Waikato Business News November/December 2020

WAIKATO BUSINESS NEWS November/December 2020
61
GST on property – Yes or no?
The front page of the standard ADLS Sale
and Purchase of Real Estate Agreement
includes the question:
“The vendor is registered
under the GST Act in
respect of the transaction
evidenced by this Agreement
and/or will be registered at settlement.
Yes / No”
The question and answer
comprises a warranty relating
to the vendor’s GST registration
status. As a factual point
it should be easy to answer
correctly. But, in another
example of problems seen over
recent years regarding the GST
treatment of land transactions,
the warranty clause was the
subject of a High Court judgement
dated 12 November 2020,
in the case of Marr v Mills.
Ms Marr sold a property to
the Mills at auction for $1.45m
(inclusive of GST). The property
comprised a mix of residential
and commercial buildings.
The Mills intended on
becoming GST registered for a
planned business venture to be
operated from the commercial
part of the property.
Because the vendor
answered ‘no’, they were not
GST registered, the purchaser
expected to be able to make a
second-hand goods deduction.
This would be based on the
amount paid for the commercial
part of the property and
use the GST refund as working
capital.
As it turned out, Ms Marr
was registered for GST. The
Mills sought professional
advice, which confirmed
that if both the vendor and
purchaser were GST registered,
the transaction would
be ‘zero rated’ and the Mills
could not claim a GST refund.
The purchasers decided not
to pursue their planned business
venture, on the basis that
financially they could not take
further risk setting up the businesses
without the GST refund.
Instead, the property was subdivided
to sell the commercial
premises with road frontage -
ultimately no taxable activity
TAXATION AND THE LAW
> BY HAYDEN FARROW
Hayden Farrow is a PwC Partner based in the Waikato office.
Email: hayden.d.farrow@pwc.com
was undertaken.
The Mills, however,
asserted ‘breach of warranty’.
They argued that regardless
of whether a taxable activity
occurred, their ‘intention’ to
undertake it and the loss of
a ‘prospective’ benefit were
sufficient to support a viable
GST refund that they could not
make.
Ms Marr argued an intention
to pursue a business was
insufficient to support the
Mills’ eligibility to register
for GST. Without registering,
a GST refund could not
be claimed by the purchasers
on the property’s acquisition.
Whether a business venture
was undertaken or not was
contingent on other factors.
The District Court decided
in favour of the Mills. The
case was appealed to the Auckland
High Court where it was
dismissed. An amount was
awarded to the Mills equivalent
to the GST refund on
the property transaction and
related expenses.
While the vendor argued to
undermine the lack of certainty
of the benefit to the purchasers,
the Court noted that this does
not exclude the prospect of a
benefit. The Mills’ intentions
could be corroborated by their
acquisition of collateral for
the business and post-auction
instruction for the value of the
property to be apportioned for
the purpose of a GST claim.
These actions were all taken
by the Mills prior to notice of
Ms Marr’s breached warranty.
Therefore, the actions of the
Mills were deemed neither
speculative nor opportunistic.
A ‘prospective’ benefit was
denied in this situation because
the purchasers were not in a
financial position to take further
risk to set up the business
venture without the GST
refund. The GST refund was
quantified as the value of the
loss to the Mills due to a failure
by Ms Marr to uphold the
warranty stated in the sale and
purchase agreement.
The case has once again
brought to light the problems
that can occur in relation to the
GST treatment of land transactions.
The comments in this article
of a general nature and should
not be relied on for specific
cases. Taxpayers should seek
specific advice.
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