Inland Revenue - Tax policy Tax Policy

News and information about the Government's tax policy work programme, including:
- proposed changes to the laws that Inland Revenue is responsible for
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Taxation bill introduced

16 May 2000

The Government today introduced the Taxation (Annual Rates, GST and Miscellaneous Provisions) Bill. Most of the bill is devoted to wide-ranging changes to GST arising from the Government review of the tax. Also introduced is anti-avoidance legislation to prevent people who are essentially employees from avoiding the new 39% income tax rate through the use of a company, trust or partnership as a shelter for employment income. Other anti-avoidance legislation prevents the abuse of foreign tax credits. Amendments arising from recommendations of the Finance and Expenditure Committee in its inquiry into the powers and operations of Inland Revenue introduce greater flexibility into the rules relating to overdue tax and reduce penalties for late tax. For details see Commentary and Summary of GST Changes.


Summary of GST Changes

Unless otherwise indicated the changes listed here are proposed to take effect from the date of enactment of the legislation.

Topic Proposal

Main Issues

Second-hand goods input tax credits

The second-hand goods input tax credit in relation to supplies between associated persons will be limited to the lesser of:

  • the GST (if any) included in the original cost of the goods to the supplier; or
  • 1/9th of the purchase price; or
  • 1/9th of the open market value.

This proposal will remove the potential for taxpayers to make windfall gains by manufacturing transactions with associates.

Deregistration

Output tax will be based on market value in all cases (rather than the current cost or market option), but the current cost or market option will continue to apply to pre-GST assets.

This proposal aims to correct the anomaly in the GST treatment between assets retained and sold after deregistration and assets sold before deregistration. The exception for pre-GST assets addresses the concerns expressed in submissions on the March 1999 discussion document.

Deferred settlements

GST will be required to be returned on an invoice (or accrual) basis for any supply exceeding $225,000 (including GST), unless the supply is in relation to a short-term agreement (93 days, in line with the accrual rules).

This is intended to address the potential for a purchaser on an invoice basis to obtain an up-front input tax credit but a vendor on the payments basis to significantly defer the payment of output tax in the same transaction.

Local authorities accounting basis

The automatic ability to account on a payments basis will be removed from 1 July 2001. Specific time-limited exceptions to the invoice basis of accounting for local authorities may be made by Order in Council.

The legislation will be clarified so that local authorities under the invoice basis of accounting will be required to pay output tax on rates at the earlier of:

  • the date of an instalment notice for a single payment; or
  • the due date for payment; or
  • the date when payment is received.

General anti-avoidance provision

Section 76 will be changed to align with the Income Tax Act general anti-avoidance provision.

Adjustments to input and output tax

Taxpayers will have the choice when making adjustments for changes in use (e.g. from business to personal use or vice versa) of making ongoing input or output tax adjustments either:

  • annually; or
  • in each taxable period.

In relation to business assets used for private or other non-taxable purposes, taxpayers will have the choice of making one output tax adjustment (either when the asset is acquired or when the change in use occurs), rather than periodic adjustments. If a taxpayer chooses to make a one-off adjustment, additional adjustments will be required if the relative use changes further by 20% or more.

Most of the changes will apply to goods and services treated as being supplied on and after the date the legislation receives the Royal assent. However, the amendment to limit the input tax credit for changes from non-taxable to taxable use will apply on and after 1 October 1986, unless the Commissioner has agreed, in writing, before 16 May 2000 to the input tax credit claim.

A long-term review of the change in use versus apportionment methodologies is included in the Government's tax policy work programme.

Registration threshold

The compulsory registration threshold will be increased from $30,000 to $40,000, in line with inflation since 1990 and with expected inflation for the next five to ten years. This preserves the balance between the following competing considerations achieved when the threshold was originally set:

  • A high registration threshold reduces compliance costs because it allows many small businesses to fall outside the GST system.
  • A low threshold reduces the potential for smaller businesses to place significant competitive pressures on businesses operating above the threshold.

The change will apply from 1 October 2000.

Other Issues

"Associated persons" definition

The definition of "associated persons" will be replaced with the broader definition used in the Income Tax Act 1994 for international tax and certain other purposes, with the following modifications:

  • The definition of "relative" in the "relatives test" will be narrowed to the second degree of relationship.
  • A universal test for treating as associated persons those with a common relationship to another person will be included.
  • The "habitually acting in concert" test will not be included.

People in de facto relationships will also be included in the definition of "associated persons". In addition, the current 10% threshold for association between an individual shareholder and a company will be changed to 25%.

Debt collection services

Third-party debt collection services will be excluded from the definition of "financial services"

.

Financial options

Financial options will be included in the definition of "financial services".

Non-deliverable futures contracts

Non-deliverable futures contracts will be exempt if they are tradeable on a defined market or are traded at arm's length.

Deliverable futures contracts

Deliverable futures contracts will be subject to GST unless the supply of the deliverable commodity is exempt.

Penalty interest

Penalty interest will be treated as being consideration for an exempt supply.

General insurance

The words "indemnify" and "indemnity" will be removed from sections 5(13) and 20(3)(d) to clarify the scope for general insurers to claim input tax credits.

The term "taxable supply" in section 5(13) will be changed to "taxable activity".

Section 5(13) will be amended to ensure that an insured party is liable for output tax where a payment is made directly to a third party (instead of to the insured) under the insured?s contract of insurance.

Subrogation payments

The Act will be amended to ensure that the GST liability of an insurer on receipt of payments resulting from the exercise of subrogation rights is limited to the amount of any input tax credit received for making a subrogation payment to an insured person.

Termination of a taxable activity

The definition of "taxable activity" will be amended to include both a premature ending of a taxable activity as well as a successful completion of a taxable activity. This change will also be made in other provisions that refer to the "cessation" or "termination" of a taxable activity.

Meaning of "cash price"

The "cash price" of a good or service will be the higher of the lowest price in cash or the open market value of those goods or services.

Vouchers, stamps and tokens

The sale of a token, stamp or voucher will be treated as a supply but their redemption will not be a supply. However, for compliance reasons, suppliers will generally have the option to recognise GST when a voucher, stamp or token with a face value is redeemed.

No further change to ensure that an input tax credit is allowed in relation to vouchers acquired as prizes for lottery events, as foreshadowed in the discussion document, is required. This is because the input tax credit will be allowed on acquisition.

"Going concerns"

The "going concern" test for zero-rating purposes will apply when the supply is deemed to be made.

A business will be required to be capable of being carried on by a purchaser for it to be transferred as a "going concern".

Services supplied in relation to exported goods

Services supplied in relation to exported goods will be zero-rated if the services are supplied to a non-resident who is outside NZ at the time the services are performed.

Temporary imports

Services supplied to a NZ resident directly in connection with a temporary import will be zero-rated.

Importers acting as agents for non-residents

Importers who are acting as an agent for a non-resident, and others who apply goods (but do not acquire them) for the purpose of making taxable supplies, will be allowed to claim an input tax credit for any GST levied under section 12.

Zero-rating of exported information services

Services supplied to a non-resident who is outside NZ at the time the services are performed and that comprise the supply of information from NZ to outside NZ that is provided directly in connection with personal property in NZ will be zero-rated.

Exported aircraft

Aircraft that are exported and leave NZ under their own power will be zero-rated.

Goods destroyed prior to export

Supplies of goods that were to be exported but cease to exist owing to circumstances outside the control of either the supplier or purchaser of the goods will be zero-rated.

Residential accommodation

The supply of residential property for lease or rental under a head lease will be exempt if the property is acquired for the purposes of providing residential accommodation. The supplier and purchaser will have the option to agree that the exemption not apply to supplies made under a lease entered into before 16 May 2000 that the supplier has previously treated as taxable supplies.

The six-monthly filing threshold

No increase to the current $250,000 threshold is proposed but the Commissioner will have the discretion on written application to allow taxpayers to file on a six-monthly basis taking into account:

  • whether the taxpayer has a history of accurate and timely filing and payment of GST;
  • whether the taxpayer has good record-keeping practices;
  • whether the taxpayer has previously been entitled to account for GST on a six-monthly basis;
  • the nature of the taxable supplies;
  • the volume of taxable supplies.

The last day of a taxable period

The legislation will be amended to provide the Commissioner with the power to reverse a decision allowing registered persons to change the last day of their taxable period if there is no commercial reason other than a tax timing advantage for maintaining the change.

The payments basis threshold

The threshold under which a person can account for GST when payments are received will increase from $1 million to $1.3 million.

The change will apply from 1 October 2000.

Factored debts

Registered persons accounting for GST on a payments basis will be required to pay GST on the remaining book value of a debt when it is factored. When a debt is factored on a recourse basis the assignor can claim a deduction if the debt becomes bad after it is returned.

Adjustments to input and output tax

The current methods of allocation will be legislated in the GST Act. Taxpayers will be required to adopt the allocation method that gives the fairest and most reasonable allocation.

The input tax credit allowed for changes from non-taxable to taxable use will be limited to supplies of goods and services on which GST has been charged and to supplies of second-hand goods that have either always been situated in New Zealand or have incurred GST under section 12(1). This change will apply from 1 October 1986 other than where the Commissioner has agreed to an input tax credit claim.

The $10,000 threshold for one-off input tax adjustments from non-taxable to taxable use will be increased to $18,000. (The increase is in line with inflation since 1986.)

The minimum threshold for exempt supplies (over which adjustments must be made) will be increased from $48,000 to $90,000. (The increase is in line with inflation since 1986.)

Output tax adjustments will be required for any non-taxable use of goods and services acquired or produced as well as applied for the principal purpose of making taxable supplies.

An adjustment will be triggered by any change of use (not just a subsequent change of use).

Fringe benefits provided to past employees (including associated persons) will be subject to GST.

Change in use adjustments will not arise if a deemed supply has arisen because of change in the legislation.

The time of supply of output tax adjustments for non-deductible entertainment expenditure will be the same time as when the income tax return is due (or furnished, whichever is the earlier).

Abbreviated tax invoices

The threshold under which an abbreviated tax invoice is accepted will increase from $200 to $1,000.

The change will apply from 1 October 2000.

Unincorporated bodies: debt priority and members' liability for GST

GST debts recoverable from individual members of an unincorporated body will have preferential status.

Unpaid GST debts of an unincorporated body will have preferential status if a receiver is appointed other than by court order.

The liability of a member of an unincorporated body for GST payable during the time the person was a member will extend beyond the period of membership, but only in respect of liabilities arising during the period the person was a member.

The current requirement to provide written notification to the Commissioner will involve actual receipt of the notice and the change in membership will take effect from this date.

Personal representatives, liquidators and receivers (specified agents)

Section 58 will include appointments of receivers to control only part of a taxable activity.

An agency period will terminate when the taxable activity is no longer carried on by a specified agent whether by a liquidator, receiver or both.

Section 58 will be amended to ensure that input tax credits not previously claimed by an incapacitated person in relation to pre-agency supplies can be claimed by their specified agent. This provision will be subject to new legislation in section 46 to allow the Commissioner to set off pre-agency GST debts against pre-agency input tax credits claimed by a specified agent.

Section 58(1A) will override section 5(2).

A specified agent will not be personally liable for any liability incurred on (as well as before) the date of commencement of the agency period.

The appointment of a specified agent will not affect the membership of a group of registered companies.

Other minor issues

The circularity between sections 10(3) and 10(3A) will be removed by replacing the reference to "registered person" in section 10(3A) with "person".

To ensure that section 10(3) will apply where consideration is not provided in money the references to "consideration in money" will be replaced with "consideration".

Various redundant provisions and references will be repealed and minor amendments made to update and correct other provisions.

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