Compulsory Zero-Rating of Land Transactions 

 
Grange Associates Ltd - 3 July 2012

From 1 April 2011, the GST rules for transactions involving the supply of land between GST registered businesses were amended to prescribe compulsory zero-rating of the supply.  The change was enacted to prevent “phoenix” fraud schemes involving Inland Revenue refunding GST to one party without receiving the corresponding payment from the vendor, due to the vendor winding up the business before making payment of GST to Inland Revenue.

Key Criteria

GST-registered vendors will be required to charge GST at 0% (zero-rated) on any supply to a GST-registered person involving land, or where land is a component, if at the time of settlement:

• The recipient intends to use the goods for making taxable supplies; and
• The recipient does not intend to use the land as a principal place of residence for themselves or a relative.

If any of the above conditions are not satisfied at the time of settlement, the supply should be taxed at 15%.

This information must be provided by the recipient to the vendor in writing prior to settlement.  This will generally be as a schedule within the Sale & Purchase Agreement.

Once the vendor has received a written statement from the recipient, the vendor may rely on the statement to either zero-rate or standard-rate the supply.

Record Keeping

If a supply is zero-rated, the vendor must keep a record of the following:

• Name, address and GST-registration number of the recipient; and
• A description of the land supplied; and
• The consideration paid for the supply.

Land forms only part of supply

If land is supplied as part of a larger supply, the whole supply is zero-rated.  For example, if land is supplied as part of a business being sold as a going concern, the supply of the going concern is wholly zero-rated.

If a “principal place of residence” is included in a larger supply of land, the law now requires the supplier to treat the supply of the residence as separate from the supply of any other property included in the supply.  This is achieved by splitting the transactions and invoicing the residence separately.

Supply not used wholly for making taxable supplies

In the case of a recipient that does not intend to use the goods wholly for making taxable supplies, the supply may still be zero-rated in its entirety by the vendor.  In these circumstances, the recipient must account for the output tax on the non-taxable use of the goods by making payment of the GST thereon directly to Inland Revenue.

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