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Residential property
Whare nohoanga

GST and zero-rated apartments

If you buy an apartment with a zero rating it may seem like a good idea because:

  • you don’t have to pay GST on the purchase price
  • its GST is charged at 0%
  • there’s no hassle with tenants because the management company takes care of renting the apartment, and
  • you may also have a guaranteed source of income.

Unexpected GST liabilities

Buying an apartment that’s been zero-rated for GST may seem like a good idea because you don’t have to pay GST on the purchase price.  There’s no hassle with tenants because the management company takes care of renting the apartment, and you may also have a guaranteed source of income. But, there are conditions attached to this type of transaction.  You need to know what they are or you might get an unexpected GST bill.

If you sell your apartment with the original or an appropriate replacement management agreement still in place, to a buyer who is also registered for GST, your apartment may still be a going concern.  In this case you probably don’t have to pay GST on the sale.

But, if you change the apartment use, you may have to pay GST.  

For example:

  • if you or a member of your family move into the apartment
  • if you rent it to residential rental tenants yourself, without going through the management company.

You may also have to pay GST if you sell your apartment and and the original management agreement has expired, and you haven’t negotiated another lease with them.

Example - Bill and Marie

In 2006, Bill and Marie bought an apartment as an investment. The apartment was leased to a management company and was "zero-rated" as a going concern.

Bill and Marie signed a lease with the management company which set out conditions of use. They also signed some papers relating to GST.

When the lease ended, Bill and Marie decided to sell their apartment rather than negotiate another lease with the management company. Their daughter moved in on a casual basis while the apartment was on the market.

They were pleased to accept an offer of $255,000 which covered their mortgage, real estate fees and other expenses, and gave them a clear $20,000 profit.

But when Bill and Marie told their accountant about the sale, they were shocked to find they had a GST bill of $33,260.87 (the GST component of the sale price, which included GST at 15%).

GST was payable because the apartment was no longer a going concern. The lease had ended and there'd been a change in the apartment's use.

If Bill and Marie had checked the GST status of their apartment before they sold it, they may have avoided a costly mistake.

For more information about tax on zero-rated apartments, read our leaflet Thinking of selling your leased apartment? (IR498).

 


Date published: 29 Sep 2010

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