Tax Bites #19

About the Author:

MURRAY McCLENNAN

Director at Tax Central
A chartered accountant and a member of the International Fiscal Association and the Society of Trust and Estate Practitioners, Murray has over 30 years experience in tax.

---

The following discussion reflects the adage that GST is 95% easy and 5% difficult.

Recently I had an interesting discussion with a local accountant. The brief summary of the facts is:

1. A couple bought a section from a developer with the purpose of building a “spec house” on the section for resale; and

2. Depending on the success of this endeavour the couple may build more houses for sale.

The accountant believed that the couple did not have to register for GST as the activity was a one- off. He added that in his experience Inland Revenue had a similar view.

Registration is only available if a person carries on a “taxable activity”. A taxable activity that:

1. Is carried on continuously or regularly; and

2. Involves making supplies to another person for consideration.

The sale of a “spec house” will be a supply for consideration, which will clearly be more than $60,000. The key issue is whether a one-off “spec house” is a continuous or regular activity.

Clearly a “spec house” is not regular in this sense if there is only one construction and sale. There would be a regular activity if a second “spec house” was constructed.

In my view the construction and subsequent marketing of a house is a continuous activity.

There is an Inland Revenue statement that provides that there is no continuous activity where a person subdivides up to three sections from his or her property on which their family home is located provided that the:

1. Person continues to live in the existing family home; and

2. Subdivision involves minimal time and effort.

The Inland Revenue statement, which reflects case law, is often cited as authority that any subdivision on a property that has an existing family home will not be a taxable activity.

There will be a continuous activity and thus a taxable activity, however, if any of the following apply:

1. The person builds a family home to live in on one of the subdivided sections and either sells or rents the section with the original family home;

2. The subdivision involves more than minimal time and effort;

3. The subdivision is of more than four sections; or

4. The subdivision is not a one-off activity.

I frequently see balance sheets with contingent liabilities for GST adjustments that have not been made. That is, the client prepares and files their own GST returns, and the accountant identifies GST errors when preparing the annual financial statements, but the client does not want to pay the GST.

If you are considering buying into an existing business, it is important to obtain an indemnity for existing tax issues. 

Murray McClennan

Director
Tax Central Ltd
027        244-5365

www.taxcentral.co.nz

---

Related Articles