Watch out - IRD & GST claims by traders

[Rosco]

If you are trading properties, you need to be very careful with GST claims as the IRD are on the war path.

1) If you have just purchased your first trade property within a trading entity, when you try to claim the GST, IRD will audit the GST refund. As it is the first transaction they look to see if you are undertaking a continuous taxable activity. If you are just buying one property, doing it up and selling it, they will probably argue this isn't a continuous activity! So they will disallow the GST refund and look at charging interest and penalties.

If you plan on doing several trades, then you need to be able to prove this. If you can't get more mortgages, IRD will most likely not believe you, and once again determine that it is not a continuous activity.

So if you are new to trading, or using a new entity, you need to be able to prove to IRD that your trading activity is more than a "one off" and you have financing to do more, plus a plan etc would help.

2) Lease Options, Sandwich Leases and Rent to Own.

If you sell your trading properties by any of these methods, IRD will look to apply the definition of a hire purchase. If sucessful, you will have to pay the WHOLE GST on the sale price at the date the option or rent to own agreement is signed. This could have huge affects on a traders cashflow, and if only a small deposit is received, it could result in a GST liability on the sale of significantly more than the deposit received!

I would suggest that anyone trader who is about to make there first GST return, or any trader that is in the audit process contacts myself or Anthony from GRA to discuss IRD's new viewpoint of these transactions and possible problems you may face.

Ross

[Keithw]

Good Warning Ross.
I am seeing some very pig headed ignorance from the Takapuna IRD with regard to my partners activities.
They have Idiots that don't have a clue about property, making decisions about whether the property company is in business & actually trying to bully my partner into closing the business !!!!

By their definition, any developer that puts a development on hold due to this current climate is not carrying on continuous activity, and further, is therefore not in business !!!!!

Not only that, but these inexperienced idiots are making personal judgements on commercial decisions when they obviously don't have a clue.
Quote:
"I know if I was a Bank I wouldn't lend any money to build houses with just 2 pieces of land as security " !!!!!!!!
Derrrrrr
And we let these idiots control our business lives !!
We can only hope that the 250 to lose their jobs are some of these incompetent ones.

[Keithw]

So when they disallow the GST claim, does that then mean when you sell it that there is no GST payable ?

Or have you suddenly become active again, in which case GST is claimable & payable, unless they come up with some scheme that says that because it was diasallowed you can't claim it, but you have to Pay it !!!

And what happens when you start building on a place that has had the GST claim disallowed. Are all the building expenses now not claimable. If not then the Sale of the built place must also not attract GST, unless you now magically qualify for their unspecified criteria of what attracts GST & what doesn't (which used to be crossing the $40k threshold)

[Cadmium]

Thanks for raising this Rosco.

So lets say I was about to do my first trade, using a GST-registered company as the entity.

What's best? Claim GST or do not claim GST?

Personally I don't care either way. I don't want to pocket the GST refund, long term, for any personal purpose. I just want to do what is right by the law.

Should I claim GST on my first trade, or wait till my second, third, fourth....

Regards,
Cadmium

[Rosco]

Hi Cadmium,

1) Company????? Make sure you are getting some good advice on the structure and affects of tainting. With new association laws expected August or September, using a Company could be OK but make sure you understand the full consequences.

2) It depends on your circumstances as to whether GST should be claimed or not. But based on the information you have provided, it sounds like you plan to do a few trades, therefore GST should be claimed and payable on sales. Just make sure you have good information to provide to IRD to back up that you will be doing more than one trade, that you can get finance, some kind of plan etc.

Ross

[Rosco]

Hi Keith,

If IRD argue that it is a one of transaction and GST is not claimable, if they are correct that it isn't a continuous activity, then the entity would not need to repay GST either. A common example is say you had never done any trading, and just wanted to buy one section with the intention of selling at a profit. This is a taxable activity but just a one off, so NO GST claimable or payable.

BUT.... just because no GST, doesn't mean no income tax as this has different rules. So in my example above, income tax would be payable on the profit.

If IRD get it wrong (maybe WHEN IRD get it wrong), and for example disallow a GST claim on a section where 4 townhouse are going to be built and sold. Yes GST would still be payable on the sale. In this situation, you should be fine getting the GST refund back as well.

Ross

[Keithw]

Hi Keith,
If IRD get it wrong (maybe WHEN IRD get it wrong), and for example disallow a GST claim on a section where 4 townhouse are going to be built and sold. Yes GST would still be payable on the sale. In this situation, you should be fine getting the GST refund back as well.

"you should be fine getting the GST refund back as well."
This is where the law is being abused by the IRD, they are not refunding because they don't believe or understand what work is required to do a development.

This is no one off Ross
It is a retirement village development that has resource consent & building plans & waiting for building permits due to council insisting that 5 metres of the neighbours property be obtained in order to widen the entrance !
So while waiting for that to be sorted, another section was purchased, with the intention to build 2 townhouses. That GST claim was disallowed and now they are claiming that the retirement village is not progressing, so must have its GST from 18months ago repaid as well.

So what they have done is create total uncertainty as to when GST must be charged

Do the townhouses attract GST or not ?
If they force the repayment of GST on the retirement village, do those need to be sold with or without GST ?
How can any of these individual houses be presold when the GST position is unknown ?

[Rosco]

Hi Keith,

As mentioned at the start, you may wish to talk to myself or Anthony (or Matt) at GRA as we are coming across these situations all the time. Generally we can get IRD to see sense, and in your case the GST should be claimable on the 2 townhouses and definetly kept on the retirement village.

GST will still be payable on the sales, as taxable activity and over $60,000 threshold of income per year! I know this is totally unfair.



Ross

[Keithw]

Hi Keith,

GST will still be payable on the sales, as taxable activity and over $60,000 threshold of income per year! I know this is totally unfair.
Ross

Are you saying that the IRD can disallow a claim but then make GST payable on Sale ?
is that on the total sale value or on the difference between sale price & build cost (cost of sale) ?
since they have disallowed the input GST claim & presumably will continue to disallow the build cost GST.

Thanks for the offer, will pass on to my partner.
They will be hesitant to spend more, as Educating the IRD (and possibly themselves by the sound of it) has already earned the accountant RSM Prince over $3k on a $14k GST claim & had no effect.

[Bluekiwi]

Great stuff guys, as I am just about to start doing my first.
And will be looking at least one every 3 months, well as many as I can depending finance and speed of sale.

I will do 1 and IF it works, keep doing them.

[Cadmium]

Hi Cadmium,

1) Company????? Make sure you are getting some good advice on the structure and affects of tainting. With new association laws expected August or September, using a Company could be OK but make sure you understand the full consequences...

Thanks Ross,

Yes a company.

I remain unconvinced that trust structures provide much more in the way of tainting protection. My understanding is that if IRD decides I am not playing it straight, I will be tainted, no matter what trust structures are in place - its quite transparent to them that the Trust is me, and I am the Trust.

I am happy to hear arguments to the contrary though.

Regards
Stuart

[Dean@Massiveaction]

I've had 2 clients denied input credit but forced to pay it on sale. Sorted by aggressively attacking IRD but ridiculous nevertheless.
As this is a moving target mine field I suggest getting current advice from GRA as they are involved with NSA on the test case at the moment for a mate of mine.
There will be a legal precedent set shortly.

[Bluekiwi]

I've had 2 clients denied input credit but forced to pay it on sale. Sorted by aggressively attacking IRD but ridiculous nevertheless.
As this is a moving target mine field I suggest getting current advice from GRA as they are involved with NSA on the test case at the moment for a mate of mine.
There will be a legal precedent set shortly.

Nice tie Dean

[Cadmium]

...I suggest getting current advice from GRA as they are involved with NSA on the test case at the moment for a mate of mine...

What's NSA Dean?

[Dean@Massiveaction]

Nigel Smith and Associates