What do you do about GST when you have purchased Second-Hand Goods?

It’s an area where we have seen increasingly more problems and issues for many of our clients, particularly around land.

A GST good is where someone buys a piece of property or asset and they are GST registered but they are buying it off someone that isn’t GST registered. Normally you would think that you cannot claim GST back but you actually can.

The first trick is that even if the vendor is registered on an invoice basis you can only claim GST back on a second-hand good on a payments basis. So it is only as you pay for it even if you are on an invoice basis.

The second thing is that if you buy a second-hand good and then export it, the export of that good isn’t GST zero-rated. So an example is if I went and bought a second-hand yacht as a GST registered person and then sold it overseas when I sell it I am going to have to claw back that GST input that I got.

The third situation to be careful about is distributions from trusts and things like that. We favour actually selling assets at a market value and then distributing the debt for the consideration rather than trying to distribute the asset. That does cause problems and we have seen several negligence claims against accounting firms where that has not been done well.

The one I really want to talk to you about though is land. Most second-hand goods issues arise around someone buying typically residential land, but not always, from a GST unregistered person. When you buy land, as we noted, you can only claim it back on a payments basis even if you are on an invoice basis, so don’t claim it largely until settlement. You can claim it back on the deposit.

However, where it gets really tricky is when you buy land off an associated person. Now the definition of an associated person is different in the GST Act than in the Income Tax Act. I am not going to take you through it here but you will need to be aware of that.

When an associated person second-hand goods transaction takes place, the purchaser’s GST input on the basis they are registered buying off an unregistered associated person is limited to the lesser of the GST content of the cost, the open market value or the actual GST paid by the associated vendor.

So if the associated vendor has got a residential section and sells it to a property developer and they didn’t pay GST when they bought it, ie it was a private transaction when they bought it then the purchaser is not going to get any GST back in those situations. This can be problematic.

Let’s take an example,  Fred owns a residential rental property, he has owned it for a number of years, let’s assume it is somewhere like Glen Innes in Auckland where could probably put 8 terraced houses where you originally had a single residential house.
Fred is not GST registered, he originally bought the house privately and he has owned it for a number of years. The first thing is that today’s market value for the land is a lot higher than what Fred paid for it. From an income tax viewpoint, Fred wants to sell it because he wants to crank up the input price and avoid problems under section CB12 being work of a minor nature commenced within 10 years. So by selling it, he can take a market value input on the land, obviously, if he had owned it more than 10 years we would be in CB13 and he would get a market value anyway.

The problem with that is because Fred is not registered for GST he is selling it to an associated company or trust that is GST registered and is going to be a property developer the associated persons rules kick in. Since he didn’t pay any GST when he bought the property the associated purchaser, the developer, cannot claim any GST back at all. So this is problematic.

We end up having to do some maths to work out which gives us the best net answer. Are we better to leave the land in Fred’s name and effectively get a GST input on the cost paid and use cost for income tax purposes? Or do we sell it to an associated party, crank up our value, get a higher input for income tax but get no GST input for the land purchased, sure you can claim GST on the costs of development but you will still have to charge GST on the whole of the sale. It comes down to a mathematical calculation to see what works out. Again, it is quite hard to break association in these situations but that is also worth looking at.

GST on Second-Hand Goods is a tricky area and we do see a number of cases where CA’s and lawyers have had problems with it and have not remembered about the GST secondhand goods associated persons limitations.

Be careful out there and just tuck that one in the back of your head, you don’t need to remember all of this but you just need to remember that if there is a transaction between associated parties and if the vendor is not GST registered and the purchaser is, you are going to have to be very careful around that.

If you do need some clarity around your situation then please contact Nigel Smith (nigel@covisory.com), +64 9 307 1777 or fill out our contact form below.