Waikato Business News September/October 2017

52 WAIKATO BUSINESS NEWS September/October 2017
GST and property
transactions
Deciding whether to buy or sell a property
is the biggest financial decision many
people make, so overlooking the GST
implications of property transactions can
be an expensive mistake.
When entering into a
property transaction,
both purchaser
and vendor need to consider
whether or not they should be
registered for GST in respect
of the transaction. Determining
this ultimately comes
down to whether the person is
completing the transaction in
the course or furtherance of a
“taxable activity”.
The GST Act defines a
“taxable activity” as any activity
which is carried on
continuously or regularly and
involves, or is intended to involve,
the supply of goods and
services to another person for
a consideration. Importantly,
the activity does not have to
be carried on for the purpose
of making a profit, hence a
person could be carrying on
a “taxable activity” for GST
purposes even though the activity
would not constitute
a “business” in the ordinary
sense.
In relation to property
transactions, the concept of a
“taxable activity” is particularly
relevant where the property
is purchased and re-sold
in a short period of time, especially
if subdivision or development
work is involved.
The landmark case on what
amounts to a “taxable activity”
in relation to property is
the Court of Appeal’s decision
in Newman v C of IR.
Newman was a GST registered
builder who completed a
one-off subdivision involving
splitting a single section into
two, including some electrical
and drainage work. The IRD
ruled that the subdivision and
subsequent sale of the property
was a “taxable activity” and
assessed Newman for GST on
the sale. The case ended up
going all the way to the Court
of Appeal and the Court overturned
the IRD’s assessment,
ruling that the subdivision
could not be regarded as a
continuous or regular activity
and therefore Newman was
not carrying on a “taxable activity”
in respect of the property.
In their judgment, the
Court of Appeal took an overall
view of the activity to determine
that it was not repeated
continuously or regularly,
i.e. it was a one-off. The minimal
development work was
also considered relevant.
The IRD were forced to
change their stance as a result
of the Newman decision,
releasing a policy statement
expressing the view that a subdivision
of land into two, involving
no development work,
will not by itself amount to a
“taxable activity”. Although
the statement did note that a
“taxable activity” would be
more likely to arise if a greater
number of lots were created,
the development work was
more extensive, or there was
a greater commitment of time
and money to the project.
Despite the established
principles, there appears to be
a muddying of the waters in
recent times as to the meaning
of “taxable activity”. The IRD
are now increasingly challenging
the GST status of un-registered
vendors when the purchaser
makes a second-hand
goods GST claim in respect of
the property purchase. A second-hand
goods GST claim
is generally available when
a GST registered purchaser
buys from an un-registered
vendor.
In some cases it appears the
IRD are alleging a “taxable
activity” exists in simple buy
and sell transactions within a
short time frame. Conversely,
we sometimes see situations
in which the IRD will seek to
deny GST refunds on the basis
that the taxpayer does not conduct
a “taxable activity”.
The confusion around what
comprises a “taxable activity”
was recently exacerbated by
the High Court in the recent
case of YL NZ Investments
v Louise Ling. The case involved
a GST registered purchaser
successfully claiming
a breach of warranty by the
vendor, as the vendor had
warranted in the sale agreement
that she was not GST
registered. But she was retrospectively
registered by the
IRD after the transaction was
completed.
While not directly relevant
to the issue in the case,
the Judge expressed the view
that the vendor was “clearly
carrying on a taxable activity”
when she had merely bought
and sold a property in a short
period of time. The comment
directly contradicts both the
Newman principle and IRD’s
policy, under which a one-off
buy and sell transaction is not
enough for a “taxable activity”
to arise.
The IRD’s basis for deciding
the vendor had a “taxable
activity” is not known,
although hopefully they considered
more than the fact the
property was bought and sold
in quick succession.
The YL NZ Investments
case also highlights the onus
on vendors to ensure they
correctly state their GST status
on the sale and purchase
agreement, or include an ap-
TAXATION AND THE LAW
> BY HAYDEN FARROW
Hayden Farrow is a PwC Executive Director based in the
Waikato office. Email: hayden.d.farrow@nz.pwc.com
Checking your IT provider’s credentials
propriate contractual remedy
in the event that their GST status
is overturned by the IRD.
To avoid an unexpected
GST bill or lawsuit, vendors
and purchasers should be fully
aware of the GST implications
of every property transaction
they enter into and take steps
to ensure they are appropriately
protected in the event their
GST status is challenged by
TECH TALK
> BY DAVID HALLETT
David Hallett is a director of Hamilton software specialist Company-X,
design house E9 and chief nerd at Waikato Need a Nerd.
Is your IT provider a member
of IT Professionals
New Zealand?
ITPNZ, as it is known, is
the IT professional body in
New Zealand. Membership
requires individuals to sign
up to a Code of Professional
Conduct, and provides them
with access to a Professional
Knowledge Curriculum designed
to upskill them.
Using a member of the
institute for your IT needs
ensures that your IT provider
is required to act professionally
and ethically, and is also
a professional who will be
judged by their peers if they
do the wrong thing by their
client.
The institute is a community
of IT professionals who
care deeply about professional
practice in IT. The institute
helps develop its members,
sets standards and recognises
those IT professionals in New
Zealand who aspire to excellence,
and works as the voice
of the IT profession to government
and others.
The code ensures IT Professionals
NZ members provide
the best possible service
to their clients, regardless of
their specialisation.
Complaints against ITPNZ
members are referred to the
institute’s Professional Conduct
Board which will investigate
the complaint through a
hearing.
If the IT professional is
found to have committed a
breach of the code a penalty
will be handed down by the
board.
If the hearing uncovers
significant criminal or civil
wrongdoing the IT Professionals
NZ National Council
may refer the matter to police
through a formal complaint, or
start other legal proceedings.
Things change very quickly
in the technology space,
and the institute has acknowledged
that by forming the
Professional Practice Working
Group. The new working
group is reviewing the code
and curriculum, and will make
recommendations on other
professional practice guidelines
that could be added.
We, at Company-X are primarily
engaged in software
development for a range of
clients big and small. Mostly,
we start new projects
from scratch, but sometimes
we inherit projects from new
clients, after they have had a
sub-optimal experience with
another software developer,
often based overseas.
This is one of the reasons
IRD.
The comments in this article
of a general nature and
should not be relied on for
specific cases. Taxpayers
should seek specific advice.
we believe that this institute
led review is such important
work. This is not just a company
sentiment, but we have
actioned our commitment
by freeing up staff who were
selected to participate in the
review. One of them recently
flew down to Wellington for
the day, as part of the review
process, and there will be
more trips as the project continues.
Next time you get someone
in to meet your IT needs,
check to see if they are a
member of the Institute of IT
Professionals.
Disclaimer: David Hallett
is chair of the Hamilton
branch of the Institute of IT
Professionals.
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