Inland Revenue has cleared up confusion on the treatment of GST for property settlements. Mike Scannell and Valerie Bland of Simpson Grierson analyse the impact of the ruling

The settlement statement is a key feature of a property sale and purchase transaction. It is prepared to determine the final settlement price to be paid by a purchaser. Inland Revenue's long-awaited binding ruling clearly sets out the treatment of GST for settlement statement apportionments.

There had been some confusion and uncertainty in the past among conveyancers as to whether apportionments (such as local authority rates) should be calculated on the GST-inclusive or GST-exclusive figure. The confusion resulted in disputes with vendors about how much money to pay on settlement, and disputes with Inland Revenue about deductions and payments.

Inland Revenue's ruling is that a GST-registered vendor must charge GST (if the supply of land is subject to GST) on the consideration, including the portion of rates payable by the purchaser. This is explained in the following typical transactions:

- Sale by a GST-registered seller to an unregistered buyer. If the supply is part of the seller's taxable activity, the apportionment of rates will be part of the consideration for the supply, and the seller will apportion on the GST-inclusive rates figure.
- Sale by a registered seller to a registered buyer (full GST). The seller will charge GST on the value of the supply (including apportionments), and would therefore apportion on the basis of the GST-inclusive rates figure.
- Sale by a registered seller to a registered buyer (zero-rated). The seller is not charging GST on the value of the supply, and therefore should apportion on the basis of the GST-exclusive rates figure to be consistent.
- Sale by an unregistered seller to a registered or unregistered buyer. There is no GST charged on the supply, and Inland Revenue states that whether the apportionment will be based on the GST-inclusive or GST-exclusive rates figure would be a matter of agreement between the parties. Standard conveyancing practice and the intention of the parties would expect that it would be done on the GST-inclusive figure.

The GST reconciliation to Inland Revenue will follow the principles in the settlement statement. A registered seller will return GST output tax on the value of the supply (including the apportionments) except, obviously, in the case of a zero-rated supply.

A registered buyer may be able to claim an input tax deduction for the GST element of the purchase price (including the apportionments), except for a zero-rated supply. This may also include the "bonus" of a secondhand goods deduction where a supply has been made by an unregistered seller, or where an exempt supply has been made by a registered seller.

The standard conveyancing practice is that when apportioning on a daily basis in the settlement statement, the outgoings and incomings for the possession date itself are the responsibility of, and belong to, the seller.

This is a general summary only and should not be taken as a substitute for specific advice.

Mike Scannell is a partner and Valerie Bland is an associate at Simpson Grierson.

Web site: Simpson Grierson
Mike Scannell email: michael.scannell@simpsongrierson.com
Valerie Bland email: valerie.bland@simpsongrierson.com
March 2001