5.2 Submissions on the officials’ paper indicated different views about the approach that should be adopted. Given the uncertainty expressed, the government believes legislative clarification of the issue is warranted.
5.3 Proposals in chapter 2 on the introduction of a domestic reverse charge (DRC) would affect how tax is to be paid and deductions claimed. To ensure that the DRC rules operate as intended, separate rules are proposed for nominee transactions affected by the DRC. The proposals in this chapter would only apply in situations when the DRC rules did not apply. They are predominantly concerned with input tax entitlement.
Nominee transactions when the domestic reverse charge does not apply
5.4 The term “nominee transaction” is used to describe the situation where a vendor agrees to sell property to a purchaser and the title to the property is transferred not to the purchaser but to a third party nominated by the purchaser. The nominee does not in this situation pay a fee to the purchaser for the right to be nominated.
5.5 The GST consequences of a nominee transaction depend on the form which the nomination takes. In “bare” nominations, the purchaser settles the transaction and, therefore, there is only one transaction for GST purposes – between the vendor and the purchaser. In other situations, the nominee may settle the transaction by paying the purchase price to the vendor. In this case, it is arguable that there are two transactions for GST purposes – between the vendor and the purchaser, and between the purchaser and the nominee.
5.6 The latter type of transaction can result in GST being charged twice, giving rise to corresponding input tax deductions in most cases, for what is essentially a direct transfer of property from the vendor to the nominee.
The proposal
5.7 For transactions involving nominations, the GST treatment should be determined on the basis of the economic substance of the transaction. Under the proposed changes, one payment of GST would be made and input tax deductions that might arise would be limited to the entity that economically acquires the supply as outlined below.
“Bare” nominations
5.8 In a transaction involving a “bare” nomination, the transaction is settled by the purchaser. Therefore, there will be only one supply which will be to the purchaser. The purchaser will be the only party entitled to an input tax deduction.
Nominee pays the purchase price and settles the transaction
5.9 In transactions where the nominee settles the transaction by paying the purchase price, the proposed legislative change would consider a single transaction to take place between the vendor and the nominee. This would involve a single payment of output tax by the vendor with the nominee entitled to claim any input tax deduction. The contractual purchaser would essentially be treated as acting as an agent for the nominee and “ignored” for GST purposes.
Nominee settles the transaction, but the purchaser pays the deposit or contributes to the purchase price
5.10 In some transactions, a purchaser may pay a deposit, but not the balance of the payment, to the vendor. This may arise, for example, when the purchaser has entered into a sale and purchase agreement with the vendor and the identity of the nominee is not yet known.
5.11 Alternatively, the purchaser may contribute to the purchase price on settlement.
5.12 In these circumstances, it is proposed to again treat the transaction as involving a single supply between the vendor and the purchaser, with the purchaser being entitled to the input tax deduction. However, the purchaser and the nominee would be able to override this default rule by explicitly agreeing that the supply of the property be treated as a supply by the vendor to the nominee. This would allow the nominee to claim any input tax deduction.
Tax invoice requirements
5.13 In normal circumstances, a taxpayer must have a tax invoice in order to claim an input tax deduction. In transactions involving nominations, a nominee may not have the tax invoice as it may have been issued to the purchaser. Under the proposed changes, the absence of a tax invoice should not prevent the nominee from being able to claim a deduction as long as there is sufficient other documentation to establish the nominee’s claim, based on the agreement between the purchaser and the nominee.