Property problems: Implications of delaying transfer of GST

Q. I own a commercial building. A buyer has offered to buy the building from me for $1 million plus GST of $125,000. The sale cannot be zero-rated as the supply of a going concern, as the building is vacant.

The buyer has proposed to pay me $1 million on the possession date, October 28, 2005, and the GST of $125,000 will be "transferred" into my Inland Revenue GST account in early November 2005. I will not be paid a deposit.

I would like to understand the implications of this GST transfer arrangement. The buyer and I file monthly GST returns and we are both on an invoice accounting basis. I will issue a GST invoice to the buyer on the possession date.

A. The best place to start is to discuss the GST implications if the buyer paid you the $125,000 of GST on possession date.

The buyer would file a GST return for October 2005 and claim a refund of the GST paid from Inland Revenue (to simplify things, we have assumed that the buyer does not have GST output tax liabilities or other input tax deductions for the October period). After the buyer receives the GST refund from Inland Revenue, the net cost of the building to the buyer is $1 million.

However, there is a funding cost to the buyer because there is a delay between the time the buyer pays you the $125,000 of GST on the possession date and the time the buyer receives a refund of the $125,000 of GST from Inland Revenue (which will probably be in late November if the return is filed in early November).

From your perspective, you would receive the $125,000 of GST on the possession date, but would not have to pay the GST to Inland Revenue until November 30, so you could put the $125,000 in the bank and earn about a month's interest.

The buyer has proposed the GST transfer arrangement to remove the funding cost of paying the GST to you and waiting for a GST refund from Inland Revenue. For this to work, you and the buyer's GST periods must be aligned and both of you must be on the same GST accounting basis.

Under the GST transfer arrangement, the buyer files an October GST return in early November claiming a GST refund of $125,000 in respect of the GST charged on the purchase of your building.

However, instead of physically receiving the cash from Inland Revenue, the buyer elects in writing at the time of filing the GST return to transfer the refund to your Inland Revenue GST account. This means the $125,000 of cash never leaves Inland Revenue. It is transferred from the buyer's Inland Revenue account to your Inland Revenue account.

You would then receive a credit of $125,000 in your Inland Revenue GST account which would satisfy your liability to pay GST to Inland Revenue on the sale of your building.

The buyer can request the transfer of the GST refund to take place one day after the GST return is filed by the buyer. For example, if the buyer files the October GST return on November 3, 2005, the buyer can request that the transfer is effected on November 4, 2005.

The main issue you need to be aware of is that you would have transferred title to your building before the buyer has transferred the GST to your Inland Revenue account. You are taking a credit risk on the buyer, ie the buyer may not transfer the GST amount to your account.

Also, if the buyer had paid you the $125,000 on the possession date you could have banked the funds and earned about a month's worth of interest before paying the GST to Inland Revenue (although under the GST transfer arrangement, Inland Revenue will pay you interest, at the rate of 5.71 per cent, if your Inland Revenue account is in credit after the transfer).