This article out in the Herald yesterday that talks about rent to buy arrangements.
The interesting part from a tax point of view is on page 3:
Hamilton accountant Ross Barnett says his client is facing a test case over how the Inland Revenue will treat GST liability when a rent-to-own scheme is signed. Usually a trader buys a property with the intention of reselling it, so claims GST on the purchase, and pays GST on the resale profit.
If the trader finds a buyer who wants to rent-to-own the property, they account for GST on any amount paid toward the purchase price. When the tenant opts to buy, GST is returned on the sale price less the amounts already paid.
An Inland Revenue spokesperson confirmed to the Herald on Sunday that if the arrangement provided that part of the rental payments would be put toward the purchase price of the property, then it is likely that the property trader would need to account for GST “on the entire price of the property as soon as they receive any payment toward the cost of the property. This will be the case even if the amount of rent paid is not sufficient to cover the cost of the GST.”
Barnett says the hard thing for developers or traders is that they’re dealing with an option. “Fifty per cent of them would probably fall over… so they end up paying GST when no actual sale occurs.”
I would agree with Mr. Barnett. I don’t see how the IRD can class an option as anything other than a right for the tennant to purchase the property.
Watch this space, Tax Blog will keep you up to date on breaking developments on this story.