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BUYING A LIFESTYLE BLOCK GST REGISTRATION - YES OR NO? This article first appeared in our Napier office's regional newsletter For buyers of lifestyle properties the decision to register for GST or not is significant. Three key issues need to be considered: 1. The cashflow advantages of registration both initially and throughout any development of the property. 2. The hassles and cost of compliance with GST legislation and returns. 3. The eventual cost when deregistration takes place. There certainly can be a significant cashflow benefit at the time of purchase if the vendor is not registered for GST and the buyer is registered eg: (say a 2 HA property of bare land is purchased for $180,000 - in this case a GST claim can be made for one ninth of the purchase price of the taxable supply which is $20,000). Initially to be able to claim this amount back is very tempting. In addition GST on all future costs of development and running the property (excluding exempt suppliers) can also be claimed. The right to register for GST The right to register for GST depends on whether the person is or will carry on a "taxable activity". Taxable activity is defined as: "Any activity which is carried on continuously or regularly by any person, whether or not for a pecuniary profit, and involves or is intended to involve, in whole or in part, the supply of goods and services to any other person for a consideration; and includes any such activity carried on in the form of a business, trade, manufacture, profession, vocation, association, or club". This definition is different from the business test definition for income tax purposes. Pecuniary profit is not a requirement for a GST taxable activity so long as a taxable activity is undertaken. GST voluntary registration can take place even if the business turnover is below the GST registration threshold of $40,000. If the property being purchased has a dwelling on it no GST claim is available in respect to the cost of the dwelling and curtilage (house, section, garden, garage, driveway etc.) The downside of GST registration Now for the less desirable aspects of GST registration. Firstly there is the ongoing hassle and cost of implementing GST returns, sometimes when there are very few transactions in any particular GST return period. One must either study the intricacies of GST or pay an accountant to undertake this work which in some cases can be a reasonably high cost relative to the earnings from the property. Furthermore if the property is later sold or prior to this the frustration of GST preparation results in the owner deregistering the activity for GST purposes, a significant GST tax cost can arise. In the latter case of deregistration GST representing one-ninth of the market value of the retained business assets retained must be paid to Inland Revenue without a corresponding cash flow becoming immediately available from such GST deregistration to assist with GST payment. In effect a "notional" sale takes place to oneself. A proper valuation of the business assets is required to support the GST payable (ie: valuation of all the business assets including land, tractor and plant, livestock etc). The same situation applies on a sale to an outside party. In most instances a purchaser will not be (nor wish to be) registered for GST (being a lifestyle purchaser) so GST will become payable on the sale price of all of the business assets. Using the earlier example to ascertain the position assuming the property has been owned for a number of years and has doubled in value the GST payable would be $40,000 (one ninth of $360,000) plus GST on any other business assets accumulated since purchase. A further issue to consider is that during the GST registration period GST must be paid on any income from the property (ie: livestock, fruit etc;) which could impact on the net cash flow earned from such activities. Conclusion
Fred Girvan Contacts
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