Special report
Published 11 October 2000

A special report on the GST changes

A special report on the GST changes included in the Taxation (GST and Miscellaneous Provisions) Act 2000. 11 October 2000.

11 October 2000

Unless otherwise indicated the changes listed here take effect from the date of enactment of the Taxation (GST and Miscellaneous Provisions) Act 2000, 10 October 2000.

Main issues

Second-hand goods input tax credits

The second-hand goods input tax credit in relation to supplies between associated persons is 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.
  • If the second-hand goods have been sold by a person who has previously paid output tax on deregistration, the input tax credit allowed to the associated purchaser is equal to that output tax.

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 as currently on the lower of cost or market), but the cost or market option will continue to apply to pre-GST assets.

This change corrects 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 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 for the sale and purchase of property (extended from 93 days to one year as recommended by the Finance and Expenditure Committee).

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.

"Associated persons" definition

The definition of "associated persons" has been 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" is narrowed to the second degree of relationship.
  • There is a universal test for treating as associated persons those with a common relationship to another person.
  • The "habitually acting in concert" test is not included.
  • People in de facto relationships are also included in the definition of "associated persons". In addition, the current 10 percent threshold for association between an individual shareholder and a company has been changed to 25 percent.

The Finance and Expenditure Committee recommended two minor amendments to the universal tripartite test to ensure that the definition is not interpreted more broadly than intended.

General anti-avoidance provision

Section 76 is aligned with the Income Tax Act general anti-avoidance provision. This will strengthen the application of the section and provide some consistency of interpretation for GST and income tax purposes.

Adjustments to input and output tax

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

Taxpayers will have the choice when making adjustments for changes in use (eg. 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.

In relation to private assets that cost $18,000 or more used entirely for taxable purposes, taxpayers will be able to apply to the Commissioner for a one-off input tax adjustment. In considering an application the Commissioner will apply the following criteria:

  • Whether the taxpayer has previously made one-off input tax adjustments. This criterion is directed at taxpayers who have already made one-off input tax adjustments and would incur significant compliance costs in making a change.
  • Whether the taxpayer has elected to make one-off output tax adjustments for any previous changes from taxable use to non-taxable use.
  • Whether making period-by-period or annual adjustments is practical in the circumstances. The one-off basis is likely to be more appropriate in relation to assets with relatively constant ongoing taxable use.
  • The nature of the goods or services. Goods and services to which a one-off adjustment should apply are those that are likely to be retained for a number of years, such as real property.

If the Commissioner approves a taxpayer's application for a one-off input tax adjustment and the taxable use changes to a non-taxable use the taxpayer will be required to make a one-off output tax adjustment to the extent of the non-taxable use.

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

A specific anti-avoidance rule provides that a deemed supply in relation to a change in the use of goods or services will not arise if a taxpayer is contemplating the sale of those goods or services.

Most of the changes apply to goods and services treated as being supplied on and after the date of Royal assent. However, an amendment to limit the input tax credit for changes from non-taxable to taxable use, so as to reflect GST actually paid, applies on and after 1 October 1986. A savings provision excludes:

  • input tax credit claims which the Commissioner has paid or agreed to pay before 16 May 2000; and
  • claims of which the Commissioner has not been notified other than by inclusion in a GST return and has not queried before 16 May 2000.

Registration threshold

The registration threshold has been 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 applies from 1 October 2000.

Other issues

"Going concerns"

The "going concern" test for zero-rating purposes will apply when the supply is deemed to be made and the supply will be zero-rated if at that time:

  • the supply is agreed in writing by the supplier and the purchaser to be the supply of a going concern; and
  • both the supplier and the purchaser intend that the business supplied is capable of being carried on as a going concern by the purchaser.

Residential accommodation

The supply of residential property for lease under a head lease will be exempt if the property is to be used for the principal purpose of 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.

Tokens, stamps and vouchers

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 cost saving reasons, suppliers will have the option to recognise GST when a voucher, stamp or token with a face value is redeemed if:

  • it is not practical to return GST when a token, stamp or voucher is supplied; and
  • the issuer of the token, stamp or voucher and the supplier/s of the goods and services specified in the token, stamp or voucher agree that GST is to be returned on redemption.

A registered person who has purchased a voucher and chooses to on-sell it rather than redeem it for goods and services will be required to return GST when the voucher is sold, not when it is redeemed by the purchaser.

The treatment of excess consideration is unaffected - any consideration in excess of the face value must be returned when the voucher is issued. Similarly, GST in relation to the supply of a postage stamp and a voucher sold to a non-resident for services performed in New Zealand (being services to which 11A(2) applies) will be recognised at the time of issue.

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 agents for non-residents, 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 (even if the imported goods are unsuitable for their intended use). These changes will not however apply to agents involved in merely delivering imported goods.

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, from NZ to outside NZ, of information 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.

Debt collection services

Third-party debt collection services are excluded from the definition of "financial services".

Financial options

Financial options are included in the definition of "financial services".

Futures contracts

Futures contracts are exempt if they are tradeable on a defined market or are traded at arm's length and are either:

  • non-deliverable; or
  • for the delivery of money; or
  • for the supply of a deliverable commodity that is exempt.

Penalty interest

Penalty interest is treated as being consideration for an exempt supply.

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.

Consideration for a supply made under a credit contract

The consideration for the supply of goods and services under a credit contract is the higher of the cash price and the price the supplier would have charged the purchaser if the purchaser had paid in full at the time of sale.

General insurance

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

The term "taxable supply" in section 5(13) has been changed to "taxable activity" to remove any unintentional narrowing effect of the former term.

Section 5(13) is amended to ensure that a registered third party is liable for output tax where a payment is made directly to that person under the insured's contract of insurance.

Subrogation payments

Section 5(13B) is clarified to ensure that subrogation payments are deemed consideration for a supply of services by an insurer if an input tax credit has been allowed to the insurer for the payment in respect of which the subrogation payment is made.

Section 20(3) is amended to allow registered persons making subrogation payments input tax credits for those payments.

Local authorities accounting basis

The automatic ability for local authorities 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 has also been 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 establishing an obligation to pay a particular instalment; or
  • the due date for payment; or
  • the date when payment is received.

Termination of a taxable activity

The definition of "taxable activity" is amended to include both a premature ending of a taxable activity as well as a successful completion of a taxable activity.

This change is also made in other provisions that refer to the "cessation" or "termination" of a taxable activity.

Unincorporated bodies: debt priority and members' liability for GST

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

Unpaid GST debts of an unincorporated body 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 extends beyond the period of membership, but only in respect of liabilities arising during the period the person was a member.

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

Personal representatives, liquidators and receivers (specified agents)

Section 58 now includes 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 now ensures 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 is 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) now expressly overrides 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 persons.

The six-monthly filing threshold

The Commissioner will have the discretion on written application to allow taxpayers above the $250,000 threshold 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 payments basis threshold

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

The change applies from 1 October 2000.

Tax invoices

Failure to issue a tax invoice within 28 days after a request is an absolute penalty offence.

The threshold under which an abbreviated tax invoice is accepted has been increased from $200 to $1,000. The increased threshold applies from 1 October 2000.