There are claims property traders are increasingly trying to dodge paying GST but the Inland Revenue Department says it is watching and taking quick enforcement action. Photo / John Weekes
There are claims property traders are increasingly trying to dodge paying GST but the Inland Revenue Department says it is watching and taking quick enforcement action. Photo / John Weekes
Property traders and developers are reportedly dodging tax as authorities have found $150 million in unpaid GST and income taxes this financial year.
Traders are dodging GST as a way to buy and sell new-build homes on the cheap, an insider says.
A tax adviser warns would-be tax dodgers that they underestimate Inland Revenue at their own peril.
Property traders are illegally dodging GST payments as a way to buy and sell new-build townhouses on the cheap, an industry insider says.
It comes as the tax dodge strategy is in the Inland Revenue Department’s cross-hairs after it found developers, property traders and investors had accumulated $150 million inunpaid GST and income taxes this financial year.
A small developer told the Herald that by avoiding paying tax, property traders have less costs and can sell at lower prices than others following the law.
These artificially low selling prices were helping put small developers - who are desperate to find buyers in the tough housing market - out of business, the man said.
“I‘m happy to just let go of the properties and break even,” he said.
“It’s not worth the stress to go through this.”
He claimed it was an open secret that developers in trouble, who need to sell fast to break even or minimise losses, can seek out traders to buy their properties.
Tom Rawson, a developer and co-owner of Ray White Manukau, said there is an oversupply of new-builds on the Auckland market now and a lack of buyers.
His development team had also recently sold units at their newest project 15% below what they’d originally hoped due to the current market conditions, he said.
Property traders were trying to take advantage of distressed developers by offering them low-ball purchase prices, an insider says.
How it works
The small developer gave an example price for a new townhouse to show how he believes the traders are trying to “scam” the system.
Take a new-build with an expected $800,000 sale price, he said.
The price is set so that it covers all costs, such as $105,000 in GST payments made during its construction, such as on bills from contractors.
If the developer sells to a regular home buyer, then the home buyer would pay $800,000 from which the developer would set aside $105,000 GST to pay to the government.
However, if he sells to a trader, the sale can be done in what is called a zero-rated transaction because both his company and the trader’s company are GST-registered.
That means he would sell the house to the trader at $695,000 (which is $800,000 - $105,000 in GST).
Under this arrangement the obligation to pay the $105,000 GST shifts to the trader.
To make a profit and pay the GST, the trader would need to flip the home to a regular home buyer willing to pay more than $800,000.
However, increasingly some traders are on-selling for $750,000.
The idea is they pocket the $55,000 gain and then try to dodge paying the $105,000 GST, such as by liquidating their company and leaving no assets behind for the taxman to seize, or by trying to hide the GST transaction, the developer said.
It’s similar to tradies using cash payments to avoid paying GST, the small developer said.
This has a flow on effect to put added pressure on other developers because those planning to pay the GST and sell for $800,000 are now in competition with tax dodgers selling for $750,000, the man claimed.
Traders were also taking advantage of distressed developers and the tough market in other ways, he said.
That included by inserting clauses into flip deals allowing them to put down lower deposit payments or walk away from purchase deals penalty free if they cannot find another buyer to flip the homes to.
They’ve got “no risk because they only go unconditional to buy once they have got another buyer agreeing to buy it unconditionally”, the man said.
There is an oversupply of new-builds in Auckland and a lack of buyers, Ray White Manukau co-owner Tom Rawson says. Photo / 123rf
IRD ‘putting the foot down’
Despite the apparent increase in attempts to dodge GST, tax adviser Terry Baucher warns the taxman is likely watching.
Inland Revenue has been armed with sophisticated tools for the past 10 years, he said, but has stepped up its efforts after being given an additional $29m in the last Budget to hunt tax avoidance.
That has included a focus on property trading hotspots and a range of automated tools and analysis that raise alerts.
That could include instances, such as when a property changes hands multiple times in a short period of time.
The IRD was also now much faster in taking enforcement action, he said.
“You underestimate Inland Revenue at your peril,” he said.
The IRD said this month it had found $150m in unpaid GST and income taxes.
It linked about $70m of that to developers and about $60m to property traders and investors.
“We’re seeing a growing number of issues involving companies or individuals making multiple land transactions where GST needs to be correctly accounted for,” it said in relation to property trading.
“Sometimes they are changing the intended use of the land or frequently transferring ownership between entities with or without GST registrations.
“These actions appear to be attempts to circumvent their GST obligations.”
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