The GST comes loaded with a host of hidden traps for those in the property and investment industries who refuse to face up to its imminent arrival, according to Geoff Stevens of law firm Phillips Fox.
The GST comes loaded with a host of hidden traps for those in the property and investment industries who refuse to face up to its imminent arrival, according to Geoff Stevens of law firm Phillips Fox.
Mr Stevens said the threat comes more from ignorance of how the GST works rather than from any inherent defect or unjustness in the legislation.
In a report to the Property Council he cited several areas where the GST could prove particularly nasty for the unprepared – one-off property deals, contracts old and new, the timing of property transactions and the sale of a going concern.
Mr Stevens said: “The New Zealand experience indicates there is real danger in assuming a one off activity will not attract GST.
“It was held in New Zealand that the one off activity of an individual subdividing a block of land and selling the lots constituted an enterprise with the result that the individual had to pay 1/11th of the sale proceeds to the government.
“In addition to the direct effects, if the individual had anticipated the GST treatment, he would have had the opportunity to register under the GST legislation and thereby reduce the GST payable to the government by the amount of GST paid on goods and services acquired to complete the subdivision and sale.”
On contractual issues, Mr Stevens said: “GST can be payable on supplies made under a contract entered into not only before the legislation was passed but also before the legislation was even contemplated.
“The party making the supply, and therefore with the obligation to account to the government for the GST, does not want the imposition of GST to reduce net return.
“This is where the problems start as the legislation does not give the right to pass the GST cost on to customers. If the contract does not allow the supplier to do it, they will be stuck with the GST liability.
“Also, it is not an attractive proposition to be faced with extra building costs especially when they cannot be paid for from available cash or debt.
“The bank will also be unexcited by the prospect of having security over a partially constructed home.
“Many building contracts will be caught by the GST web even though they are entered into before 1 July 2000.”
Mr Stevens said that if the GST was not managed properly, it could have a severe impact on cashflow.
“A supplier, which could include the seller of land and other property, can be liable for GST even though payment may not have been received,” he said.
Mr Stevens said that under the GST legislation, the sale of a
business as a going concern is GST-free.
“In New Zealand, it has been accepted this can include the sale of a tenanted building,” he said.
“There are other situations which may quality for the GST-free status even though they may not appear to involve a sale of going concern.
“The problem is that in order to qualify for the GST-free status, the parties must agree in writing that the sale is a going concern.
“If not, the sale will not be GST-free, even though it may be a sale of a going concern. The result may be that the purchaser will pay too much or the vendor will receive less than anticipated.”
With good early planning, many of these problems could be overcome and, in some cases, become an advantage Mr Stevens said. He can be contacted at Phillips Fox on (08) 9288 6926.
Mr Stevens said the threat comes more from ignorance of how the GST works rather than from any inherent defect or unjustness in the legislation.
In a report to the Property Council he cited several areas where the GST could prove particularly nasty for the unprepared – one-off property deals, contracts old and new, the timing of property transactions and the sale of a going concern.
Mr Stevens said: “The New Zealand experience indicates there is real danger in assuming a one off activity will not attract GST.
“It was held in New Zealand that the one off activity of an individual subdividing a block of land and selling the lots constituted an enterprise with the result that the individual had to pay 1/11th of the sale proceeds to the government.
“In addition to the direct effects, if the individual had anticipated the GST treatment, he would have had the opportunity to register under the GST legislation and thereby reduce the GST payable to the government by the amount of GST paid on goods and services acquired to complete the subdivision and sale.”
On contractual issues, Mr Stevens said: “GST can be payable on supplies made under a contract entered into not only before the legislation was passed but also before the legislation was even contemplated.
“The party making the supply, and therefore with the obligation to account to the government for the GST, does not want the imposition of GST to reduce net return.
“This is where the problems start as the legislation does not give the right to pass the GST cost on to customers. If the contract does not allow the supplier to do it, they will be stuck with the GST liability.
“Also, it is not an attractive proposition to be faced with extra building costs especially when they cannot be paid for from available cash or debt.
“The bank will also be unexcited by the prospect of having security over a partially constructed home.
“Many building contracts will be caught by the GST web even though they are entered into before 1 July 2000.”
Mr Stevens said that if the GST was not managed properly, it could have a severe impact on cashflow.
“A supplier, which could include the seller of land and other property, can be liable for GST even though payment may not have been received,” he said.
Mr Stevens said that under the GST legislation, the sale of a
business as a going concern is GST-free.
“In New Zealand, it has been accepted this can include the sale of a tenanted building,” he said.
“There are other situations which may quality for the GST-free status even though they may not appear to involve a sale of going concern.
“The problem is that in order to qualify for the GST-free status, the parties must agree in writing that the sale is a going concern.
“If not, the sale will not be GST-free, even though it may be a sale of a going concern. The result may be that the purchaser will pay too much or the vendor will receive less than anticipated.”
With good early planning, many of these problems could be overcome and, in some cases, become an advantage Mr Stevens said. He can be contacted at Phillips Fox on (08) 9288 6926.
