Property problems: When to pay GST on your property purchase

Q. I am considering buying a commercial property as an investment. The vendor is registered for GST and the property has an existing commercial tenant. Will I have to pay GST on the purchase? Will I have to register for GST? Would this GST treatment be different if I purchased a residential rental property? Is there a capital gains tax if I sell the property?

A. As the property is a commercial property and the vendor is registered for GST the sale of the property to you will be a taxable supply. In that case, GST will be either nothing or charged at 12.5 per cent.

GST will be charged at 0 per cent if the commercial property is supplied as a going concern (and the parties agree in writing that it is the supply of a going concern).

It will be a going concern if the commercial property is to be sold subject to the existing tenant. You will also need to register for GST to get the benefit of this zero-rating. You could not claim a GST deduction on the purchase price, if the sale is zero-rated.

If the commercial property is to be sold without the existing tenant, GST will be payable by the vendor and the vendor would wish to increase the price by an additional 12.5 per cent on account of the GST payable.

You could claim a GST deduction on the purchase price of an untenanted commercial property if you acquired it for the principal purpose of making taxable supplies and registered for GST. This would be the case if you intended to find another commercial tenant once you purchased the commercial property.

If the property being sold was a residential rental property, generally there is no GST payable on the sale.

However, if the vendor claimed a GST deduction when the vendor originally purchased the property, the vendor would have to account for GST on the sale.

You could not claim a GST deduction on the purchase of a residential property, if it was acquired in order to rent out for accommodation - as supplies of rental accommodation are GST exempt supplies. So the price you pay for the property would need to reflect that any GST charged on the sale could not be recovered by you.

There is no general capital gains tax in New Zealand. However, gains made from the sale of land/buildings (whether commercial or residential) are deemed to be income, and taxed accordingly in certain circumstances.

These circumstances can include where the property:

* is acquired for the purpose of resale, or

* is acquired and sold as part of a business of dealing in or developing or erecting buildings on land (or is acquired by a person who has such a business and sells the property within 10 years of acquisition), or

* is acquired by a person who is associated with another person who has a business of dealing in or developing or erecting buildings on land and the property is sold within 10 years of acquisition, or

* is sold at a profit within 10 years of acquisition and at least 20 per cent of that profit is due to zoning (or possible) zoning changes, or

* gains arising from the sale of all or part of the property, where the property is developed or subdivided within 10 years of acquisition (unless the development was to enable the owner to carry on a business on the land, or in order for the owner to reside on the land or to derive rental income from the land), or

* a major development involving significant expenditure takes place more than 10 years after acquisition (only the development profit is taxed in this case).