Plus GST or inclusive of GST?

Taxing Times is a weekly column that looks at various aspects of tax and money management.
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Taxing Times is a weekly column that looks at various aspects of tax and money management.

GST has been with us since 1986 and, on most accounts, is a relatively straightforward tax.

However, it does contain several traps for people, which can be costly, especially regarding GST and land transactions.

In an article I wrote in June, I referred to the golden rule of GST for vendors, and that is to make contracts for the sale of land "plus GST (if any)".

However, I am still seeing contracts where the words "plus GST (if any)" are crossed out and the contract is signed as "inclusive of GST". This may be fine if both parties are not registered for GST, and clearly not liable to be registered for GST, and the transaction is the sale and purchase of a private dwelling.

However, I see contracts for dwellings sold on the basis that they are not subject to GST, when they may well be.

Residential rental properties that are in a GST-registered taxable activity or used for short-term accommodation are two examples.

In writing this, I am reminded of a case that involved a property in Queenstown sold on a GST-inclusive basis.

The property had been owned by the vendor for several years and had been used for both private purposes and short-term accommodation. The purchaser of the property intended using the property as a bed and breakfast establishment and had registered for GST.

Before settlement, the Inland Revenue Department challenged the GST registration status of the vendor, and moved to force registration of the vendor. The implication for the vendor was that they would have been required to account for the GST on the sale, and would not have been able to pass on the GST cost.

While this outcome has been ameliorated to an extent with the zero-rating rules for land transactions that applied from April 1, 2011, nevertheless similar outcomes can and do arise.

So what does "inclusive of GST" mean? If a transaction is subject to GST, contracts signed on this basis require the vendor to account for the GST obligation to Inland Revenue from the sum agreed in the contract. Thus, if I sell my apartment that was in a GST registered taxable activity on a GST-inclusive basis to a non-registered buyer for, say, $450,000, I cannot further increase that price for the GST and must pay GST of $58,695 from the $450,000 proceeds of sale.

"GST inclusive" is not shorthand for no GST content in the supply, nor does it mean that the transaction is not subject to GST.

Likewise, selling a property on the basis of "plus GST (if any)" does not automatically mean the property is subject to GST, it just means that IF the property is, or later becomes, subject to GST, the vendor can charge GST.

If you find yourself under pressure to sign a contract and you are not sure which way to express the contract for GST purposes, the default should be "plus GST (if any)". If that causes issues for the sale negotiation, then seek advice from your lawyer or accountant. The old Mark Twain adage that it is easier to stay out of trouble than dig yourself out is one that should come to mind in these circumstances.

* Craig Macalister is tax principal at accounting firm Crowe Horwath. He can be contacted on (03) 211 3355.

The Southland Times