[Global IDT Insights] New Zealand Issues GST Clarification on Land Deposits

Editorial Team, [2025] 178 taxmann.com 747 (Article)

Global IDT Insights provides a weekly snippet of tax news specifically related to Indirect Taxes from around the globe.

1. New Zealand Issues Clarification on GST Treatment of Forfeited Deposits in Cancelled Land Sale Agreements

New Zealand has issued a clarification (QB 25/18) on the Goods and Services Tax (GST) consequences where a land sale agreement is cancelled and the seller retains the deposit. The clarification confirms that GST does not apply to such deposits, as the seller makes no supply of land or any other supply in return for retaining the deposit.

The clarification outlines how the GST Act 1985 applies to cancelled land transactions, the treatment of deposits in cases of buyer or seller default, and the adjustments required if GST has already been paid or claimed before cancellation. It also replaces earlier guidance issued in May 2005.

Key clarifications are as follows:

(a) No supply occurs: When a land sale agreement is cancelled, no supply of land or services is made. A deposit retained by the seller does not constitute consideration for a taxable supply under the GST Act 1985.
(b) Buyer default: Where the buyer defaults and the deposit is forfeited, the amount is treated as compensation for failure to complete the purchase. Compensation does not involve a supply, and therefore GST does not apply.
(c) Seller default: Where the seller defaults, the deposit must be refunded. If the seller fails to return it (e.g., due to insolvency), GST still does not apply, as no supply has been made.
(d) Adjustments required: If GST output tax has already been returned by the seller, or input tax has been claimed by the buyer prior to cancellation, these amounts must be reversed under section 25 of the GST Act in the period of cancellation.
(e) Zero-rated transactions: Where the land transaction was expected to be zero-rated, no GST would have been accounted for or claimed. Accordingly, no adjustment is required upon cancellation.
(f) Distinction from Australia: The clarification notes that the Australian High Court’s ruling in FCT v. Reliance Carpet Co Pty Ltd [2008] HCA 22 is not relevant in New Zealand, as Australia has specific legislative provisions (Division 99 of the GST Act 1999) which New Zealand law does not contain.

Taxpayers involved in land transactions must ensure that any GST previously accounted for is reversed where contracts are cancelled and deposits are forfeited, in line with section 25 adjustments.

Source- Official Clarification

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