Harcourts concerned some buyers may get GST shock

Harcourts CEO concerned some buyers may get GST shock

16 September 2010: Harcourts New Zealand CEO Hayden Duncan says he is concerned some property buyers may be in for a shock when GST increases to 15% on 1 October.

“Some buyers may not be aware that if they have entered into a contract on a GST-inclusive basis with a GST-registered seller who is responsible for paying GST on the sale, then the seller is entitled to increase the sale price to include GST at 15% if the deal is settled on or after 1 October when GST increases to that amount,” Mr Duncan says.

“In some cases this could have a significant impact on the value of the transaction, and if loans have been approved strictly to the level documented in the contract then purchasers will have to come up with the extra GST from somewhere else.”

By way of example he explains that if a non-GST registered purchaser has a contract with a developer to purchase a dwelling for private use off the plans for a specific GST-inclusive price subject to the title being issued and that condition isn’t met until after 1 October, the Goods and Services Tax Act allows the developer to add to the purchase price the extra GST that they are required to pay – without negotiation, unless specifically excluded under the contract.

Mr Duncan says he is highlighting the issue due to concerns for unsuspecting buyers.

“We are not getting at vendors, who we are well aware will not be making a gain out of doing this and in some cases will absorb the GST increase themselves, but we are concerned some buyers will not be aware of the situation and will get a shock in due course,” he says.

Mr Duncan says buyers or potential buyers who have or are negotiating GST-inclusive contracts with GST-registered vendors and who may be affected should review the terms of their contract, and if they could be affected they should seek independent, specialist advice.

As he explains, for GST purposes the important date to recognise for any transaction is the “time of supply”, which is usually deemed as being the earlier of either the time an invoice is issued, or the time any payment is received.

“The time of supply is difficult to determine when it comes to real estate contracts though, and given there is a GST increase occurring on 1 October, we are encouraging buyers who may be affected to seek independent advice.”

As he notes, determining the “time of supply” with regards to buying and selling real estate can be difficult because a contract itself is not considered an “invoice”, only a settlement statement is, and for a range of legitimate reasons such a document may not be issued until long after a contract is signed.

In addition even if a deposit is paid it does not amount to a “payment” for GST purposes if the contract is conditional and the payment is held in trust by a stakeholder.

“Obviously with a GST increase pending the determination of whether the ‘time of supply’ is before or after 1 October will impact the amount of GST that needs to be accounted for, and therefore it’s in the interests of buyers who may be affected to ensure they get specialist advice prior to 1 October.”

ENDS

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