GST implications

As to “separate supply” in the current Agreement for Sale and Purchase of a Business.

Coffeys provide this information as a guideline only, all parties should seek professional legal and tax advice for confirmation of this interpretation.

In the latest edition of the Agreement for Sale and Purchase of a Business, Schedule 3 has been removed and warnings included in the document as to potential GST implications of residential accommodation forming any part of the sale. The now removed Schedule 3 included a declaration by the purchaser that they intended to use part of the property as a principal place of residence. It was silent on the implications of that however.

The Real Estate Institute of New Zealand has suggested the following clause, which is now to be included in the Further Terms of Sale of the Agreement (for Business Agreements) as follows:

SPECIAL GST CLAUSE DEALING WITH RESIDENCE – Clause 12 of this Agreement is substituted for the following:

 20.1     If the sale evidenced by the Agreement includes any interest in land, and

1. any part of the land is being used as a principal place of residence at the date of this agreement; and
2. that part is still being so used at the time of supply under this Agreement; then the supply of that part will be a separate supply in accordance with section 5(15)(a) of the GST Act.

20.2      If the Purchaser warrants, or the Purchaser expects any nominee to warrant that at settlement:

1. they will be a registered person; and
2. they intend to use the land for making taxable supplies; and
3. they intend to use part of the land as a principal place of residence for themselves and/or for any person associated with them under section 2A(1)(c) of the GST Act (persons connected by blood relationship, by marriage, civil union or de facto relationship, or by adoption); and
4. the part is the same part as that being used as a principal place of residence at the time of supply under this Agreement; then the relevant references under this Agreement to ‘the supply’ shall mean the supply under this Agreement excluding that part of the land being used as a principal place of residence.

So, what are the implications of this?

5(15)(a) of the GST Act states:

When either of the following supplies are included in a supply, they are deemed to be a separate supply from the supply of any other real property that is included in the supply:

1. a supply of a principal place of residence:
2. a supply referred to in section 14(1)(d)

Section 14(1)(d) states supplies that are exempt from GST include:

The supply, being a sale, by any registered person in the course or furtherance of any taxable activity of—

1. any dwelling; or
2. the reversionary interest in the fee simple estate of any leasehold land,—

that has been used by the registered person for a period of 5 years or more before the date of the supply exclusively for the making of any supply or supplies referred to in paragraph (c) or paragraph (ca):

c)       the supply of accommodation in any dwelling by way of—

1. hire; or
2. a service occupancy agreement; or
3. a licence to occupy:

ca)  the supply of leasehold land by way of rental (not being a grant or sale of the lease of that land) to the extent that that land is used for the principal purpose of accommodation in a dwelling erected on that land:

We were not aware of any issues with GST on the sale of going concern accommodation businesses in recent times, so were initially confused as to why such strong warnings were included in the new agreement.

In conclusion, it would seem that the residential portion of the sale is exempt from GST, whereas the balance of the sale, being a taxable activity, is zero rated for GST. This may explain why we have not heard of any GST issues arising on settlement and have never had a request for a theoretical apportionment as to the value of the residential component.

Kelvyn Coffey

Principal

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