Zero-rating of land transactions

Definition of "land" and "zero-rating of land rules" in section 2(1) and section 11(8D) of the Goods and Services Tax Act 1985

Changes have been made to clarify what type of transactions are subject to the zero-rating rule in section 11(1)(mb) of the GST Act.

Background

Previously, the definition of "land" included a subparagraph (subparagraph (b)(iii)) that specified that certain lump-sum payments made under a lease were subject to the zero-rating rule in section 11(1)(mb). Its purpose was to ensure that the exclusion from the zero-rating rule for commercial leases was not used to generate large input deductions for parties to such transactions. This could otherwise be achieved by large lump sum payments being made alongside rental payments under a lease agreement.

However, the definition did not make it clear whether the assignment or surrender of an interest in land (such as a lease) was to be standard- or zero-rated. The changes clarify that these transactions are to be zero-rated when the general requirements for zero-rating in section 11(1)(mb) are met.

Including this clarification in section 11(8D), and also moving the "lump sum" rule to this section, allows the "land" definition to just refer to interests in land - with transactions involving land being located in section 11.

The lump sum rule is now located in section 11(8D)(b). The wording of the test for whether a payment is to be zero-rated has changed to what was in the "land" definition. This wording change has been made for clarity's sake and does not represent a policy shift. For a period supply (such as a lease), any lump-sum payment that totals more than 25% of the consideration specified in the agreement will be zero-rated. The 25% figure is referable to the longer of:

• the consideration received under the shortest possible fixed term of the agreement; or
• if there is no fixed term, one year.

There is an exclusion for payments that are themselves rental payments. This is to ensure that, for example, regular quarterly payments under a one-year lease do not need to be zero-rated just because there is some slight variance on one or more of them.

Application date

The changes apply from 1 April 2011.