GST considerations
Question from Peter updated on 4th May 2020:
We have never before considered GST when purchasing and selling residential properties for rental. We had three properties and two have been sold (outside the bright-line period).The one we still hold is a gold mine. We have a building consent granted to build a six-unit apartment building on the site (and six separate unit titles will be created).
But we just realised there may be some benefit if we choose to register for GST now:
1. We could claim back GST for what we have spent so far in getting consents approved (separate invoices and records were well kept over the years).
2. We could claim GST for the purchase of this property and we could later claim GST for the building cost and any cost of the subdivision.
3. We do not have to return GST to IRD because we are going to hold and rent out the apartments.
We will consider engaging a professional to handle our tax issues as it seems too complex for us from now on.
Our expert Matthew Gilligan responded:
There is a relatively straightforward answer here in that if you are constructing these new apartments to rent them out residentially, then you are carrying on an exempt activity for GST purposes. This means you are not entitled to be GST registered, cannot claim GST on expenses and ultimately will not pay GST on sale. As you have pointed out in point 3, GST does not get charged on residential rental.
The quid pro quo to this is that you cannot claim GST in relation to expenses incurred in carrying on such an activity. While this produces a short-term disadvantage for you, you will be better off in the long term.
You have described the property as a “gold-mine” which I assume means you expect the end value to far exceed the cost of acquiring the land and building.
Therefore, even if we put aside the fact that you are legally not entitled to be GST registered, you are in fact better off not being GST registered (ie: a significant downside of being GST registered is that 13% of any margin you create ends up being lost when GST is ultimately paid on sale).
You are clearly a rental investor who is in the game for the long term, a strategy that I would certainly encourage. I would not compromise your tax status as a property investor (as opposed to a developer who develops for sale) by attempting to introduce this property into the GST net. I agree wholeheartedly about getting professional help – a misstep with regard to GST can be extraordinarily expensive.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.
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