GST & RENTAL PROPERTIES
Is There GST In The Sale and Purchase Agreement?
“We frequently encounter inquiries regarding the inclusion of a Goods and Services Tax (GST) component in a Sale and Purchase Agreement for a rental residential property, as well as whether GST must be claimed on purchases made for the property.
The response to both inquiries is a definitive ‘no.’ Why is this the case? It’s because residential rent falls under the category of a ‘GST exempt supply’ of services.
What Is An Exempt Supply?
An ‘exempt supply’ refers to goods and services that are not liable to GST and thus do not need to be reported in your GST return. In the context of rental residential properties, this exemption is applied because such transactions are considered essential services rather than commercial goods or services subject to GST. Consequently, there’s no GST component involved in the Sale and Purchase Agreement for these properties, nor is there a requirement to claim GST on purchases made for their maintenance or improvement. This distinction simplifies the financial processes involved in residential property transactions and ensures clarity regarding tax obligations in this specific sector.”
Inland Revenue Guidelines on GST
IRD give these guidelines:
- GST can’t be charged on the rent for a residential dwelling. A landlord can’t claim any GST on dwelling expenses, such as maintenance, rates and insurance.
- If a residential dwelling is sold as part of a taxable activity, and it was rented for at least five years beforehand, the sale is an exempt supply.
- If a property developer acquires a property for the principal purpose of making a taxable supply and then subsequently rents the property out, a change of use adjustment may be required.
Why You Need To Be Careful
Property investors must understand how input and output tax credits work. Input tax credits allow GST-registered investors to claim back the GST they paid (if applicable) when they purchased a rental property. For GST-registered buyers, buying a property off a GST-registered seller means that the sale is zero-rated for GST i.e. none is paid by the seller and none claimed by the buyer. But, if the property in question is sold to a non-GST registered buyer, then there will be GST to pay (output tax) to IRD.