Tax Updates: 23 June 2025

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

Land & GST change of use adjustments

With nothing of real interest in the tax space coming across my desk in the past week, I thought I would take the opportunity to cover an issue that I see come up relatively frequently.

Here’s a scenario for you.

A GST-registered person (let’s just stick with individuals for now to keep things simple) acquires a piece of land from a GST-registered vendor, which may or may not include a building that could be used for residential purposes. I won’t use the term dwelling here, as that term itself can have implications concerning how the vendor treats the supply for GST purposes. Think of deemed separate supplies, in accordance with section 15(5). The GST-registered person, having made the requisite declarations on Schedule 1 (including that they have no intention to live on the land as they presently enjoy their city living), results in the vendor treating the supply of the whole land as compulsory zero-rated for GST.

The person is happy not to have had to fund any GST on purchase (as contracts like this will often be stated to be plus GST, if any), and perhaps just sits on the land for a period time while they decide what they are going to do with it, or they might lease the whole land to a neighbour, who requires additional space for their livestock. You may be surprised to hear that often, people in these instances do not seek any professional advice in advance of the purchase to understand the potential taxation implications, particularly GST. And, instead, often they solely rely on the advice of their real estate agent on how to structure the transaction to negate having to pay the additional GST component (which, in itself, should trigger some alarm bells).

So, the person puts on their rose-coloured glasses, life is good, and they continue down their very merry path.

The change of heart – moving to rural life

At some point down the track, they decide that they are tired of city living and crave a more rural lifestyle. So, they either construct their new family home on the land or decide that an existing building (which has been used like a barn since purchase) is more than suitable (post a bit of tender loving care (TLC)) for their occupation.

They move their family onto the land, and life just gets better. More often than not, the person prepares and files their own GST returns, because with just a single monthly lease payment from the neighbour and the odd expense, like rates, why would they want to pay someone to do something so simple?

Consequently, with nobody looking over their shoulder, there is no discussion at the time the use of the land is changed, surrounding the potential GST implications which may be triggered by their occupation.

When the issue finally surfaces

Now, when it comes to income tax return filing time, the person’s mindset is often different from their GST one, they feel things are somewhat more complex and, not wanting to get it wrong, they approach someone like you or me (well, my team at least as I can’t remember the last time I prepared a tax return) to assist. The very real risk here, however, is that because the person appreciates that any expenditure over the year in either constructing the family home or undertaking the TLC project is private in nature, it will not reflect in any records that they provide you with. Therefore, unless you just happen to ask the right questions, the issue is not identified.

Worst case, it may not be until the person goes to sell the land that the purchaser’s adviser approaches you to clarify how the residence on the land is to be treated for GST. “What residence?” you then say, with a slight feeling of queasiness. You then investigate and move into damage control mode.

What should have happened – the legal requirements

So, what should have happened when the person decided that they were going to live on the land, and commenced some sort of overt action to put their plan into effect? Well, a GST-registered person’s change of use of land in this situation is governed by sections 21 to 21D.

When this person originally acquired the land, they saved on paying any GST by declaring that they intended to use the land 100% for making taxable supplies.

Each year, there is now an annual adjustment period for GST (usually the March GST return). With respect to that annual adjustment period, the person needs to consider whether the taxable use of the land has changed over the 12-month period. If the percentage use has changed by more than 10 percentage points, or less than 10 percentage points but the adjustment amount calculated will exceed $1,000, then the person is required to make an output/input tax adjustment to reflect the change in use.

Calculating the adjustment

So in the present scenario, the person should have used a fair and reasonable method (there is no legislative required method – area is the most common used for land, but equally value could be used if certain parts of the land could be considered more valuable than others) to reflect the change in the use of the portion of the land that is now being used for exempt purposes – the family home. The adjustment in this case, as the original transaction was zero-rated, would be based on the deemed notional GST component of the purchase price (what GST would the person have paid if the transaction was not zero-rated?).

As we are dealing with land values, potentially the GST output tax discrepancy could be quite material, although this will depend on factors like the value of the overall transaction itself (a $500k purchase versus a $5m purchase) or perhaps the land use proportions (4000sqm home/curtilage use of a 10,000sqm lot versus 4000sqm use of a 10hct lot). Consequently, your client could also now be exposed to significant use of money interest costs, depending on the time that has passed, since the payment due date for the relevant annual adjustment period return and the date the GST output tax is now paid.

The voluntary disclosure option

In most cases (particularly if the scenario is not identified as a consequence of your client selling their land, but just due to them having mentioned it to you in a discussion about something else), the prudent course of action is the filing of a voluntary disclosure with Inland Revenue (IR). The risk being that if you don’t tell them before they tell you, then there’s also the potential shortfall penalty imposition risk. When we do this, we stress that no penalties should be charged due to the voluntary disclosure by our client, and somewhat cheekily, we also request remission of any interest cost. We are always successful with the former, but rarely with the latter, unfortunately.

The risks of ignoring the issue

Now, you and your client could just close your eyes to the issue and proceed to inform the purchaser’s adviser that section 5(15) will apply to the sale. The home/curtilage (satisfying the “principal place of residence” condition) is treated as an exempt supply, with the remainder land either standard/zero-rated depending upon the status and declarations made by the purchaser.

The risk here for your client is then the potential application of section 5(16), which will deem the supply of the home/curtilage to be made in the course of your client’s taxable activity – GST payable by your client, therefore on the market value of this land. Now depending on how long ago the change of use occurred, there may or may not be a material difference between the section 21 calculated output tax amount (plus interest) and the section 5(16) deemed supply output tax amount – which may dictate the next course of action – your client wanting to use the lower of the calculated amounts. In this regard, naturally, there is always the risk that IR could discover that the requisite section 21 adjustment was not undertaken when required, and your client could find themselves in some hot water, even though they may have paid the GST subsequently under section 5(16).

Conclusion

So, some food for thought. Perhaps ensure that specific asset use questions are included in your annual questionnaire for the client. And I hope this narrative has been of some use to you.   

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.