, and
- the parties must intend that the taxable activity supplied be capable of being carried on as a going concern by the recipient.
Find out more about the GST and income tax implications on the sale and purchase of land in the New Zealand Lawyers' Tax Companion.
New Zealand Lawyers' Tax Companion
Organised around legal transactions rather than tax topics, New Zealand Lawyers' Tax Companion is designed to be a practical guide to tax law for the general legal practitioner.
Packed with examples, case studies and checklists, it contains straightforward commentary covering the tax aspects of transactions that lawyers commonly advise on.
Topics covered include the tax implications of:
- real estate transactions (including bright-line test and RLWT obligations)
- structuring a business
- buying and selling a business
- compensation and damages payments
- family law
- the Inland Revenue disputes procedure
- family trust transactions
- wills and administration of deceased estates.