Chapter 5 - Zero-rating of land rules
Allowing inputs to registered persons subject to the domestic reverse charge
5.1 The GST Act provides for what is effectively a “domestic reverse charge” in circumstances when a person purports to be registered in order to zero-rate a land transaction, when they are in fact not registered. The effect of the domestic reverse charge is that the recipient is treated as the supplier, so has to return GST on the sale. This outcome was designed to prevent a purchaser representing that they are GST registered to take advantage of the lower price that might be available if the land was zero-rated.
5.2 Mechanically, this outcome is achieved through the following provisions:
- When a transaction is incorrectly zero-rated, the recipient is treated as having supplied the relevant goods and services to themselves (section 5(23)).
- On the assumption that the recipient is not otherwise a registered person, the recipient is treated as being registered from the date of the supply (section 51B(4)).
- The person is then denied the ability to claim an input tax deduction in respect of the supply (section 20(4B)).
- Once the tax is accounted for, the person may apply to be deregistered (section 51B(5)).
5.3 As recognition of the fact that the person might later use the land as part of a taxable activity, the proviso to section 20(4B) allows inputs to be claimed if the person “later becomes a registered person… and uses the relevant goods for making taxable supplies”.
5.4 What is not catered for under section 20(4B) is the fact that the purchaser may already be a registered person and the transaction may have been zero-rated as a result of a genuine error.
Company A contracts to sell Company B various assets, including an interest in land. Both parties are GST-registered and make only taxable supplies. For GST purposes, it is not completely clear whether the transaction involves one or two supplies. If there is one supply, it should be zero-rated. However, if there are two supplies only the one containing the interest in land should be zero-rated.
The parties treat the transaction as a single supply, but it is later determined that this treatment was incorrect.
5.5 Under a strict interpretation of the relevant provisions, section 5(23) would treat Company B as making the relevant supply to itself, but section 20(4B) would deny an input deduction – the proviso would not apply because Company B is already registered, rather than later becoming registered. This is despite the fact that Company B is using the relevant goods for making taxable supplies.
5.6 We consider that the proviso in section 20(4B) should be extended to cater for both a person that later becomes registered and a person already registered (in both cases only to the extent that they use the goods for making taxable supplies). Although it would be undesirable for the domestic reverse charge to become the default position for transactions where the parties are unsure of the legal status of the supply, the approach will provide the necessary certainty should an unintended error in the treatment arise.
Suggested application date
5.7 Given the proposed change would reinforce existing policy, and is concessionary to taxpayers, we consider it should have an effective date of 1 April 2011.
Clarifying section 11(8D)
5.8 It has been suggested that under the current wording of the Act, all assignments or surrenders of interests in land should be zero-rated – even if the other requirements for zero-rating land transactions are not met.
5.9 Section 11(8D) provides that:
For the purposes of the zero-rating of land rules,—
(a) a supply that is an assignment or surrender of an interest in land, is a supply chargeable with tax at 0%:
5.10 The section is designed to clarify that assignments and surrenders of interests in land are “land” transactions for the purpose of the zero-rating rules. The policy intent of this section is that it should apply when the requirements for the zero-rating of land rules are met.
5.11 However, we are aware that the section could be interpreted more widely. In particular, it could be read to mean that all assignments or surrenders of an interest in land should be zero-rated even if, for example, the recipient of the supply is not GST-registered.
5.12 We consider that the words “chargeable with tax at 0%” should be replaced with “of land”. This would clarify that the assignment or surrender is a land transaction. Whether it should be zero-rated would then be determined on whether the requirements in section 11(1)(mb) are met.
5.13 It has also been suggested that the wording of section 11(8D) requires leases to be zero-rated when there is no extra payment made in advance, or contemporaneously, with the supply being made. We suggest that the provision should also be clarified to reflect the policy intent that standard commercial leases are not zero-rated unless there are significant lump-sum payments that pass under the agreement.
Suggested application date
5.14 Section 11(8D), recently enacted, is itself a clarification amendment, recently introduced with retrospective application to 1 April 2011. As this is a further clarification and does alter the intended scope of the provision, we therefore consider that this change should have the same effective date.
Procurement of a lease
5.15 In some transactions when a vendor/lessee is selling its business, the lease will not be assigned. Instead, as a condition of the business being sold, the vendor will procure that the lessor will enter into a new lease with the purchaser. Part of the consideration for the sale will be for this procurement or to compensate the vendor for fees payable for the early termination of the existing lease.
5.16 Because a new interest in land is created through this transaction (the lease between the lessor and the purchaser) there is no transfer of an interest in land between the vendor and the purchaser. Any consideration payable in respect of this supply will therefore not be subject to the zero-rating rule, even though the practical effect of the transaction is similar to an assignment of a lease.
5.17 We consider that payments for the procurement of a lease should be added to the list of “land” transactions in section 11(8D), and amended in the manner referred to above. This would ensure that such transactions are zero-rated, subject to the requirements of section 11(1)(mb) being met.