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GST on housing horror stories – act now to avoid an unexpected tax bill

May 2024 - Tax Alert

By Robyn Walker & Hana Straight

For the last decade or so, the press has occasionally featured articles claiming injustices related to the application of GST on the sale of property. The horror stories normally involved someone converting a residential property into a short-term holiday rental or operating a business from home, registering for GST and claiming back GST on costs, and then being surprised that GST then needed to be paid on the sale price when the property was subsequently sold. With large increases in property values, taxpayers had found themselves with significant GST bills.

Fortunately, the law has been clarified to allow registered persons to elect certain assets outside of their taxable activity and therefore not subject to GST on sale provided input tax hasn’t been claimed and the goods were not acquired/used for the principal purpose of making taxable supplies.

What if GST has been claimed?

For taxpayers who have previously claimed back GST on the cost of an asset, the time to act is now, as there is a transitional rule in section 91 of the GST Act which must be used before 1 April 2025. These rules apply to all tangible assets, but we expect them to be used most for property.

When does the transitional rule apply?

The transitional rule applies when:

  • A registered person has previously claimed input tax credits for goods or acquired them as zero-rated supplies; and
  • The goods were acquired before 1 April 2023; and
  • The goods were not acquired for the principal purpose of making taxable supplies; and
  • The goods were not used for the principal purpose of making taxable supplies.

The critical point above is that the asset can’t have been principally used for making taxable supplies, so the rules don’t apply to property that has principally been used as short tax accommodation, but could apply to properties that had mixed uses, with the private or exempt use being the principal use.

Under the transitional rule, the person must return an amount of output tax equal to the input tax previously deducted (less any output tax adjustments already made for non-taxable use); or the nominal GST amount of the purchase price if the property was acquired as a zero-rated supply. An election must be made to the Commissioner before 1 April 2025 – we recommended this is done by making a debit adjustment in the GST return with an accompanying letter or secure mail to Inland Revenue.


The rule is best illustrated by some examples. These are replicated from Inland Revenue’s guidance on this rule:

Scott is a registered person who acquired a dwelling for $1.15m in 2022 from an unregistered person. Scott intends to use 20 percent of the dwelling (a dedicated office) to make taxable supplies for his GST-registered consulting business. He claims an input tax deduction of $30,000, which is 20 percent of the tax fraction of the purchase price.

If Scott had still expected to continue to have some taxable use of his dwelling (such as using his home office to make taxable supplies on certain days of the week), and this was not the principal purpose of the dwelling, he could choose to apply the transitional rule in section 91 for goods acquired before 1 April 2023. To apply the transitional rule, he would need to make the $30,000 output tax adjustment before 1 April 2025 and notify the Commissioner that this output tax is because he intends to apply section 91.

In 2026, Scott sells the dwelling and as he has already made output tax adjustments to return the full amount of input tax deduction he originally claimed ($30,000), section 5(16) will not apply. Instead, Scott can treat the sale as not being made in the course or furtherance of his taxable activity, … because he has applied the transitional rule in section 91.

What types of costs can be claimed without causing GST issues?

GST issues have largely arisen when GST has been claimed on the purchase price of a property (i.e., big amounts). If GST has only ever been claimed on more operational costs (e.g., a portion of rates or insurance for a home office), then there is no requirement to repay any GST. If the property is subsequently sold, the taxpayer can elect that the asset has not been part of a taxable activity and GST does not need to be returned.

The following examples are once again replicated from Inland Revenue’s guidance:

Rebecca is a registered person who acquired a dwelling that was not a zero rated supply when it was acquired. She did not claim deductions under section 20(3) for the cost of acquiring the dwelling or any subsequent capital improvements to the dwelling. Although part of the dwelling is used to run Rebecca’s taxable activity of farming, the dwelling’s principal purpose is a private residence. Rebecca claimed input tax deductions for certain overheads and operating costs, such as insurance, utilities, and local authority rates, based on the percentage that these services were used to make taxable supplies. When Rebecca sells the dwelling, she can elect to treat the sale as a supply that is not in the course or furtherance of her taxable activity (not subject to GST on sale).

Charlie has a GST-registered business hiring bicycles. Because she has run out of storage space in her retail shop, she begins to use her home garage to store some of her hire bikes. She does not claim input tax deductions for part of the acquisition cost of her house, even though it is now partly used (the garage) to make taxable supplies. Charlie claims input tax deductions for purchasing bike hooks and shelving that she attaches to her garage and uses to store the hire bikes and related equipment in her garage. These items do not form an integral part of her dwelling. Because Charlie has not claimed input tax deductions for any costs that became an integral part of her dwelling, and the dwelling was acquired and used for the principal purpose of a private residence, she can choose to treat the sale of the dwelling as not being made in the course or furtherance of her taxable activity (and therefore not subject to GST on the sale).

What next

If you think you may be eligible to use this transitional rule, we recommend you act now to validate that you can use it and undertake the necessary calculations to determine the amounts owed to Inland Revenue. The amount would become GST payable, so we would expect that Inland Revenue will be open to providing an instalment arrangement for taxpayers who need it.

1 April 2025 will be upon us in no time, so start considering this rule sooner rather than later as there will be no extensions given to this deadline.

Please contact your usual Deloitte advisor for more information.  

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