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.

Examples

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

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:

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.