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
- updates on the progress of bills through Parliament
- policy announcements

GST


GST AND LATE PAYMENT FEES

Clause 137

Issue: The changes extend the scope of GST

Submissions

(PricewaterhouseCoopers, KPMG, New Zealand Institute of Chartered Accountants)

The proposed amendment to charge GST on late payment fees should not go ahead. Charging GST on late payment fees is contrary to the policy intent of the Goods and Services Tax Act 1985, which is to impose GST on the supply of goods and services. Late payment fees are not consideration for the supply of goods and services.

Comments

New Zealand has a broad-based GST. The over-arching policy behind this broad base is that supplies of goods and services should be subject to GST unless they are specifically excluded.

A flat late payment fee can be viewed as the on-charging of administration costs that a business incurs in chasing payment for the underlying taxable supply. In this respect, it is in effect an increased charge for the goods and services provided and should be subject to GST in the same way as the underlying supply. This can be contrasted with interest imposed on an outstanding amount, which represents the time value of the money unpaid. The interest is analogous to interest charged on borrowed money (in this case the money the customer retains rather than paying the bill on time) and is therefore GST-exempt.

By defining this boundary with more certainty, the proposed change will afford businesses the clear choice between charging a flat-fee for late payment (with this fee being subject to GST) or charging exempt penalty interest. Which method is chosen will be a business decision that can be made on a clearer understanding of the GST consequences for both the business and its customer base.

Charging GST on late payment fees also provides consistency with transactions involving prompt payment discounts – GST being built in as a charge in those transactions if payment is late.

Recommendation

That the submissions be declined.

 

Issue: Application date of the amendment

Submissions

(PricewaterhouseCoopers, Corporate Taxpayers Group, New Zealand Institute of Chartered Accountants)

The proposal should only apply prospectively. Retrospective application is inequitable as it disadvantages taxpayers who have historically accounted for GST on late payment fees vis-à-vis taxpayers who have not. (PricewaterhouseCoopers)

The application date of the savings provision should be extended to:

  • 1 April 2013. (Corporate Taxpayers Group)
  • The start of the taxpayer’s next income year. (New Zealand Institute of Chartered Accountants)
  • The first GST period commencing after the date of enactment. (New Zealand Institute of Chartered Accountants)

Comments

Officials are concerned that making this change prospective could result in numerous back-claims of GST charged on late payment fees over the last eight years. This would result in refunds of approximately $13.8 million for these periods. Unless the businesses concerned were to repay these refunds to the individual customers that are likely to have suffered the GST impost, such refunds will be windfall gains to the businesses at the expense of the Crown.

The proposed amendment will confirm that businesses that charged GST did the correct thing, while also saving the position of those businesses that, in good faith, did not charge GST over this period. The savings provision was intended to allow affected businesses the time to update their systems.

Officials do, however, accept that the proposed effective date of 1 April 2012 is administratively unworkable, given the likely progression of this bill through the remainder of the legislative process. Submissions seeking a delayed effective date are premised on the basis that businesses will need time following enactment of the bill to update their systems. Officials consider that an effective date of 1 January 2013 would be sufficient lead-in time to address these concerns.

Recommendation

That the retrospective application date and savings provision remain in place, but the effective date for the proposed amendment (and, correspondingly, the length of the savings provision) be extended to 1 January 2013.

 

Issue: Definition of “late payment fees” and the boundary between “late payment fees” and “penalty or default interest”

Submissions

(Corporate Taxpayers Group, New Zealand Law Society, New Zealand Institute of Chartered Accountants)

The proposed legislation should explicitly exclude interest charges from late payment fees. (Corporate Taxpayers Group)

A specific definition of “late payment fee” is required to remove the ambiguity between such fees and the “penalty or default interest” concept in section 14(3)(a) of the GST Act. (New Zealand Law Society)

Guidance on the boundary between the late payment fee clause and penalty or default interest under section 14(3)(a) is required. (New Zealand Institute of Chartered Accountants)

Comment

It is not intended that clarifying the GST position of late payment fees will in any way narrow the scope of the penalty or default interest exemption in section 14(3)(a). To the extent that penalty or default interest is charged, it would not be caught by the proposed provision.

The key distinction is between interest charges (which are exempt) and other late payment fees (which should be subject to GST). Officials consider this distinction will be obvious in most cases. Attempting to define “late payment fee” could, as with many definitions, create additional confusion. This could particularly be the case when a fee falls outside of any definition proposed but still could not easily be categorised as “interest”.

However, in order to avoid confusion, officials recommend that the proposed charging provision in clause 137 of the bill be made explicitly subject to the “penalty or default interest” exemption in section 14(3)(a) of the GST Act.

To the extent that there is some confusion between “penalties” and “penalty interest”, officials agree that clarification would be useful. More specifically, there should not be scope for businesses to avoid charging GST on late payment fees simply by labelling them as “penalties” instead.

Recommendations

That the submissions be accepted to the extent that clause 137 be made subject to section 14(3)(a). Clarification should also be made to ensure that non-interest penalties, however labelled, fall within the scope of the proposed provision.

 

Issue: Late payment fees linked to the underlying supply

Submissions

(Corporate Taxpayers Group, New Zealand Law Society, KPMG, New Zealand Institute of Chartered Accountants)

To be consistent with policy, the legislation should specifically exclude GST from applying to late payment fees when the underlying supply is outside the scope of GST – for example, if the underlying supply is an exempt supply of financial services.

Comment

Officials consider late payment fees to be, in effect, an increase in consideration for the underlying goods and services to reflect the non-payment of an invoice. On this basis, if the underlying supply does not attract GST, or is zero-rated, the tax treatment of the late payment fee should be consistent with that. The bill should be amended to reflect this.

Recommendation

That the submissions be accepted.

 

Issue: Time of supply and invoice requirements

Submissions

(KPMG, Corporate Taxpayers Group)

It is not clear from the draft legislation that a new time of supply will arise, and this should be clarified. (KPMG)

There should be no requirement for a separate tax invoice to be issued in respect of the late payment fee. (Corporate Taxpayers Group)

Comments

The default position under the GST Act is that a time of supply will arise at the earlier of an invoice being issued or payment received. Officials consider that this default rule should adequately cater for late payment fees. Take, for example, a supplier that charges a late payment fee of $20 plus GST. If a customer fails to pay their bill on time for a month, the late payment fee will presumably be added to their invoice for the following month. The issuing of this subsequent month’s invoice will trigger a time of supply for the late payment fee (unless of course the customer has proactively paid the fee before receiving their invoice).

The fact that a subsequent invoice is likely to be provided as a matter of course should also address the issue of whether a separate invoice for a late payment fee is necessary. Therefore, officials do not consider that a legislative exclusion from the invoicing requirements is necessary.

Recommendation

That the submissions be declined.

 

Issue: Ease of avoidance and fiscal implications

Submission

(Matter raised by officials)

The Committee asked officials to comment on how easily the proposed rule could be avoided and how the proposed amendment would affect the Government’s fiscal position.

Comment

As noted by Committee members, GST on late payment fees could be avoided by businesses switching to a penalty interest regime for unpaid amounts (penalty interest being exempt from GST). However, as any GST on late payment fees will ultimately be borne by the customer, businesses may find it easier simply to on-charge the GST on these fees rather than going to the expense and effort of adopting different systems. As officials understand it, the majority of businesses that currently charge late payment fees do so on a plus-GST basis, despite the argument being potentially available that GST is not required to be charged.

It is anticipated that the proposed change will clarify for businesses the GST consequences of both options, so their choice can be an informed one.

The fiscal impact of the proposed amendment is an estimated increase in GST revenue of approximately $2.5 million per year. As previously noted, making the change retrospective ensures a further $13.8 million is not lost to the tax base through potential windfall gains.

Officials acknowledge that a behaviour shift from businesses away from late payment fees towards a penalty interest model will impact on the $2.5 million, but note that the main purpose of the proposed amendment going forward is to provide clarity for businesses and customers rather than raise significant revenue.

Recommendation

That the submission be noted.

 

Issue: Other matters

Submission

(PricewaterhouseCoopers)

In a business-to-business context, any GST charged on late payment fees will be deducted by the customer. Therefore, there is no revenue risk in that regard.

Comment

Officials agree with this statement, but note that there is a revenue risk when the GST is charged to non-registered persons.

Recommendation

That the submission be noted.

 

Submissions

(PricewaterhouseCoopers, New Zealand Institute of Chartered Accountants)

A lack of clarity around the existing rules is no reason to change the law. (PricewaterhouseCoopers)

Inland Revenue could clarify the issue by releasing an interpretation statement confirming late payment fees are not subject to GST. (PricewaterhouseCoopers, New Zealand Institute of Chartered Accountants)

Comment

As previously stated, officials consider that the broad-based nature of New Zealand’s GST rules and their link to an underlying supply of goods and services suggest that late payment fees should be subject to GST. “Clarifying” the law to the opposite effect would therefore be contrary to what is, in officials’ view, the best policy outcome.

Recommendation

That the submissions be declined.

 


LIQUIDATORS AND RECEIVERS CHANGING GST ACCOUNTING BASIS

Clause 140

Issue: Fiscal cost does not justify new rule

Submission

(PricewaterhouseCoopers)

The overall fiscal cost (estimated at $2.5 million) of allowing liquidators, receivers and voluntary administrators to switch accounting basis does not justify the new rule which will create an asymmetry in some situations. The policy objective is based on the assumption that there will be a negative impact on the Government’s tax base if GST refunds are paid to liquidators and receivers.

The submitter notes that this may not always be the case, as suppliers on the invoice basis should already have accounted for output tax. Therefore, to ensure neutrality in these situations, liquidators and receivers should be entitled to claim GST deductions.

Comment

If a registered person meets certain conditions – for example, when the total value of taxable supplies for a 12-month period has not exceeded, or is not likely to exceed, $2 million, the registered person may account for GST on a payments basis. The majority of registered persons (approximately 80 percent) account for GST using the payments basis. The GST Act allows registered persons who are accounting for GST on a payments basis to change to the invoice basis by applying to the Commissioner. There are currently no restrictions on registered persons making this accounting basis change.

It has become standard practice for liquidators and receivers to adopt the invoice basis for accounting for GST, immediately upon becoming a liquidator or receiver of a registered person that accounts for GST on a payments basis. Moving to an invoice basis allows the liquidator or receiver to claim input tax credits for supplies received for which no payment has been made. A change of accounting basis for insolvent firms will typically give rise to a refund because a firm in this condition will generally have more unpaid suppliers than customers who have not paid them.

The current practice does not seem to have a non-tax commercial purpose other than to generate GST refunds.

The amendment precludes liquidators, receivers and voluntary administrators switching from the payments basis to the invoice basis when accounting for GST; they will still receive a tax credit for any supplies they pay for and therefore GST will not be overpaid.

If the supplier is on the invoice basis and has accounted for the sale and writes off all or part of the debt, they can make a credit adjustment in their GST return. This ensures neutrality.

Example

Cook accounts for GST on a payments basis.

Cook purchases goods from Baker. Cook is not entitled to a GST input tax credit until the goods are paid for.

Cook cannot pay for the goods because it is insolvent, and a liquidator is appointed. If the liquidator moved Cook to the invoice basis, an input tax credit could be claimed, even though the goods have not been paid for.

If Cook remained on the payments basis and paid for the goods, they could claim an input tax credit.

Baker is on the invoice basis.

Baker has paid output tax on Cook’s purchase to Inland Revenue.

If Cook does not pay for the goods and Baker writes off the debt, Baker can claim back the tax from Inland Revenue.

Recommendation

That the submission be declined.

 

Issue: Amendment results in a “super-preference” for Inland Revenue

Submissions

(C & C Strategic Limited, Coalition of Insolvency Practitioners, Fisher White and Associates Limited, Gerry Rea Partners, Restructuring Services Limited)

The bill adopts a position that Inland Revenue should have a “super-preference” for GST, in priority to all other claims, including employees’ wages and other taxes such as PAYE, cutting across well-established and carefully considered principles of both insolvency and GST law. (Coalition of Insolvency Practitioners)

The bill entitles Inland Revenue to GST for all income without offsetting GST on creditors that were used to earn that income. This creates a “super-preference” for Inland Revenue contrary to schedule 7 of the Companies Act 1993. It puts Inland Revenue ahead of employees’ final pay, back pay, and holiday pay, denying many employees the chance of a pay-out. The social cost of this is will be borne by the taxpayer and affected families. (Fisher White and Associates)

The submitter cannot support the amendment because of the serious effect which the proposed change would have on the equitable entitlements of Inland Revenue, employees and secured and unsecured creditors in liquidations and receiverships.

The proposed clause will have the effect of artificially inflating the preferential GST claim of Inland Revenue in liquidations and receiverships of distressed companies which have been returning GST on the payments basis permitted by the GST Act. This will be achieved to the detriment of all other creditors including employees, who will receive a lower distribution than their equitable entitlement under the Companies Act 1993. (C & C Strategic Limited, Gerry Rea Partners, Restructuring Services Limited)

Comment

A super-preference is not being created. Schedule 7 of the Companies Act 1993, which sets out the creditors who have preferential claims in cases of liquidation, is not being amended.

Approximately 80 percent of registered persons account for GST using the payments basis. It has become standard practice on appointment for liquidators and receivers to adopt the invoice basis allowing the liquidator or receiver to claim input tax credits for supplies received for which no payment has been made. Inland Revenue has no concerns with the fees charged by insolvency practitioners (and if it did, as noted by submitters, there are other avenues for addressing such concerns). Rather, the amendment is aimed at ensuring the GST system is not used to fund liquidations.

The amendment maintains the status quo by preventing an insolvent firm changing its GST accounting basis from the payments basis to the invoice basis. These firms have typically been on the payment basis for their entire lifetime and a change is sought only in their wind-up phase. This change seems to have no non-tax commercial basis other than to generate a GST refund.

Recommendation

That the submissions be declined.

 

Issue: Funds used to finance liquidations

Submissions

(Coalition of Insolvency Practitioners, HFK Limited)

The clause as drafted is a knee-jerk and disproportionate reaction to an incorrect perception that GST refunds post-insolvency are being used for the purpose of inappropriately funding insolvency practitioners. This perception is without a factual basis. Even if some insolvency practitioners have sought to change the GST basis inappropriately, the issue of whether the amendment is appropriate needs to be carefully thought through, particularly given the regulation of insolvency practitioners that is already proposed in the context of the Insolvency Practitioners Bill. (Coalition of Insolvency Practitioners)

If liquidators are unable to access the GST refund to fund their investigations, liquidators will refuse to accept these appointments unless the petitioning creditor agrees to fund the liquidator’s time cost fee for undertaking investigations and taking action against the company or its directors and shareholders. Being unable to access this “fighting fund” may result in liquidators refusing to accept appointments unless funding is provided by their appointer. (HFK Limited)

Comment

Officials consider that it is not the purpose of the GST system to fund liquidations or receiverships. Liquidations and receiverships have been around long before GST was introduced. Providing a “fighting fund” for liquidators and receivers should not be a by-catch of the GST system.

The funding of liquidators and receivers is a separate issue from the administration of GST. The submissions note that more cases will be referred to the Officials Assignee and that petitioning creditors will have to fund liquidations. Officials consider that the funding of liquidations should be transparent – for example, if Inland Revenue is a petitioning creditor, the funding should be directly from Inland Revenue and not via the GST system.

Recommendation

That the submissions be declined.

 

Issue: There may be other reasons for changing the accounting basis

Submissions

(Coalition of Insolvency Practitioners, HFK Limited, New Zealand Law Society)

The amendment draws an artificial line, and one which on particular facts may not be appropriate. There may be genuine commercial reasons for a liquidator or receiver requesting a change in the GST accounting basis.

Comment

The current practice of changing the GST accounting basis does not seem to have a non-tax commercial purpose other than to generate GST refunds. In many cases liquidators and receivers are dealing with firms who have always been on the payments basis and only when the liquidator or receiver is appointed is a change sought.

Officials note the amendment does not alter the ability to obtain a tax credit under the payments basis – that is, if a supplier is paid by a liquidator or a receiver, a GST refund could still arise and GST will not be overpaid.

Recommendation

That the submissions be declined.

Issue: Amendment is not necessary because the Commissioner already has a discretion to deny application for change

Submissions

(HFK Limited, New Zealand Law Society)

The amendment may not be necessary as the current wording already provides the Commissioner with the discretion to deny a taxpayer’s application to change their accounting basis. (New Zealand Law Society)

Rather than barring all liquidators, receivers or administrators from requesting a change of GST accounting basis, allowing the Commissioner discretion would be a middle ground option. (HFK Limited)

Comment

The default position for registered persons is that they must account for GST on the invoice basis. However, if certain criteria are met, they can account for GST using the payments basis. Approximately 80 percent (517,000) of registered persons (647,000) use the payments basis to account for GST. Relying on a discretion to stop liquidators, receivers and administrators from switching from the payments basis to the invoice basis would not be a feasible remedy. Officials consider switching the GST accounting basis in such cases should be prohibited.

Recommendation

That the submissions be declined.

 

Issue: No consultation

Submissions

(Coalition of Insolvency Practitioners, Fisher White & Associates Limited, New Zealand Institute of Chartered Accountants)

The insolvency industry was not consulted about the amendment under the Generic Tax Policy Process. Members of INSOL were consulted. Any INSOL committee members that were approached failed to communicate with membership that the bill existed or that they represented practitioners to Inland Revenue on this matter. Submitters are concerned that a lack of consultation results in the amendment failing to address a number of wider policy issues. (Coalition of Insolvency Practitioners, Fisher White & Associates Limited)

This matter should be put out for further consultation and appropriate analysis undertaken by Inland Revenue as part of the Generic Tax Policy Process. (New Zealand Institute of Chartered Accountants)

Comment

Officials discussed this issue with representatives from INSOL, the industry group for insolvency practitioners. These submissions would require the amendment to be removed from the bill to allow a further consultation. Given the prior consultation that has taken place and the strong policy basis for reform on this issue, officials do not support this suggestion.

Recommendation

That the submissions be declined.

 

Issue: Existing invoice basis companies

Submission

(HFK Limited)

The submitter seeks clarification on what is proposed to happen in the situation where the company is already on an invoice basis for accounting for GST at the appointment of the liquidator, receiver or administrator but the company has actually been preparing the GST returns on a payments basis. Is the company still able to get the refund associated with the unclaimed invoices?

Comment

The normal invoice basis rules would apply. If there were an entitlement to a refund, the refund would be given. However, if there were tax shortfalls in previous periods, the registered person could be liable also for use-of-money interest and, if the taxpayer is culpable, shortfall penalties.

Recommendation

That the submission be noted.

 

Issue: Inland Revenue’s debt preference

Submission

(New Zealand Institute of Chartered Accountants)

The creditor preferences enjoyed by Inland Revenue in the Companies Act 1993 for employer-related debts (other than Child Support) and GST debts should not be available when Inland Revenue applies to the Courts to place a taxpayer company in liquidation.

GST should be removed as a creditor preference.

If the Select Committee believes that the above submission is beyond its terms of enquiry for the tax bill, NZICA submits that the Committee recommend that the Government consider this at a later time as a matter of priority.

Comment

Officials note that this submission raises issues that are separate to the issue of change of GST accounting basis by liquidators, receivers and administrators.

Recommendation

That the submission be declined.


CREDIT CARD SERVICE FEE AND GST

Clause 133

Issue: GST should apply to the credit card service fee

Submission

(New Zealand Institute of Chartered Accountants)

The scheme of the GST Act is that GST applies to all goods and services unless there are valid reasons from departing from this. We do not see a case for departing from the scheme of the GST Act, which the current wording of the bill would suggest.

Comment

The credit card service fee is not exempt from GST. The current wording of clause 133 “plus any GST” infers that GST does apply, but it is the rate of GST that may vary. For example, an overseas-based taxpayer who opts to pay their income tax debt by credit card will be subject to the credit card service fee plus GST, but because they are not resident in New Zealand, the rate at which GST is charged will be zero. Alternatively, a resident taxpayer who pays their income tax debt by credit card will be subject to the credit card service fee plus GST at a rate of 15%.

Recommendation

That the submission be noted.

 

Issue: Absorption of the credit card service fee

Submission

(New Zealand Institute of Chartered Accountants)

The fee of 1.42% should be absorbed by the Government.

Comment

The credit card service is one of many forms of payment options for domestic-based taxpayers. Taxpayers can choose whether to use this service and, in some cases, receive additional benefits (in the form of interest-free periods and travel points from credit card providers). The Commissioner will continue to charge the fee for domestic taxpayers who choose to use this service.

Recommendation

That the submission be declined.


OTHER GST MATTERS

Issue: Definition of “land”

Clause 135

Submissions

(New Zealand Law Society, Russell McVeagh, Matter raised by officials)

The exclusion from the zero-rating rules for certain transfers of interest in land should be contained in the zero-rating provisions themselves rather than being part of the “land” definition. (New Zealand Law Society)

Irrespective of where the exclusion is located, there are drafting issues that need to be addressed. In particular, the quantum of payments that triggers the zero-rating rules needs to be clearly set out. (New Zealand Law Society, Russell McVeagh)

Clarifications should be made to ensure that zero-rating applies to payments in respect of the assignment or surrender of a lease. (Matter raised by officials)

Comment

The clause is designed to ensure that taxpayers cannot circumvent the rules that zero-rate land transfers by making lump-sum payments under non-standard rental agreements. Broadly speaking, the intended effect of the provision is that if an up-front payment of more than 25 percent of the total rental is made in advance, the lease will be zero-rated. Officials and submitters agree that the policy behind the amendment is sound.

Officials agree with the New Zealand Law Society that the zero-rating rules should apply to the transfer of interests in leases, because these transactions have the potential to involve large lump-sum payments.

For the same reasons, officials submit that the zero-rating rules should be clarified to ensure that they apply to payments made for the assignment or surrender of leases. There is concern that, for example, a taxpayer could enter into a lease transaction and, almost immediately, receive a large payment to assign or surrender that lease. Such an arrangement, if standard-rated, could give rise to the type of arrangement that the zero-rating rules were designed to prevent.

Submitters are also concerned that the proposed drafting makes it difficult to be sure what quantum of up-front payment would trigger the zero-rating rules. In particular, there is concern that, under the current drafting, any upfront payment would result in zero-rating. The New Zealand Law Society also submits that the link to 25 percent of the total consideration specified in the lease is difficult to determine – particularly in the case of rolling or periodic leases when the “total consideration” can be unclear at the outset. Their preference is therefore to replace the “total consideration” test with one based on the lesser of a year or the agreed term of the lease.

Officials agree that only leases involving lump-sum payments that represent 25 percent or more of the lease payments should be zero-rated. The New Zealand Law Society submission that the threshold be set at 25 percent of annual lease payments (or the total lease if it is shorter than one year) is attractive for its simplicity. However, officials are concerned that such a rule might inadvertently affect commercial arrangements such as the payment of a deposit.

To clarify the effect of the provision, officials consider that the 25 percent should relate to the consideration that is the greater of one year’s payments under the lease or the minimum term of the lease as entered into at the outset. For example, if the parties entered into a two-year lease, with an option to extend for a further two years, the “total consideration” should be the first two-year term. Alternatively, if the parties entered into a monthly lease with no fixed term, the lease should be standard rated unless there is an upfront payment of 25 percent or more of what would be the first year’s rental payments.

In addition, officials consider that the provision should be clarified so that it only applies to payments that are not themselves regular payments under a lease. For example, if a one-year lease was entered into with quarterly payments, the payments should not be zero-rated, even though each one represents 25 percent of the total consideration. As mentioned above, the zero-rating rules are designed to cover non-standard rental payments that could be seen, at least in part, as the economic equivalent of freehold transfers.

Officials agree that the exclusion for lease payments could be moved out of the land definition to provide a distinction between interests in land and transactions involving land.

Recommendation

That the submission regarding moving the relevant paragraph to the “land” definition be accepted.

That the effect of the submissions regarding the clarity of the test be accepted, except the New Zealand Law Society’s proposed annual lease payments test should be varied in the manner set out by officials.

 

Issue: Concurrent supplies

Clause 146

Submission

(New Zealand Institute of Chartered Accountants, KPMG)

The proposed drafting still does not clarify how the concurrent use of land rules would apply to, for example, land or common areas that are divided amongst taxable and non-taxable use.

Comment

Officials agree that there is potential confusion over the application of the concurrent use rules. The situations described in the submission are:

  • common areas of an activity that is both taxable and exempt, such as communal areas in a residential rest home; and
  • a building that is divided into taxable and exempt activities, such as a warehouse with an apartment on top.

The concurrent use of land rules are not designed to cater for these situations, which are more appropriately dealt with through the general apportionment rules. Instead, the concurrent use rules are in place to deal with a very specific fact situation.

Given the level of confusion, officials consider it would be preferable to spell out in the GST Act the scenario at which the provision is aimed: when the same piece of land is used both for the exempt purpose of residential rental while simultaneously being marketed for disposal as part of a taxable activity. Setting this scenario out in legislation should provide the clarity submitters are seeking, while also providing a clearer boundary between the concurrent use of land rules and the general apportionment rules.

Recommendation

That the submission be accepted, subject to officials’ comments.

 

Issue: Goods and services acquired before 1 April 2011

Clause 148

Submissions

(New Zealand Institute of Chartered Accountants, Matter raised by officials)

The old apportionment rules should apply to assets that were zero-rated before 1 April 2011 and not adjusted before that date. (New Zealand Institute of Chartered Accountants)

Clause 148 and section 21H of the GST Act should be redrafted to clarify when the old and new apportionment rules, respectively, apply to an asset. (Matter raised by officials)

Comment

Officials agree that supplies that were zero-rated prior to 1 April 2011 and not adjusted before that date should be subject to the old apportionment rules. As a matter of consistency, it can be argued that the new apportionment rules should apply, as the new rules would apply if the supply in question had not been zero-rated but had instead been fully taxable. However, allowing the use of the old apportionment rules is a pragmatic solution that should provide certainty and lower compliance costs for businesses.

As drafted, there is potential confusion over the application of section 21H, which is intended to clarify the application of the old and new apportionment rules. Section 21H(1) provides that the section only applies to an asset that has been adjusted under the old apportionment rules. Proposed section 21H(2B) then sets out the treatment for assets that have not been so adjusted. The assets affected by subsection (2B) are not a subset of those set out in subsection (1). As a result, it is possible to interpret subsection (2B) as having no effect. This is not the desired outcome and redrafting section 21H to clearly accommodate both situations is therefore recommended.

Recommendation

That the submissions be accepted.

 

Issue: GST groups and information obligations

Submission

(Russell McVeagh)

As currently drafted, it is not apparent how the obligations to provide information for land transactions apply to registered persons that are part of a GST group, but not the group’s representative member. The legislation should specify that the provision or receipt of the necessary information by any group member should be treated as the provision or receipt by the representative member.

Comment

Officials agree that clarity in this area would be useful. Given that the taxable activity of each group member is treated for GST purposes as if it were carried on by the representative member, it makes sense that the required information should also be treated as being provided or received by the representative member. This will ensure the information is treated as being given and received by the person that is actually registered for GST and will be completing the requisite returns.

Recommendation

That the submission be accepted.
 

 

Issue: Agents and information obligations

Submission

(Russell McVeagh)

The requirement to provide information as part of the zero-rating for land provisions should apply to all agencies, not just undisclosed agencies.

Comment

From an administrative perspective, it is generally preferable for the information provided as part of a land transaction to relate directly to the parties who are the actual supplier and recipient of the goods and services. The rules that cater for purchases made by agents for undisclosed principals are a concession from this general position to reflect the commercial reality of these transactions.

Officials do not consider that these concessionary rules should be extended to all agency situations. In a “disclosed” agency, the parties should have no objection to the details of the principal, rather than the agent, being provided to the counterparty.

Recommendation

That the submission be declined.

 

Issue: Tax fraction for secondhand goods

Clause 145

Submission

(Matter raised by officials)

The secondhand goods input tax deduction available should be limited to the tax fraction that was in place at the time the goods were acquired.

Comment

Clause 145 clarifies that a person will be able to claim input tax deductions when they acquire the goods or services before becoming registered and later use those goods or services as part of their taxable activity. This deduction will be available when the person has paid GST on the goods and services under section 8(1) of the GST Act or on the import of goods under section 12(1). Both of these deductions are limited to “tax charged”, being the tax actually paid by the person when they acquired the goods and services. If the goods and services were acquired when the rate of GST was 12.5%, GST at that rate will determine the maximum deduction they can claim.

When a secondhand good is brought into a taxable activity, officials consider that the input deduction available should similarly be limited to the tax fraction in place when the goods were acquired. To do otherwise would effectively afford secondhand goods favourable treatment over similar goods that were acquired on a plus GST basis.

Officials do not consider this amendment would place an undue compliance costs on businesses, because they already need to have documentary evidence to support any claim for a secondhand goods deduction. Under section 24(7), this evidence must include the date on which the goods were purchased. Given the GST rate has only changed twice since its introduction and on clearly defined dates, identifying the relevant tax fraction should be relatively simple.

Recommendation

That the submission be accepted.
 

 

Issue: Application of new apportionment rules

Submission

(New Zealand Institute of Chartered Accountants)

The GST Act should be amended to allow all registered persons to apportion GST for goods and services acquired after 1 April 2011 under the new apportionment rules. Amendments to clarify this should be retrospective. The Income Tax Act should allow small businesses to incorporate the GST apportionment ratio to adjust for private use, rather than having to account for fringe benefit tax.

Comment

Officials are aware that there is some potential confusion regarding the scope of the new apportionment rules – in particular, their application to non-individuals – and are looking at this as part of an existing item on the Tax Policy Work Programme. Given the timeframe for the current bill and the potential breadth of any changes in this area, officials will continue to review the scope of these rules with a view to including any changes considered necessary in the next available tax bill.

The potential for small businesses to use the GST apportionment rules to account for income tax in lieu of using the fringe benefit rules is not a matter being considered in the current bill, but is noted.

Recommendation

That the submission be noted.

 

Issue: GST treatment of land used for taxable and exempt purposes

Submission

(New Zealand Institute of Chartered Accountants)

Sections 5(15) and 20(3J) of the GST Act should be amended to confirm that the supply of a dwelling included in the supply of land is a separate supply and therefore treated as an exempt or non-taxable supply.

Comment

This is an interpretative issue that Inland Revenue has not reached a final view on. Once the position under the current provision has been clarified, Inland Revenue will communicate its position and recommend a legislative amendment if required. It is not necessarily the case that the current wording does not achieve the desired policy outcome.

Recommendation

That the submission be noted.

 

Issue: Drafting matters

Clauses 141, 145 and 152

Submissions

(Russell McVeagh, BDO)

The wording of clauses 141 and 152 should be amended to provide more clarity and consistency with other drafting in the GST Act. Consequential amendments to sections 78F(7), 73(3D) and 75(3E) of the GST Act would also aid clarity. (Russell McVeagh)

Clause 145 allows input tax claims for certain secondhand goods. However, section 21B(3) of the GST Act should also be updated to refer to the record-keeping requirements for secondhand goods. (BDO)

Recommendation

Officials agree that the drafting suggested in the submissions would be beneficial and recommend that the submissions be accepted.

 

Issue: Deductible output tax

Clause 88(3)

Submission

(New Zealand Institute of Chartered Accountants)

The amendment is supported but internal processes should be improved to prevent this sort of oversight from occurring. Alternatively a framework should be established to correct these errors more quickly.

Comment

The recent change to the GST apportionment rules prompted the introduction of a new defined term in the Income Tax Act 2007, “deductible output tax”. As part of the creation of that definition, a type of GST output tax that was deductible under the old rules was not carried over into the new definition. The proposed amendment clarifies that the relevant output tax is deductible and makes the change retrospective to avoid any possible confusion about the correct position in the intervening period.

Recommendation

That the submission be noted.

 

Issue: GST – secondhand goods input tax credit

Submission

(New Zealand Institute of Chartered Accountants)

NZICA broadly supports the amendment but proposes a change to the drafting.

Comment

The provisions in new section 3A(2)(b) of the GST Act are intended to be read together as one provision, and therefore adding the word “not” to the second subparagraph as proposed by the submitter would change the intended outcome rather than correct it. Officials do agree, however, that the provision can be made clearer and will provide alternative wording.

Recommendation

That the submission be accepted, subject to officials’ comments.