If you’re buying and selling houses on a regular basis be careful of GST.
The Tax Review Authority recently backdated GST registration for a couple’s family trust to 1999 because they traded 11 residential properties in 12 years.
The case is reported at: Case 5/2013  NZTRA 05 TRA 019/11, 30 September 2013.
Over the 12 year period the couple bought sections, built houses, lived in the houses for a while and then sold them, some for losses but mostly for gains.
They told the Authority they had reasons in each case for selling their home such as difficulties with neighbours, noise, ill health of family members, children’s schooling requirements, concerns about build quality and so on. However the Judge didn’t find these reasons credible and concluded the couple engaged in a pattern of building houses, living in them only until they had completed all work on them and then selling them. This was a taxable activity and they had to register for GST and pay GST on their sale proceeds.
The case also concluded the couple’s Family Trust had to pay income tax on the sale proceeds.
Penalties for “gross carelessness” were imposed because the taxpayers ignored an “obvious and serious” tax risk according to the Judge.
In this case the extent of trading activity is probably towards the high end, i.e. almost one property each year. The challenge for other taxpayers is to determine just where the line is drawn.
How many times can you buy a property, do it up, live in it and sell it before you trigger the “taxable activity” test and have to pay GST? This case won’t tell you that but it will give you a steer on what factors the IRD and a court will look at.
Barrister, Director and Consultant specialising in tax, family enterprise governance and succession, helping start ups and entrepreneurial enterprises grow safely and international expert on value added tax policy and implementation.