Chapter 6 - Zero-rating of land - commercial leases

6.1 Supplies of land between registered persons, where the land will be used in a taxable activity by the purchaser, are generally zero-rated, meaning no GST is charged by the vendor or deducted by the purchaser. The decision to zero-rate land was based around concerns with “phoenix” fraud, often involving land sold between associated entities. The purchaser would receive a refund of GST charged on the supply, but the vendor would deliberately wind up before making payment of the GST.

6.2 To avoid introducing significant compliance costs, and given the multitude of existing standard-rated commercial leases, commercial leases were excluded from the requirement to zero-rate supplies of land. An exception to this exclusion was certain long-term leases, with large up-front payments. These leases may be substitutable for a sale of land – posing a risk of phoenix fraud – and are therefore zero-rated.

6.3 Section 11(8D) contains the rules governing when commercial leases, and certain associated payments, will or will not be zero-rated. However, a number of technical issues have been identified in relation to these rules.

6.4 Unless otherwise specified, the suggested changes set out in this chapter would apply from 1 April 2011 (the date section 11(8D) first came into force), and provide for past positions to be preserved.

Lease-related surrender payments

6.5 The first issue concerns the rule in section 11(8D)(a) which zero-rates supplies of an assignment or surrender of an interest in land. It is not clear that both of the two conceivable types of surrender payment – specifically payments from landlord to tenant and payments from tenant to landlord, would be zero-rated.

6.6 The wording of the provision fits well in the former scenario (landlord pays tenant), as the tenant is surrendering its leasehold estate (and so, in a sense, supplying an interest in land) in consideration for the payment.

6.7 However, the landlord will arguably not supply an interest in land; they are instead agreeing not to enforce their right to payment under the lease. Consequently, it is arguable that the rule will not apply in this scenario. However, both forms of surrender payment were intended to be zero-rated.

Suggested solution

6.8 An amendment to section 11(8D)(a) is proposed, to clarify that a payment from tenant to landlord can also be zero-rated, when the supply of land to which it relates is a zero-rated supply of land.

Lump sum lease payments

6.9 When a large payment (in excess of 25 percent of the total consideration under the lease) is made, the payments under the lease are zero-rated. In some situations, this approach may arguably apply to retrospectively change the GST treatment of payments made prior to the large payment. This is because, as currently drafted, the zero-rating could apply to the entire supply of land not just the individual payments.


Betty makes regular payments under a lease agreement. These payments are standard-rated and not subject to the zero-rating rules. At some point a large irregular payment is made. Consequently, the entire lease could now be treated as zero-rated, meaning that past and future payments under the lease are also zero-rated.

If Betty was unable to anticipate this payment, and zero-rate previous payments, she will need to unwind the GST treatment of the previous payments, so that they are correctly zero-rated.

6.10 It was not intended that the payment would affect lease payments that were made before this large one-off payment. When GST has already been correctly returned, these payments do not pose the risk which the zero-rating rule was intended to address.

Suggested solution

6.11 One approach would be to preserve tax positions taken in relation to lease payments made prior to the large one-off payment being made. Instead only the large one-off payment and all future payments would be zero-rated.

6.12 Alternatively, the paragraph could be amended to ensure that only the large one-off payment would be zero-rated and all other regular payments under the lease would remain standard-rated.

6.13 We prefer the first approach as it would align better with the treatment of up-front large one-off payments and the policy intent, which is to fully zero-rate leases which are substitutable for transfers of ownership.

Periodic supplies

6.14 One of the requirements for a supply of land to be standard rated is that the supply be made “periodically” (section 11(8D)(b)(i)). This wording is intended to indicate a lease agreement.

6.15 A lease arrangement generally provides for a single continuous supply of the right to use land, with periodic payments. The timing rules treat this supply as a series of successive supplies. In particular, section 9(3) deems a supply with periodic payments to instead be a series of successive supplies, with the timing of each supply determined by the earlier of the time of payment becoming due or being received.

6.16 Consequently, it is intended that the lease will be treated as a continuous series of successive supplies. There is a technical question, however, about whether this series of successive supplies would satisfy the requirement that the supply of land be made periodically.

Suggested solution

6.17 This question could be resolved by an amendment to align the two provisions. The test for standard rating a commercial lease could be clarified to apply to supplies of land that are treated as a series of successive supplies under the timing rule in section 9(3) (agreements to hire, periodic payments, progressive supplies).

The test for large, irregular, payments

6.18 Another issue with the test for standard rating relates to the requirements that a payment in advance of, or contemporaneous with, the supply must meet. These requirements are set out in section 11(8D)(b)(ii).

6.19 The test considers whether the amount totals 25 percent or less than the total consideration specified in the agreement, and relates to the longer of one-year or the shortest possible fixed-term of the agreement (that is, not including a renewal period), and is not itself a regular payment.

6.20 When an amount satisfies these criteria, the lease will be standard-rated. However, this could arguably allow a lease to be standard-rated, despite another amount also being paid or payable that does not satisfy the test. This potentially allows the test to be circumvented. The focus of the test might be clearer if it was on whether a payment is made that does not satisfy the criteria, rather than whether a payment is made that does.

Suggested solution

6.21 The test could be amended to ensure that zero-rating is triggered where an amount is paid or payable under the lease that is not a regular payment, which exceeds 25 percent of the consideration specified in the agreement and which relates to the longer of one year or the shortest possible fixed term of the lease.

Procurement of a lease

6.22 The Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 inserted a new paragraph (c) in section 11(8D), to ensure that payments for the procurement of a lease are subject to the zero-rating of land rules. When a lease cannot be assigned, the current tenant may contract with a prospective tenant, to seek the landlord’s agreement to enter into a new lease agreement with the prospective tenant. It was intended that the current tenant’s (the vendor’s) services in procuring this agreement would be zero-rated. However, a further amendment may be required to ensure the provision works as intended.

6.23 Currently, this paragraph provides: “a supply of an interest in land by way of a procurement by a third party of an existing lease is a supply under subsection (1)(mb) if it meets the requirements set out in that subsection”. This implies the third party acquires the existing lease. However, the reason for the procurement is because the existing lease is incapable of being assigned, so it is necessary that the vendor (the current tenant) arranges a new lease between the purchaser (the prospective tenant) and landlord.

Suggested solution

6.24 An amendment could be made to clarify that a payment to the existing tenant is zero-rated when the third party does not acquire the existing lease, but instead a new lease is created and the payment is for the vendor’s services in arranging a new lease.

6.25 The amendment could apply from 30 June 2014 (the effective date of paragraph (c)). The amendment would preserve existing positions previously taken.

Land acquired by non-profit entities

6.26 The zero-rating of land rules apply to a supply of land between registered persons, when the purchaser acquires the land for the purpose of making taxable supplies.

6.27 Under section 20(3K), a non-profit entity that is registered for GST is treated as if all its supplies of goods and services are used for making taxable supplies, except when they are used to make exempt supplies. This allows a registered person to recover GST incurred for all the non-profit body’s non-exempt activities.

The zero-rating of land rules and GST-registered non-profit entities

6.28 The zero-rating of land rules do not apply to the purchase of land by a GST-registered non-profit entity, which purchases the land for use in its non-profit activities. The supply is instead standard-rated, in which case the supplier must return GST and the non-profit body may deduct this amount. This is because section 20(3K) does not apply for the purposes of the zero-rating of land rules, and only applies for parts of the apportionment and adjustment rules that allow input tax deductions.

Policy considerations

6.29 The zero-rating of land rules were introduced as a method of accounting for GST on land that avoided the fiscal risk in charging and refunding GST. Non-profit bodies should be treated in the same manner as other registered persons in relation to the sale and purchase of land. Zero-rating supplies of land from a GST-registered person to a GST-registered non-profit entity would be consistent with this policy intention.

Suggested amendment

6.30 Section 20(3K) could be widened so that a supply of land by a registered person to a registered non-profit entity would be zero-rated when the non-profit entity acquires the land for use other than for making exempt supplies.