Nine times out of ten the GST information in an agreement to buy and sell property will be completed with relative ease as both vendor and purchaser (and their accounting/tax advisers) should be aware of their respective GST positions. But what happens when a vendor should be GST registered but isn’t, and doesn’t know they should be? The answer could be a $365,800 bill as was the case in Ling v YL NZ Investments Ltd  NZCA 133.
The obligation to register for GST rests with a taxpayer; this does not happen automatically. Therefore it is important to have a comprehensive understanding of your tax obligations and, if you are not sure, to seek advice from a tax specialist. As a recent case illustrated, it is particularly important to understand your GST obligations when buying and selling real estate.
Ling v YL NZ Investment Ltd
In this case, Ms Ling purchased a house with horse grazing and stables in Auckland in July 2015. She then sold the property in December 2015 for $3.5 million inclusive of GST to YL NZ Investment Ltd, which was GST registered. Inland Revenue rejected the purchaser’s application for a GST refund on the purchase, advising that the vendor was in fact registered for GST and there would be no refund. The purchaser claimed they had offered the purchase price on the basis that it could claim the GST back. If the purchaser knew the vendor was registered for GST, it may have offered a lower price. The purchaser sued the vendor for breach of contract.
The parties used the standard Auckland District Law Society form of Agreement for Sale and Purchase of Real Estate (the Agreement). There are standard warranties contained in the Agreement regarding GST registration. On the front page of the Agreement is a statement that the vendor is GST registered in respect of the transaction and/or would be so registered at settlement. The vendor has to answer yes or no. In this case the vendor circled “No” beside the statement. Clause 14.1 of the Agreement provides: “The vendor warrants that the statement on the front page regarding the vendor’s GST registration status in respect of the supply under this agreement is correct at the date of this agreement.”
Further, clause 14.3 of the Agreement provides that GST is chargeable on the supply under the Agreement at 0% if the particulars on the front page and in Schedule 2 indicate that the vendor is and/or will be at settlement a GST registered person in respect of the supply under the Agreement, and the purchaser is also GST registered. Schedule 2 of the Agreement has to be completed if the vendor has stated on the front page that the vendor is or will be registered in respect of the transaction.
After settlement of the sale and purchase the Inland Revenue Department determined that the vendor was deemed to be liable and to be registered for GST with retrospective effect to a date prior to the Agreement. Details of the vendor’s GST registration (or, more specifically why it was deemed to be registered) were not provided in this case, however this may have arisen if the vendor was using the property in question to make a form of taxable supply, for example short term rental. This meant both the vendor and purchaser were registered (or in the case of the vendor, deemed to be registered) for GST at the settlement date. A property transaction of this nature is zero-rated and GST is charged at 0%. Consequently, the purchaser could no longer claim a GST refund of 15% of the purchase price.
Ms Ling was in breach of her warranty that her statement as to her GST registration was correct at the date of the Agreement. The purchaser was therefore entitled to the $365,800 claim (payable by the vendor), which was equivalent to the GST refund on the transaction if it had not been zero-rated.
It therefore pays to ensure you are fully aware of your GST position before entering into an Agreement for Sale and Purchase, given the warranties involved. If you don’t get this part right, it can cost a lot.