Do I have to pay GST on rent?

[action]

We have 5 properties we brought in a trading company but have decided to keep them for 5+ years. We have claimed the gst on them and now our accountant says we have to pay gst on the rent because of that. As we cant charge gst to our tenants, i dont see why we should pay gst on the rent. Hope someone knows the correct rules about this?? Thanks!

[Dean@Massiveaction]

This has been discussed at length here Action a while ago. The short answer is you apply a thing called Lundy Rules. If your accountant doesn't know what they are get him or her to contact Matthew Gilligan at Gilligan Rowe and Associates.

It is based on a court case around 2 years ago that IRD lost.

[Rosco]

Have a look at this link

http://www.businesstalk.co.nz/blog.php?u=89&blogcategoryid=14

cheers

Ross

[McDuck]

This is interesting.

GST is to be passed on to the end user.

You buy a house to sell again, but then choose to keep it.

Thus you are the end user.

So you pay the GST.

Say if you bought lawnmowers to sell, but then decided to keep them.

It gets confusing if you decided to rent those lawnmowers out.

Are you taking a double bite of the pie if you claimed GST?

It seems so.

[Judge]

I am prretty sure that the answer is "yes". You do have to pay GST. The only way for you not to pay GST is to complete a "change of use" for with the IRD to confirm that your intention regarding the property has changed (i.e. you do not want to trade it any more, and want to hold it long term). Then you have to pay back the GST you claimed when you bought the property and then you do not have to pay the GST on the rental. I am not an accountant, but my understanding is - if you claimed GST on purchase, you must pay GST on rental and sale proceeds.

[Dean@Massiveaction]

Lundy rules have been in place for some time Judge, definitely don't pay GST on net rents.

[action]

Thanks for that thats great, will print off this stuff for my accountant.
Ignorants is bliss! - not.
Helen

[Rosco]

Hi Helen,

I'd suggest you get a property accountant. They should be telling you this information, not you telling them! The lundy ruling and GST adjustment for rent on trading properties have been around for years, so there shouldn't be any confusion.

Ross

[Dean@Massiveaction]

Amen to that Ross. Isn't it incredible how many accountants don't know what they are doing with property?

[Monkeyboy]

I have a property that is for development but currently rented out. I'm not paying the GST on the rent and I'm pretty sure my accountant, Nigel Lundy, understands the rules pretty well.

[Judge]

I am sorry guys, but i have to disagree with you. I just had a look at the Lundy case and what IRD has to say on the issue, and nowhere does it say that you do not have to pay GST on rental in these circumstances. The basic premise in my view remains the same - if you change use you have to pay back the GST you claimed on purchase and then you are allowed not to pay GST on rental. The Lundy case says that you do not have to pay all the GST that you claimed on purchase back at once, but rather you can pay it as you go, and because of the way the GST is caclulated in these cases it is more beneficial for the relevant person (and probably in somecases results in nil GST being due). However, i would have thought that in each case the calculations would be different and in some cases some GST may be payable. Therefore it is not correct to say that there is a rule that no GST is payable in such circumstances. I am not an accountant nor am i a tax lawyer, so i may be wrong, but this is my interpretation of Lundy.

Judge

[Rosco]

Hi Judge,

Have a read through the following thread.

http://www.propertytalk.com/forum/showthread.php?t=20347&highlight=GST+rent&page=2

There is two issues

1) Is there GST due on rental income, if you have purchased a residential rental property as a trade or development, but have rented it out for a period before development or selling takes place. This is the issue addressed earlier and in the thread above.

2) If a property is purchased to trade, GST claimed, then the buyer changes his/her intention. In this case then generally GST would be repaid at fair market valuation at the time the use changes. I didn't think this was what Action was asking, as I understood that Action was still intending to trade/development but was just renting mean time.

Ross

[Rosco]

Also just to clarify a little further, there is NO GST to pay on the rental income received, but a GST adjustment is still due, to account for the change of use of the property.

[action]

That is right Ross, we are just wanting to rent out the trade properties, not wanting to keep them in our holding trust, but sell them off later or whenever the time seems right.
If we dont have to pay gst on the rent, great, party on
Thanks, helen

[Dean@Massiveaction]

You definitely don't, just apply Lundy Rules.
I have over 150 clients/friends/peers doing this, it is fully accepted by IRD now and has been for some time.