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It's amazing how often there is confusion over these simple gst scenarios

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  • It's amazing how often there is confusion over these simple gst scenarios


    SCENARIO 1: You are looking to buy another investment property (PropertyA) that you will use for short term accommodation (e.g. Air BNB, holiday rental). Income will be over $60,000, so you have to be GST registered. You are looking at a particular property that is being advertised at $600,000 plus GST, by a GST registered developer.

    If both parties are GST registered, the sale would be zero rated for GST.

    From your research, comparable properties are worth and being sold for $600,000, with normal GST inclusive contracts.

    What should you offer?
    In this case you could buy a comparable property from a non-GST registered party for $600,000, then claim back the GST, so be left with a real cost of $521,739 exclusive GST ($600,000 / 1.15). Therefore, if the properties were the same and you were happy with the value, then you would only offer $521,739 plus GST for Property A. If accepted, the transaction would be zero rated. You would pay $521,739 and you would not claim back any GST. This would be the same as the real cost for the comparable properties.

    SCENARIO 2: You are a GST registered trader or builder wanting to do a spec house. A section is being marketing by a GST registered developer for $230,000. This is the normal price that a personal home buyer would pay for the section, so this would be $230,000 inclusive of GST.

    What should you offer?
    $200,000 plus GST. As both parties are GST registered, then the sale is zero rated. Effectively, this is $230,000 less the GST = $200,000 GST exclusive.

    • [*=left]Vendor: Would normally get $230,000, then have to pay IRD $30,000 and be left with $200,000 real sale value.
      [*=left]Buyer: Would normally buy for $230,000, then get the GST back from IRD $30,000 and be left with $200,000 real cost.
      [*=left]So the Zero Rating avoids the steps of paying the GST and receiving back the GST, and just settles at $200,000 where both parties would end up at anyway.

    SCENARIO 3: You are looking to buy a long term hold residential property that will be leased to a long term residential tenant. As such you are not GST registered. For some reason the vendor is GST registered and asking for $300,000 plus GST. They say there is only GST on half the property.

    What should you offer?
    Obviously if depends on what you think the overall property is worth. But you should be looking at a GST inclusive offer. So the vendor is really asking for $300,000 plus 50% of the GST = $322,500 ((150,000 * 1.15)+150000). If you were happy with this amount, you would offer $322,500 GST inclusive. The GST is then the vendor’s problem, and you have a set purchase price that cannot be affected by GST. Otherwise if you offer $300,000 plus GST and it turns out the GST is $30,000, then you would have to pay $330,000.

    SCENARIO 4: You want to buy a lifestyle block. Really just your personal home, with a couple of sheep, a dog, two ducks, three cats and a horse. Obviously this isn’t a real business, so you shouldn’t be allowed to claim the GST back. The lifestyle block is for sale for $2 million plus GST. The GST is only on the extra land, so is 50% of the property in this example. So the GST inclusive value would be $2,150,000.

    You are struggling to come up with the funds, so your creative real estate agent and mortgage broker come up with a plan that you should be GST registered. Then the sale would zero rate, and you would just have to pay $2 million.

    Is this a good idea? NO

    1. [*=left]Technically you cannot be GST registered as there is no continuous taxable activity. So what you are doing is illegal.
      [*=left]Is it really in your best interests? You might save interest on the $150,000 extra, at say 5% for 5 years, being approximately $37,500. But, you might sell the property in 5 years time for $4 million. The new purchaser is likely to not be GST registered. So you would have to pay GST on the sale. This could be $2.5 million for the GST part, so $326,087 GST to pay. You only saved $150,000 at the start, but are now paying $326,087. So taking the interest into account, the GST has cost you an extra $138,587!

    I hope this has cleared up any confusion you may have had.

    Book a free chat here
    Ross Barnett - Property Accountant

  • #2
    you lost me at the header "simple GST scenarios", lol. I am sure it seems simple to an accountant or those who regularly work with these scenarios but how GST rules get applied in real life is something I still struggle to get my head around at times. This is really helpful information for me though so I have copied and pasted it into a document in my property files for future reference, - thanks!