It’s surprising how often GST and non GST assets are thrown together in the one entity. Whilst certainly permissible, it can add some GST complexity, which is why most advisers suggest keeping GST and non GST assets in separate entities.
To illustrate, suppose the trustees of a GST registered trust that owns a commercial rental property acquire a residential property. If the new property is leased on a residential tenancy, clearly the residential property is not part of the Trust’s taxable activity and therefore is not in the GST net.
To keep it outside the GST net, the Trustees should ensure they do not claim any GST on expenses relating to the residential property, and that its use does not change from exempt to taxable.
This could happen if say, the use of the property switches from residential rental to a Bed and Breakfast operation – the property will be classified as a commercial dwelling, and a taxable supply. The property will be dragged into the GST net due to the Trust being GST registered and the BnB operation being a taxable supply.
However, assuming the trustees instead continue to lease the property on a residential tenancy, when the Trustees come to sell the property, it will be important that they complete the GST part of the Sale and Purchase Agreement correctly.
On the front page of the standard ADLS/REINZ sale and purchase agreement is a statement that requires a Yes or No answer. It states:
The vendor is registered under the GST Act in respect of the transaction evidenced by this agreement and/or will be so registered at settlement. Yes/No
The trustees must answer No, since the dwelling is not part of the Trust’s GST taxable activity, and the trustees are not GST registered in respect of the transaction – the sale of the residential property. The trustees as vendors should not complete schedule 2.
If the trustees circled Yes to the question on page 1 in error, there would be no issue for a non GST registered purchaser since the sale price will be unaffected. If, however, the purchaser is GST registered, the purchaser would normally be entitled to a GST second-hand goods input claim but would not be on notice they could make the input tax claim. If a later GST claim is made and for some reason Inland Revenue reject it, the purchaser’s option is to make a legal claim against the vendor under the warranty in clause 14.1 (where the vendor warrants they have completed page 1 regarding their GST status correctly) for the amount of the input tax not received.
