GST, while in many ways a “simple” tax, has a number of associated complexities. It is easy for people to make mistakes when dealing with GST. Those mistakes can be expensive.
In most circumstances a GST registered entity is required to account for output tax on the provision of sales and services.
Further, when a GST registered entity disposes of land and/or a business then there is a general presumption that GST needs to be accounted for by the seller on the sale. A buyer may conversely be entitled to a GST input claim.
In an effort to smooth out the entry and exit from businesses New Zealand has had a “going concern” exemption to the presumption that GST needs to be accounted for since the Goods and Services tax Act was introduced, namely if the both the buyer and seller are registered for GST, the sale is on a “plus GST” basis and the business being sold is capable of functioning as a “going concern” then it can be sold as zero rated, with GST charged at zero percent. It is possible for land to be included in such sales.
The “going concern” transactions caused difficulties and confusion in some circumstances and accordingly a new zero rating exemption has been introduced in respect of land sales. This new exemption is known as “CZR” zero rating.
Zero rating is mandatory where the buyer and seller of land are both registered for GST, the land is part of the seller’s taxable activity, the purchaser is to use the land in the furtherance of its taxable activity and the parties record their intention in a written Agreement. It is possible for the sale of land on a CZR zero rated basis to also include exempt supplies – such as is often the case with the sale of a farm and farm house used for domestic accommodation by the farmer or family.
The CZR zero rating can extend beyond the sale of land to include ancilliary items also being sold with the land. For example, on the sale of a farm the sale of farm machinery, stock and the like can also be zero rated. While in many circumstances it is clear that the inclusion of such items can fall into the CZR zero rated exemption it is a matter of degree and circumstances must be assessed on a case by case basis. For example the sale of a small piece of land for $5,000 along with a business worth, say, $500,000, is unlikely to be able to be zero rated on the CZR basis. Having said that it may well still be able to be zero rated on the “going concern” basis.
It may be advisable on any sale of land where there is doubt as to applicability of CZR zero rating to also document the sale on a “going concern” basis as a fallback alternative.
GST issues are potentially complicated and need to be assessed on a case by case basis. If in doubt legal and accounting advice should be taken before a binding contract is entered into, after which it may be difficult to adopt the correct structure.