Does GST registration really matter before purchase?

[Rock]

Hi guys,

One of my friend come to me with a really interesting question - Does GST registration really matter before the purchase?

His situation is:

1. From my eyes, he's a property speculator, or maybe should call him property dealer.
2. He purchased a land section and build a house on it for family last year but now he changed mind - sell it for a profit.
3. Obviously he needs to pay some tax - GST and the income tax on the gain.
4. He think he can claim the GST on the land back given the land price is GST inclusive. So only the net amount of GST should pay back to IRD.
5. The trouble now is his accountant told him the GST on land can't claim back because he was not GST registered at the time the land is purchased. So now he made a loss on the sale .

To me, in this case he is paying double GST for the land as it form part of the selling price. He has paid the land GST last year and now is paying it again.

Any ideas or opinion? Does GST registration really matter before the purchase?

Thanks

[Anthonyacat]

3. Obviously he needs to pay some tax - GST and the income tax on the gain.

This is far from obvious.

From the raw facts you've presented - a single property purchased with the intent to live in privately, I'd argue that it would often be completely tax free. Of course, the IRD may look at the facts and assess it to have been purchased with the intent to develop and sell, but so long as he has sufficient evidence to prove his initial intent, or solid demonstrable reason(s) why he changed his mind, he would likely be fine.

It certainly won't in itself require GST registration. This is only required when a continuous business activity is being undertaken. A single property rarely forms a continuous activity.


On a totally different matter, his accountant is dead wrong on the inability to claim GST because it was bought before registering. Section 21B of the GST Act allows a business to make a claim on assets purchased prior to registration. However, the accountant may still be right that you can't claim. The difficulty relates specifically to land transactions because when undertaken between two GST registered persons they are zero-rated for GST. I haven't personally been through this process but it may be that the IRD would not provide this credit, but instead the vendor would be allowed to get back the GST they paid, and on-pay this to your friend. The same net effect, your friend gets back the GST he paid. But a much more complicated way of doing it.


Lastly, to answer the ultimate question, yes GST registration matters before the purchase. It simplifies matters considerably, and is the correct way of complying with our tax laws.

[Damap]

One of my previous accountants had his input claim disallowed because he wasn't registered but was forced to pay GST on the sale because they deemed him a trader. Your friend is in dangerous territory without some proper advice.

[Rock]

This is far from obvious.

From the raw facts you've presented - a single property purchased with the intent to live in privately, I'd argue that it would often be completely tax free. Of course, the IRD may look at the facts and assess it to have been purchased with the intent to develop and sell, but so long as he has sufficient evidence to prove his initial intent, or solid demonstrable reason(s) why he changed his mind, he would likely be fine.

It certainly won't in itself require GST registration. This is only required when a continuous business activity is being undertaken. A single property rarely forms a continuous activity.


On a totally different matter, his accountant is dead wrong on the inability to claim GST because it was bought before registering. Section 21B of the GST Act allows a business to make a claim on assets purchased prior to registration. However, the accountant may still be right that you can't claim. The difficulty relates specifically to land transactions because when undertaken between two GST registered persons they are zero-rated for GST. I haven't personally been through this process but it may be that the IRD would not provide this credit, but instead the vendor would be allowed to get back the GST they paid, and on-pay this to your friend. The same net effect, your friend gets back the GST he paid. But a much more complicated way of doing it.


Lastly, to answer the ultimate question, yes GST registration matters before the purchase. It simplifies matters considerably, and is the correct way of complying with our tax laws.

Thanks Anthony, I should make the facts more clearly. He has done a couple of "Buy & Sell" or "Build & Sell" in last 3 years under his company which is GST registered. The one just sold was purchased under his personal name for family but later he changed mind (bought a bigger section in a nicer location). His accountant told him he is a trader so no matter what the GST should applies and also told him even he pays the GST on the sell price he can't claim the GST back on the purchase. I wonder why he has to pay GST twice so raised the questions here. Very interesting.

[Rock]

One of my previous accountants had his input claim disallowed because he wasn't registered but was forced to pay GST on the sale because they deemed him a trader. Your friend is in dangerous territory without some proper advice.

He got the advice before but changed the mind to sell it rather than keep it for 10 years plus. But feel enough though, everyone wants to live in a better place. A seaview mansion always appear in my dream. : )

[Anthonyacat]

Thanks Anthony, I should make the facts more clearly. He has done a couple of "Buy & Sell" or "Build & Sell" in last 3 years under his company which is GST registered. The one just sold was purchased under his personal name for family but later he changed mind (bought a bigger section in a nicer location). His accountant told him he is a trader so no matter what the GST should applies and also told him even he pays the GST on the sell price he can't claim the GST back on the purchase. I wonder why he has to pay GST twice so raised the questions here. Very interesting.

So if he's a trader, it really does just come down to whether input tax is claimable on the initial purchase and any improvements. Section 21B sets out the requirements. Have a read. From memory I believe one is that the asset is currently still held at the time of registration (which may be where Damap's example falls over, but without specifics can't tell).

He would also need to hold GST invoices for all purchases over $50, which may be an issue if he was intending it to be private and so didn't keep any records.