Second hand goods rule
Question from pritesh updated on 13th November 2017:
I purchased a zoned commercial, which had 3 flats and 3 commercial in 2016. The property was purchased from an unregistered person.
I did not claim GST on the purchase price, however i paid GST on the commercial rental, plus claimed on deductions for the commercial side.
The council deemed it all commercial, so i got rid of tenants and am now about to commence major renovations.
Can i now claim the full GST on the purchase price now that it will be commercially leased out and currently there are no tenants / leases in place.
My understanding is that i can claim under "second hand" goods rule /Sec 21FB(1)(b) of the GST Act?
Our expert Mark Withers responded:
Firstly, double check that the vendor is unregistered, it is unusual for them not to be. If commercial rental is over $60k they were required to be and IRD could deem them registered, this could invoke zero rating issues subject to what was in your agreement.
Also, GST can only be claimed using the second hand goods provisions if the property was not acquired from an associated party. Assuming this is the case, your treatment of the activity has not been consistent. It is incorrect not to have claimed GST on the commercial portion from the outset if you have considered it to be included in your taxable activity and have returned GST on the commercial rent since acquisition.
My suggestion would be to make a voluntary disclosure of the original omission of the claim that should have been made in the GST return following acquisition for the commercial portion of the property. IRD may even pay interest on the refund due assuming they accept the voluntary disclosure. Having now changed the use of the residential portion of the property to commercial you will be able to apply the change of use provisions in section 21FB to adjust for the input tax refundable on the residual portion of the property that is now applied to the commercial taxable activity.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.