Near the top of the first page of the Auckland District Law Society “Agreement for Sale and Purchase of Real Estate” sits the following question:
The vendor is registered under the GST Act in respect of the transaction evidenced by this Agreement and/or will be registered at settlement: Yes / No.
The answer to the question comprises a warranty by the vendor regarding their GST registration status.
A recent Court of Appeal decision, Marr v Mills, reinforced the need for the question to be answered correctly.
The vendor, Ms Marr, declared herself to be not registered for GST. Relying on this GST declaration, the Mills commenced plans to start a business from part of the property with the expectation that a GST second-hand goods deduction would help fund the set-up of the business.
After undertaking extensive planning, seeking accounting advice and getting a valuer to determine an apportionment of the property value, the purchasers became aware that Ms Marr was GST registered. Unable to claim any GST, the Mills opted not to commence business.
Subsequently, proceedings were issued against Ms Marr for a breach of warranty, with the District Court identifying a clear loss and awarding damages amounting to the expected GST refund plus interest and other costs incurred.
Ms Marr appealed to the High Court, which was dismissed, and more recently the Court of Appeal declined an application for leave to appeal, upholding the lower Courts decision.
Care needs to be taken when completing a land sale. With the surge in property valuations and property development activity, an incorrect GST declaration could prove to be a costly mistake.
Talk to us if you have doubts about any transactions you are considering.