GST on NZ property depends on the nature of the property acquisition. GST is an indirect tax, and as such it is treated separately from income taxes, and its imposition is contingent upon the purpose of the property acquisition. There are 4 types of property buyer:
1. Home buyer - buying for residence or occupancy, say home or holiday house. Under the GST Act an home investor is exempt from GST, and need not register for GST, in fact they can ignore it, but they will nevertheless have to pay GST on costs associated with their purchase, e.g. Conveyancing.
2. Property trader - flipping property for capital gain. Property traders will confront GST upon sale of the property unless they can demonstrate that they did not intend to buy it for re-sale. If the property is purchased for on-sale, the buyer can claim back the GST. Refer to the 2nd hand goods provisions. of the Act Refer to the Inland Revenue website for more info.
3. Property investor - holding property for a yield investment return. A further distinction is made here between residential and commercial property investors. There is no GST on residential property, but there is on commercial property.
a. Residential property investors: The investor can claim GST as a management expense, thus as a deduction on their income tax return. With commercial property, GST is payable if the gross annual rental income exceeds $40,000. If the income is less than $40K, then GST registration is optional. You will need to decide upon two methods of payment, whether you use the payment method or invoice method. The payments method, which applies to actual transactions in the period, is the most common method for commercial investors.
b. Commercial property investors: If you are a commercial investor there is another concept - zero rating - that is important to understand, however this is beyond the scope of this blog. Ivestors in serviced apartments need to take particular care.
4. Property developers need to pay GST at the time of settlement, which is deemed to be at the point of settlement. If the developer's turnover exceeds $1.3mil, they must apply the invoice method. Developers expecting to claim a GST deduction need to demonstrate an ongoing pattern of property development. An adjustment is made for developers who cannot sell the property, which allows them to pay GST on the rented portion of the property (refer to (section 21 of the Act) or any portion occupied by them.
The distinction between being a property investor and trader depends on your motives for buying the property. A trader seeks profit, and pays income tax on it. An investor seeks rental yield and pays tax on it at the marginal tax rate. There is no capital gains tax as an investor because any gain is considered incidental or unexpected. A trader however expects to make a gain, so they will pay capital gains tax on that profit. Traders can refer to sections CB5 and CB21 of the Income Tax Act. The onus of proof is on the buyer (not the tax office) to prove their intent for purchasing a property.
1. ‘Buying NZ property’ by Andrew Sheldon – buy here for residential investors
2. 'Property Tax - A NZ investor's guide' by Mark Withers – buy here.