Date posted: 07/12/2022

Property purchase or business set-up costs – How can I get the GST back?

What you need to know about obtaining a GST refund.

In brief

  • Rules for GST refunds.
  • Documentation should be well prepared in advance.
  • Inland Revenue's new technical decision as an example.

CA ANZ have recently seen a number of comments from members about their experience obtaining a GST refund, with some having difficulty accessing refunds when a registered person or company is purchasing property, or is in the start-up phase of a business. So, what are the rules here?

GST input tax may be claimed on purchases made in carrying on a “taxable activity”. A “taxable activity” is anything carried on “continuously or regularly”. The activity must involve the supply of goods and services but does not have to have a profit-making intent.

Importantly, section 6(2) of the GST Act says:

“Anything done in connection with the beginning or ending, including a premature ending, of a taxable activity is treated as being carried out in the course or furtherance of the taxable activity.”

So a “taxable activity” includes things done or purchases made in connection with beginning the activity. This means you can claim input tax on purchases you make when you are just starting out.

How does this apply to someone purchasing a rental property for short term accommodation? The person may claim GST input tax on the purchase of a residential property if it is being purchased as part of the “taxable activity”. The start of the activity must involve a concrete plan of action, not just an idea or possibility for the future.

Inland Revenue has just published a new technical decision TDS 20/22, which provides some clarity about their view on when GST input tax can be claimed on initial purchases.

The decision concerns a registered person purchasing equipment to commence a video production business. The facts are anonymised, but the decision states that the person registered for GST and claimed GST input tax on accommodation expenses and electronic equipment. The business had yet to make any supplies, so the first GST return resulted in a refund. The Commissioner considered that the person did not have a “taxable activity”. The decision states that preparatory work does not amount to a taxable activity. “The case law is clear that commencement work can only be added to such an activity, and by itself, cannot amount to a taxable activity.”

It could be argued that it will be easier to know in hindsight. Starting a business is uncertain. At the time of filing the first return, the business owner does not know what the next three months will bring. By the time Inland Revenue reviews the return in three months’ time, they will have the benefit of knowing exactly how the business performed over the period.

However, the message from Inland Revenue seems to be that there needs to be more than an intention to carry on some sort of activity. In the case of the video production business, they could have waited until they had started making taxable supplies so that the GST input tax claimable netted off against GST output tax payable. Perhaps submitting a business plan or client contracts (even in draft form) may have convinced the Commissioner that they were commencing a “taxable activity” rather than merely intending to do so in future.

The same rules apply for someone purchasing a residential rental property for short term accommodation. Our members have noted that refunds for residential property purchases are increasingly being questioned by Inland Revenue.

The TDS mentioned above is a decision on the specific facts and the decision does not go on to give practical advice on what might have assisted the taxpayer’s case. However, CA ANZ suggest it would be better if any information provided to Inland Revenue is consistent with the stated aim. A mortgage application for the property to be a “private family holiday home” may not be helpful.

It is also suggested that those seeking refunds for residential property purchases show some evidence of intention to use the property for short-term letting. Ideally this documentation should be prepared at the outset. Some examples could be – research done on current short term rental market, projected income, financial plan showing how the property is to be financed, information given to the bank, business plan for how the property is to be marketed.

The recent TDS makes clear that a “taxable activity” must be more than a future possibility, it must involve an actual plan. It is important to make sure the documentation stacks up.

Search related topics