Tax Updates: 24 March 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.

Cancelled land sales agreements and GST

Inland Revenue (IR) has issued a draft QWBA (Questions We’ve Been Asked), which endeavours to answer the question: does GST apply to a deposit the seller retains in a cancelled land sale agreement?

The QWBA is an 11-page read and is an update to the May 2005 taxpayer information bulletin article – GST consequences of a cancelled contract. However, the answer from that earlier QWBA does not change – GST does not apply to the deposit because the seller makes no supply of land or any other supply in return for the deposit.

The QWBA suggests that there are two primary questions to answer here:

1. Is there a supply of goods or services (from the seller to the buyer)?
2. If so, is the deposit payment for that supply?

When considering the first question, the QWBA reminds us that GST is a tax on transactions, not a tax on receipts or turnover. It can only be charged if a supply of goods or services exists (or is deemed to exist). The first step, therefore, is to identify the supply.

When it comes to a land sales agreement, naturally the intended supply is the land itself, and case law has reflected that a sale of land is not divisible into equitable and legal estates for GST purposes. Consequently, when a land sale agreement is cancelled, there is no supply of the legal interest in the land as intended under the contract, which means that no supply for GST purposes has occurred.

With respect to the second question, the QWBA considers the true character of a deposit to be a part payment of the whole purchase price and a guarantee that the buyer will pay the balance of the purchase price on settlement. Consequently, when the seller is entitled to retain the deposit upon the cancellation of the contract by the buyer, the deposit payment, in essence, compensates the seller for the buyer’s default. A payment that is compensatory in nature does not generally involve a supply and is not subject to GST.

Equally, in a scenario where the seller and not the buyer defaults on the contract, and the seller retains the deposit (the example given is a company that has gone into liquidation), there is still no supply and, therefore, no GST payable on the deposit amount.

The QWBA concludes with a discussion of a situation in which, for some reason, the seller may have already accounted for GST on the supply (the time of supply has been triggered, and the zero-rating rules did not apply to the transaction, for example), or the buyer may have claimed an input tax credit.

Under either scenario, a GST adjustment is required under section 25. Section 25 requires an adjustment if a return or taxable supply information contains an inaccuracy because the supply was cancelled. Generally, the timing of the section 25 adjustment will occur in the GST period during which the agreement is cancelled.

If you would like to make a submission regarding the draft QWBA, you must do so by April 17^th.

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.