GST and exported second-hand goods

Clauses 522 and 523

Under the Goods and Services Tax Act 1985, a GST-registered person who purchases second-hand goods from an unregistered person may claim an input tax deduction for the tax fraction (one-ninth) of the purchase price which has been paid. As a base integrity measure, second-hand goods that have been the subject of such an input tax deduction cannot be zero-rated if they are exported.

The amendment changes this outcome and allows exported second-hand goods to be zero-rated if the registered person obtains a written declaration from the recipient of the goods that they or an associate will not cause the goods to be brought back to New Zealand. This declaration is necessary to ensure that Inland Revenue has sufficient information to determine when goods form part of an export/reimport arrangement that seeks to create second-hand goods input tax deductions.

Submissions agree with the amendment but recommend that it apply from 1 April 2004. Officials disagree with this recommendation.

A drafting matter has been identified with the amendment that needs to be changed to specify that the amendments apply to GST-registered persons.

Issue: Support for the proposed amendment

Submissions

(As per form letter 8: SimsPacific Metals Limited, Wellington Scrap Metals Ltd, 14 – The Scrap Metal Recycling Association of New Zealand Inc and W Macaulay Ltd, 68A – Corporate Taxpayers Group)

Submissions note their support for the proposed change subject to the amendment having retrospective application to 1 April 2004.

Recommendation

That the submissions be noted.

Issue: Retrospective application

Submissions

(As per form letter 8: SimsPacific Metals Limited, Wellington Scrap Metals Ltd, 14 – The Scrap Metal Recycling Association of New Zealand Inc and W Macaulay Ltd, 53 – Ernst & Young)

The application of the proposed changes should be backdated to 1 April 2004.

The amendment removes a point of difference between Inland Revenue and taxpayers about whether certain supplies of exported scrap metal are subject to GST at the standard rate of 12.5%. The effect of the amendment negates the need to consider whether the exported scrap metal was new, second-hand or modified to such an extent that it was “new” compared with its original purchase condition. Backdating the amendment would therefore protect those taxpayers that have zero-rated exported scrap metal and produce an equitable result for dealers in the scrap metal industry.

It is further noted that:

There is no constitutional objection for retrospective application as the amendment confers a benefit to taxpayers.
The benefit conferred by the amendment should not be delayed until enactment.
There is little or no revenue risk connected with backdating the amendment to 1 April 2004 because of the costs associated with transporting scrap metal.
Inland Revenue is prevented, in situations other than avoidance, from amending assessments that are more than four years old (the four-year time-bar). Backdating the amendment to 1 April 2004 with application to taxpayers that have zero-rated the exports in question is consistent with the time-bar.

Comment

Officials consider that the amendment is new policy and does not clarify an existing uncertainty with the treatment of exported second-hand goods – it modifies the application of an existing anti-avoidance provision. The amendment also does not deal with the question of what are “second-hand goods”, which is currently being considered by Inland Revenue. The change therefore does not remove the different GST treatment of exported second-hand goods and all other exported goods.

We note Inland Revenue is investigating taxpayers that have zero-rated exports potentially involving the supply of second-hand goods.

Decisions about whether legislative changes should have retrospective application need to be made on a case-by-case basis. In this particular case, we consider that backdating the amendment is not appropriate for the following reasons:

The requirement to charge GST on exported second-hand goods that have been subject to a second-hand goods input tax deduction has been present in the Act since its enactment. The application of the relevant sections in the GST Act and its role as an anti-avoidance measure has also been confirmed by the New Zealand courts.[1] Most taxpayers should therefore have a reasonable expectation that exported second-hand goods cannot be zero-rated like other exported goods.
The amendment applies to all exported second-hand goods, not just scrap metal. Backdating the amendment is likely to create unintended consequences and potentially give rise to windfall gains. While there may be a limited revenue risk associated with exported scrap metal, we consider it would be inappropriate to backdate the amendment for the benefit of the scrap-metal industry and not for other dealers in exported second-hand goods.
Backdating the amendment, as suggested by submissions, to taxpayers who have taken a zero-rated tax position in connection with exported second-hand goods (thereby limiting the scope for unintended consequences) would create an inequity between taxpayers in similar fact situations depending on whether or not they zero-rated or charged GST on the export. We are unable to estimate the number of taxpayers (and amounts in question) that would fall into each situation.
Affected exporters are unlikely to be able to retrospectively comply with the record-keeping requirements demanded by the amendment before the export can be zero-rated. Submissions note that this requirement should not apply for the retrospective period because of the costs involved. We are of the view that removing the need to keep records about the recipient’s intended use of the goods would undermine the integrity of the amendment.
Based on our estimates of the revenue cost of the amendment being $4 million each year, there would likely be a revenue cost of $20 million or more if the amendment were backdated to 1 April 2004.

Recommendation

That the submissions be declined.

Issue: Scrap metal is not “second-hand goods”

Submission

(14A – The Scrap Metal Recycling Association of New Zealand Inc and W Macaulay Ltd)

Scrap metal is not second-hand goods.

Comment

The GST Act defines the term “second-hand goods” to mean:

“Secondhand goods, does not include—
(a) Secondhand goods consisting of any fine metal; or
(b) Secondhand goods which are, or to the extent to which they are, manufactured or made from gold, silver or platinum, or any other substance, if they were of the required fineness, would be fine metal; or
(c) Livestock:”

The Court of Appeal in LR McLean[2] noted that there is nothing in the purpose or scheme of the Act that would justify ignoring the ordinary meaning of the words “second-hand goods”. The ordinary meaning of “second-hand” was described by the Taxation Review Authority as: “…used or treated or stored by a previous owner in such a manner that it can no longer be regarded as new”.[3]

This would suggest that breaking down goods into individual components does not of itself create “new” goods. For example, removing a door from a second-hand motor vehicle for re-sale does not make the door the sale of new goods.

While the question of whether specific goods are second-hand or new is a question of fact and law, policy discussions with representatives from the scrap-metal industry have been on the basis that the goods in question are second-hand for GST purposes, giving rise to the problem that this amendment is intended to address.

Recommendation

That the submission be noted.

Issue: Drafting matter – “registered person”

Submission

(Matter raised by officials)

The amendment inserting new section 11(3B) makes reference to the “supplier”. This term should be corrected to read “registered person”. The reason for the change is that the section is intended to have effect when second-hand goods are exported by a registered person. The term “supplier” means “the person making the supply” and can refer to a registered person or an unregistered person. The change is recommended as it specifies that the section should apply to registered persons only.

Recommendation

That the submission be accepted.

Issue: Application date should be specified

Submission

(53 – Ernst & Young)

It should be specified that the amendment applies to supplies made on and after a specified date rather than have the change apply from the date of enactment. Simply having the amendment apply from date the bill is enacted can result in uncertainty and ambiguity – for example, over supplies made but not yet returned for GST purposes.

Comment

The GST Act contains a number of rules that determine the point in time when a GST-registered person must recognise a supply of goods and services that give rise to an output tax liability (including zero-rated supplies). The rules approximate when a transaction has been concluded and economic control of the goods and services has passed from the supplier to the recipient. In the majority of cases, the time of supply will be when the supplier issues an invoice or receives payment. This general rule is a mechanical provision that assists with the imposition and collection of that tax by determining such matters as when tax becomes payable.[4] The GST treatment of a supply is therefore determined by reference to these rules rather than when a registered person is required to file a return.

Recommendation

That the submission be declined.

Issue: Meaning of “substantially the same condition”

Submission

(67 – New Zealand Institute of Chartered Accountants)

Guidelines need to be published by Inland Revenue on the meaning of the phrase “substantially the same condition”.

Comment

Officials will discuss with submitters the publication of guidelines.

Recommendation

That the submission be noted.

1 Case N66 (1991) 13 NZTC 3,495.

2 LR McLean and Co Ltd and Ors v Commissioner of Inland Revenue (1994) 16 NZTC 11,211.

3 Case N16 (1991) 13 NZTC 3,142 at 3,147.

4 See Pine v Commissioner of Inland Revenue (1998) 18 NZTC 13,570 CA.