GST: proposed apportionment rules
APPLICATION DATE OF THE NEW RULES AND COMPLIANCE COSTS TO TAXPAYERS
Clauses 5, 13 and 14
Submissions
(Corporate Taxpayers Group, Deloitte, KPMG, Ernst & Young, New Zealand Institute of Chartered Accountants)
Businesses should be able to opt out from the new rules and continue to use the current system. The new rules will be particularly complicated in practice for large, partly exempt organisations, such as financial institutions. (KPMG, New Zealand Institute of Chartered Accountants)
Another solution would be to defer the application date of the proposed changes until a later date to enable businesses making significant exempt supplies to fully understand the new rules and implement new systems as necessary. (Corporate Taxpayers Group, KPMG, Ernst & Young)
Alternatively, entities should be allowed to continue their current practice to make adjustments for GST under agreements already reached with Inland Revenue, such as the Bankers Memorandum of Understanding with Inland Revenue. (New Zealand Institute of Chartered Accountants)
The GST Act should explicitly allow Inland Revenue to negotiate fair and reasonable apportionment methods with taxpayers. (Corporate Taxpayers Group, Deloitte)
Comment
Officials do not agree that the application date of the proposed measures should be deferred, especially in view of the simplification benefits that have been noted in the submissions.
Providers of financial services are concerned that the proposed apportionment rules will give rise to significant compliance costs for them for little additional value. The main concern is that existing agreements with Inland Revenue or other practices that are compliant with the current legislation will be unduly altered.
Officials agree that the legislation needs to be workable in practice for financial services providers, given the very wide range of financial assets that are held by this industry. Retaining the current legislation for the benefit of some would undermine the objectives of the proposed rules. However, we recommend the following amendments to the bill to address submitters’ concerns:
- For businesses that are principally in the business of supplying financial services, to allow apportionment to be based on either actual use or an alternative method approved by the Commissioner if the method provides a fair and reasonable result having regard to the proposed apportionment rules. This should provide the necessary flexibility for financial institutions to agree a workable approach with Inland Revenue and, for those within the industry who have existing apportionment agreements with Inland Revenue, to allow those agreements to continue with any necessary modifications.
- Businesses which would qualify for an alternative approved method would include a company group that meets the test of principally supplying financial services and a single entity that meets the test even if the group as a whole did not.
We have considered whether the recommended changes should apply more widely than the financial services sector and have concluded that this is unnecessary for the following reasons:
- The current provision that allows for an alternative method extends to all taxpayers. However, this is to reflect the uncertainty of the current apportionment provisions. The proposed apportionment rules should, on the other hand, provide greater certainty to most taxpayers – especially SMEs who need to apportion primarily to reflect the business and private use of assets. In addition, extending the ability to seek an alternative method beyond the financial services sector could give rise to additional administrative costs for Inland Revenue.
- Although no submissions have been received from the sector, the property sector is the other main sector affected by the apportionment rules. The number and range of assets held by this sector is necessarily far more limited than for the financial services sector. One issue that this sector could face is apportioning the concurrent use of assets – for example, when property that is being developed for sale is temporarily in whole or part rented out to tenants. However, the bill already provides a formula (draft section 21D) to deal with this situation and also provides the ability for the Commissioner to allow an alternative approach to the formula.
Recommendation
That the submissions be accepted in part. That the application date of the proposed rules should not be deferred.
However, the legislation should allow businesses which principally make supplies of financial services to agree with the Commissioner a fair and reasonable method of apportionment having regard to the apportionment provisions. A business that principally supplies financial services could be either a single entity or a company group that meets this test.
THE MECHANISM FOR TRANSITIONING INTO THE NEW RULES
Clause 14
Submissions
(Corporate Taxpayers Group, Deloitte, New Zealand Bankers’ Association)
Submitters state that the transitional mechanism proposed in the bill will have a negative impact on taxpayers, as taxpayers that undertake this option will be required to account for output tax on the full market value of the supply at the time of the deemed sale, but will be able to claim input tax only for the portion of the estimated taxable use of the asset. This will result in a fiscal disincentive to transition into the new rules.
Comment
To transition into the new regime, the bill requires the registered person to account as though they had disposed of the relevant goods or services at market value (and account for output tax on the disposal) and then acquire the goods or services for the same market value under the new regime.
Officials note that owing to the fundamental differences in the way the two regimes operate, most transitional methods would result in a loss to either the taxpayer or the tax base. Furthermore, owing to the voluntary nature of the transitional rules, it might be expected that the rules will only be used when providing a positive result for the taxpayer – meaning that the outcome of transitions is likely to be revenue negative. It is therefore important that the method adopted be as tax neutral as possible.
Officials have considered three possible options for a transition to the new rules for current assets.
- As currently provided in the bill, that current assets be deemed to have been sold at their market value and reacquired at that value for the purposes of the new rules.
- That a recalculation be undertaken based on the original cost price and a retrospective application of the new rules. This would require an offset of deductions under the new rules with all deductions claimed under the existing rules.
- Having a definite timeframe of five years from 1 April 2011 (1 April 2016), after which no further adjustments under the existing rules are required or allowed. This would not apply in the case of land, for which adjustments can be made for a much longer period.
We recommend option 3 as it is the simplest to apply and should not give rise to significant revenue losses or gains for the taxpayer.
Recommendation
That the submissions be accepted and new transitional rules provide for no further adjustments for current assets after 1 April 2016 (other than land).
TRACING INPUTS TO OUTPUTS
Clause 13
Submissions
(New Zealand Institute of Chartered Accountants, PricewaterhouseCoopers)
That the word “used” where it appears in new sections 20(3C) and 20(3F) be deleted. Further, if it is the intention that there is no change to the approach in the existing law to input tax credits – that is, that it is not necessary to directly trace acquired goods and services to taxable supplies produced – it should be clearly stated in the Finance and Expenditure Committee report to Parliament on the bill that this is the case. Alternatively, if there is a change in law this too should be clearly stated. (New Zealand Institute of Chartered Accountants)
Consideration should be given to inserting a new purpose provision into the GST Act to deal with input tax deductions and the principle of GST neutrality. This would ensure that no direct tracing of inputs to outputs is necessary, which would simply preserve the current position. Alternatively, the “principal purpose” test should be retained for the point of acquisition, but subsequent changes to the use of the asset would be relevant under the new apportionment rules. (PricewaterhouseCoopers)
Comment
The aim of the proposed rules in respect of the apportionment of input tax is to change the method for calculating the extent to which input tax deductions may be claimed.
Officials note that the current legislation does not provide any specific rules for tracing inputs to outputs, but also adopts an asset-by-asset formulation. As this is a feature of the current system, we do not consider that the changes suggested by submitters are necessary.
As noted earlier, however, officials have recommended that financial services providers be able to apply to the Commissioner for a fair and reasonable method that not require an asset-by-asset determination. This should address most of the compliance cost concerns raised by the submitters.
Recommendation
That the submissions be declined.
EXCLUSION FROM THE REQUIREMENT TO MAKE ADJUSTMENTS UNDER SECTION 20(3D)
Clause 13
Submission
(Ernst & Young)
Section 20(3D) is intended to relieve taxpayers from having to apportion input tax if they make mixed supplies and have reasonable grounds to believe that they will make a minimal amount of GST-exempt supplies. Clarification is required regarding:
- whether the exclusion applies from the date of initial acquisition or at the end of an adjustment period; and
- the length of period over which the requirement of the section must be met.
Comment
A purchaser may be required to apportion input tax (i) on acquisition and (ii) at the end of each adjustment period. The exclusion provided by section 20(3D) is intended to relieve taxpayers from having to apportion input tax in either or both of these situations. The determination of use should be undertaken at the time of claiming the initial input tax deduction and again on making the adjustment. For the latter, the time frame should be the period of use since the last adjustment.
Officials suggest that Inland Revenue provide published guidance on this matter.
Recommendation
That the submission be noted.
THE MEANING OF THE TERM “ACQUISITION”
Clauses 5, 13 and 14
Submission
(Ernst & Young)
Clarification is required as to what is considered by the terms “acquired” and “time of acquisition”.
Comment
The proposed legislation relies on the notion that input tax may only be claimed to the extent that an asset is used for making taxable supplies. In most situations, a purchaser will not be able to use goods or services until they obtain ownership of the goods and services. However, it is possible for goods and services to be acquired in other ways.
Officials consider that the terms “acquired” and “time of acquisition” should be given their normal meaning. We do not consider that attempting to define the terms would be helpful.
Recommendation
That the submission be declined.
AVAILABILITY OF INPUT TAX DEDUCTIONS FOLLOWING REGISTRATION
Clauses 13 and 14
Submission
(New Zealand Institute of Chartered Accountants)
Input tax credits should be allowed when an asset moves from non-taxable to taxable, or to a partially taxable state.
Comment
An unregistered person cannot claim as input tax the GST component of taxable acquisitions that they make. However, the person may later register for GST and start using the goods and services that they previously purchased in their unregistered capacity for making taxable supplies.
In these circumstances, the person should be able to claim an input tax deduction in respect of the previously acquired goods and services. The actual taxable use of the goods and services will have to be calculated from the date of the original acquisition and will take into account the previous non-taxable use of the goods and services.
Recommendation
That the submission be accepted.
MAKING CHANGE-IN-USE ADJUSTMENTS IN RESPECT OF SERVICES
Clause 14
Submission
(Corporate Taxpayers Group)
The proposal is to apportion input tax deductions in a “services” context in line with the actual use of those services. The submitter assumes that there will be no requirement for multiple GST change-in-use adjustments for services over a number of periods, but rather the supply of services will be treated as a one-off adjustment as is the case under the existing rules.
Comment
The proposed apportionment rules are intended to apportion input tax deductions in respect of goods and services in accordance with the taxpayer’s actual use of those goods and services until they are fully consumed or disposed of.
It is not proposed to introduce special rules for limiting the number of adjustments that have to be made in respect of services. Under the current change-in-use adjustments legislation, services are subject to the same general rules as goods.
It should be noted that, unlike goods, most services have a short lifespan and are generally consumed soon after acquisition. In the same way as under the current change-in-use regime, these services will normally require just one initial adjustment.
Some services may, however, last for longer periods. These services typically relate to intellectual property rights – for example, a licence to use a copyright may be used for a number of years. Under the proposed rules, the input tax in relation to such services will be adjusted throughout their use (up to the maximum number of adjustments as prescribed by the proposed legislation). Again, this requirement to make continuous adjustments to input tax relating to services is a feature of the current regime.
Recommendation
That the submission be noted.
THE MEANING OF THE TERM “DISPOSE”
Clause 14
Submission
(Ernst & Young)
Clarification is required as to how and when taxpayers might be considered to “dispose” of services so as to trigger a final adjustment of the nature provided in the proposed section 21E.
Comment
The term “dispose” is intended to apply to sales of goods and services, or any other disposition of goods and services, including a deemed disposition under the GST Act. The latter would include the deregistration of a GST-registered person.
The exact circumstances of how and when taxpayers might be considered to “dispose” of services will depend on the relevant facts. Officials do not consider that the issue warrants legislative clarification.
Recommendation
That the submission be declined.
ADJUSTMENT PERIODS
Clause 14
Issue: Time of first adjustment period
Submissions
(Corporate Taxpayers Group, KPMG, Russell McVeagh)
Requiring the first adjustment period for an asset to be between 12 and 24 months will cause material compliance issues. This is because assets in their first adjustment period will not be able to be grouped with existing assets for the purposes of applying the taxable portion percentage for a year, but will need to be tracked individually and have a weighted average actual use percentage calculated over the two periods.
The submitters suggest that a practical solution would be for the first adjustment period to be the time from acquisition to the first balance date.
Comment
Officials agree that allowing taxpayers to group acquired assets with existing assets would provide a compliance cost saving from not having to track assets on an individual basis. We note, however, that a shorter initial adjustment period could cause other problems – especially for the concurrent use of land provision. Therefore, while we accept the submission, taxpayers should have the option of the first adjustment period being the first balance date or the balance date which is at least 12 months after acquisition.
Recommendation
That the submissions be accepted subject to officials’ comments.
Issue: The effect of a change of balance date on adjustment periods
Submission
(Ernst & Young)
Clarification is required of the effect of a taxpayer changing their balance date on the definitions of “first adjustment period” and “subsequent adjustment period” in section 21F(2).
Comment
As a compliance cost saving measure, section 21F(2) aligns taxpayers’ balance dates and dates for making adjustments by stating that a taxpayer’s first adjustment period should end on the date that corresponds with the taxpayer’s balance date (subsection (a)) and subsequent adjustment periods should be periods that run at 12-month intervals after the first adjustment period (subsection (b)).
If a taxpayer changes their balance date without being able to also change the dates of subsequent adjustment periods, the compliance cost saving will not be achieved.
The proposals should allow that if a taxpayer changes their balance date, they have an option of realigning their adjustment periods by reference to the new balance date.
Thus, if in an adjustment period a taxpayer changes their balance date by moving it backwards (so as to effectively increase the length of the relevant adjustment period), their current adjustment period will end at the new balance date. In contrast, if in an adjustment period a taxpayer changes their balance date by moving it forwards (so as to effectively reduce the length of the relevant adjustment period), their current adjustment period will end at their new balance date of the following year.
Once the taxpayer has realigned their adjustment periods with the new balance date, their subsequent adjustment periods would be identified by reference to the proposed section 21F(2) in the bill.
Recommendation
That the submission be accepted.
THRESHOLDS
Clause 14
Issue: Increase of thresholds for number of adjustment periods
Submission
(Corporate Taxpayers Group, KPMG)
The thresholds governing the number of adjustment periods should be increased further.
Comment
Under the proposed rules, a taxpayer’s entitlement to an input tax deduction will depend on the extent to which they use the relevant goods and services for making taxable supplies. For this reason, the taxpayer will be required to estimate their actual use of the acquired goods and services, and to use those estimations in making adjustments to their input tax.
Depending on the value of the goods and services acquired, the number of adjustments that have to be made for substantial changes in the use of goods and services will be either nil, two, five or ten. The higher the value of an asset, the greater number of adjustments the taxpayer will have to make over a longer period of time. By requiring taxpayers to make adjustments in relation to high-value assets for longer periods of time, the proposed rules aim to minimise the possibility of taxpayers under- or over-claiming input tax in relation to those assets, so that the final amount of the input tax claimed by the taxpayer corresponds as closely as possible with the actual taxable use of the asset in question.
Although relaxing the thresholds would reduce compliance costs to taxpayers stemming from having to make continuous adjustments for changes in use, it would also reduce the accuracy of the final amounts of input tax claimed by taxpayers. Officials consider that the thresholds proposed in the bill strike a good balance between the need for accuracy and the reduction of compliance costs.
Officials note that the recommended amendment to allow calculation of the first adjustment period from the date of acquisition to the first balance date (rather than to the balance date which is at least 12 months after the date of acquisition) will reduce the time period during which taxpayers have to make adjustments.
Officials also note that, in most cases, the use of an asset will not vary significantly and only one initial adjustment will, in practice, be required. In comparison, the current change-in-use adjustment regime does not provide any limits for the number of adjustments that have to be made. Therefore, the new rules should, despite the numbers of adjustments that may be required, result in compliance cost savings.
Recommendation
That the submissions be declined.
Issue: “Taxable value”
Submissions
(KPMG, PricewaterhouseCoopers)
The word “taxable” should be deleted so that proposed section 21(2)(b) includes “the value of the goods and services”. This is consistent with the wording used in section 10(2) of the Act (being a GST-exclusive amount). (KPMG)
The phrase “taxable value” in section 21(2)(b) should be defined. It is understood that it refers to the GST-exclusive value of goods and services. (PricewaterhouseCoopers)
Comments
Section 21(2)(b) allows businesses to not make adjustments for change in use if the value of acquired goods or services does not exceed $5,000.
Officials agree with the suggestion to clarify that the “taxable value” refers to the GST-exclusive value of goods and services.
Recommendation
That the submissions be accepted.
Issue: Increase of threshold for no adjustments
Submission
(KPMG)
Section 21(2)(b) allows businesses to not make adjustments for change in use if the value of acquired goods or services does not exceed $5,000.
KPMG suggests increasing the threshold, for example, to $20,000.
Comment
On acquisition of an asset, a taxpayer would need to make a fair and reasonable estimation of the extent to which goods and services are to be used for making taxable supplies. Typically, if it later transpires that the actual taxable use of the asset differs from the taxable use of the asset as estimated on acquisition, the taxpayer will be required to make subsequent change-in-use adjustments in relation to the asset. A subsequent change-in-use adjustment will, however, not be required if the GST-exclusive value of the asset is less than $5,000.
Although this exclusion will act as a compliance and administration cost-saving mechanism, it may potentially result in a loss to the tax base. For example, a taxpayer may purchase an asset for a GST-exclusive value of $5,000 and claim the full available input tax of $750 (at 15%). If, immediately following the acquisition, the taxpayer changes their use of the asset to solely private use, the taxpayer will not be required to make a subsequent change-in-use adjustment and will therefore have claimed $750 more in input tax than they would have claimed if they were required to make ongoing adjustments.
Increasing the de minimis threshold to $20,000 would increase the potential losses described above to $3,000. At this level, the requirement to make adjustments seems warranted.
Recommendation
That the submission be declined.
Issue: Removal of $10,000 de minimis threshold
Submission
(KPMG)
A person is not required to make a subsequent change-in-use adjustment if the exclusion in section 21(2)(c) applies – that is, if the difference between the actual taxable use of goods and services and the intended actual use of goods and services is less than 10%, and the monetary value of the adjustment is less than $1,000.
The submitter considers that the $1,000 threshold is redundant and should be removed.
Comment
Depending on the value of goods or services and the GST component involved, a change of 10% may amount to a significant change in monetary terms. For example, a supply made for a GST-exclusive consideration of $10m would be subject to $1.5m of GST at 15%. A 9% change in the taxable use of the asset would therefore result in a potential adjustment of $135,000.
The monetary value of the adjustment threshold is therefore necessary to ensure that adjustments for changes in use are made when the monetary value involved is substantial.
Recommendation
That the submission be declined.
Issue: Clarification of de minimis threshold
Submission
(KPMG)
Clarification is needed about whether the 10 percent figure referred to in the new subsection 21(2)(c) relates to 10 percentage points or a percentage change from year to year.
In addition, the proposed legislation states that if the 10 percent threshold in section 21(2)(c) is exceeded in an adjustment period, the person must make an adjustment for any percentage difference in all later adjustment periods. It is submitted that this reduces the effectiveness of the exclusion, as a business must continue to make the adjustment even if the amount is nominal.
Comment
The 10 percent threshold, as drafted in the bill, compares the percentage actual use of the goods and services (calculated from the date of acquisition until the end of the latest adjustment period) with the percentage of the intended use of the goods and services as estimated on acquisition. Officials recommend that the legislation clarify this.
Officials agree that a further compliance cost saving may be achieved if taxpayers are not required to apportion the input tax when the change in use of the goods and services and the amount of the adjustment are not substantial.
For this reason, we recommend amending the requirement for ongoing adjustments if the 10 percent threshold is exceeded, to provide a further de minimis exclusion. The exclusion would apply to any adjustment period if the difference between the use calculated at the end of the relevant adjustment period and the percentage previous use calculated in the period when the taxpayer was last required to make an adjustment does not exceed 10% and the monetary value of the adjustment does not amount to more than $1,000.
Recommendation
That the submissions be accepted.
Issue: 5 percent safe harbour threshold
Submission
(New Zealand Bankers’ Association)
The 5 percent safe harbour threshold that was proposed in the 2009 discussion document Accounting for land and other high value assets should be retained.
Comment
The threshold proposed in the discussion document would allow a person to not make a subsequent change-in-use adjustment in relation to goods or services if the actual taxable use of goods or services differed from the intended use of goods or services by 5 percent or less.
Depending on the value of goods or services involved, a change of 10% in respect of the GST component of the supply may amount to a significant change in monetary terms. Therefore, having considered the issue further, officials propose to raise the threshold to 10% but limit the exclusion to situations where the monetary value of the change does not exceed $1,000.
Recommendation
That the submission be declined.
Issue: Clarification of threshold for periodic supplies of goods and services
Submission
(Ernst & Young)
Clarification is needed as to whether, in cases of periodic supplies of goods and services provided under section 9(3) (such as electricity, rates), the $5,000 threshold applies to each separate supply of goods and services received.
Comment
Periodic supplies under section 9(3) are treated as separate supplies for GST purposes. Therefore, the threshold in section 21(2)(b) would be able to be applied to each individual supply. We do not consider further clarification is needed.
Recommendation
That the submission be declined.
CONCURRENT USE OF LAND
Clause 14
Issue: Application of the concurrent use approach
Submissions
(New Zealand Institute of Chartered Accountants, PricewaterhouseCoopers)
That the rules for concurrent use of land be removed. The rules in section 21D are based on very similar principles to the previous change-in-use rules. Under the new approach, input tax is claimed based on how the taxpayer intends to use the goods and services. Under the new apportionment model, it is no longer appropriate to seek an adjustment when an asset is fully employed in the taxable activity. The asset, namely land and improvements, is fully committed to the taxable activity at all times. While the approach in section 21D for concurrent uses of land may be valid in a change-of-use model, there is no place in an apportionment model for requiring adjustments of this nature. (New Zealand Institute of Chartered Accountants)
A concessionary period of 12 months, when no adjustment is required, should be considered for the purposes of the concurrent usage of land adjustment in section 21D. Otherwise, the rule may discourage property developers and other taxpayers in similar situations from renting their properties pending sale, as a portion of their initial input tax deduction will be reduced due to the derivation of the exempt rental income. (PricewaterhouseCoopers)
Comment
Under the proposed apportionment approach, the portion of a deduction that a person should be entitled to must correspond with the extent to which the asset is used for taxable purposes. If the taxable use of the asset fluctuates, adjustments to the input tax deductions already claimed will have to be made to ensure that the overall amount of the deduction claimed corresponds with the actual taxable use of the asset from the date of the acquisition until the date when the adjustment is made.
In most situations, an asset may only be used for either taxable or non-taxable purposes at one point in time. For example, at any given time a motor vehicle may be used either for making deliveries of goods and services or for taking children to school – but usually not both at the same time.
In some circumstances, however, an asset may be used for taxable and non-taxable purposes at the same point in time – for example, a property developer may supply a house as a rental dwelling for a few months while advertising the house for sale. Thus, for the duration of the rental period, the asset is not only fully committed to the taxable activity (the sale), but is also simultaneously fully committed to the exempt activity (residential rental income). In this situation, it would be incorrect to simply ignore the non-taxable use of the property, considering that there is a chance that the property may never actually be sold.
Section 21D aims to provide guidance regarding the methodology to be used to apportion between concurrent uses of land for taxable and non-taxable purposes during adjustment periods when the land was so used. It allows taxpayers to apply to the Commissioner for an alternative approach if the formula is not workable in the circumstances.
Officials understand that the predominant concern of the submitters is the compliance cost of adjusting for the exempt use when the exempt use is temporary and/or will not be reflected in the final wash-up calculation when the asset in question is disposed of.
Officials consider that this concern would be partially addressed by the fact that the legislation would allow the first adjustment to be made after the second balance date. This should mean that in many cases of temporary exempt use, the adjustment will not be required.
Recommendation
That the submissions be declined.
Issue: Application of the rules
Submissions
(KMPG, New Zealand Institute of Chartered Accountants)
The application of section 21D is unclear and should be amended to reflect the policy intentions. For example, it should be clarified whether it will apply to all organisations that are covered by the new change-in-use adjustment rules as they will be making both taxable and non-taxable supplies, or is it only intended to apply when residential rental income is derived by a business that mainly makes taxable supplies? (KPMG)
As drafted, new section 21D applies to all entities that make both taxable and non-taxable supplies. However, it is understood that the policy is that it applies only to when rental income is derived. (New Zealand Institute of Chartered Accountants)
Comment
Section 21D is intended to assist taxpayers in identifying the extent of their taxable use in respect of land that is used concurrently for taxable and non-taxable purposes. The “concurrent” application of the land will happen when the land is simultaneously used for both a taxable function and a non-taxable function.
This situation will most commonly arise in property developer situations, that is, when a developer derives rental income (exempt use) from a property while simultaneously advertising it for sale (taxable use). Officials are not aware of a vast number of other situations in which concurrent use arises. We therefore consider that limiting the formula to land only (as the proposed section 21D currently does) provides sufficient certainty to taxpayers regarding its application.
Recommendation
That the submissions be declined.
Issue: Formula – application
Submission
(Corporate Taxpayers Group)
In the formula in section 21D, the rental should only be the GST-exempt rental.
Similarly, if the land is not rented, the “total consideration for supply” should not include the market value of the land upon which rental income would have been derived if the land had been rented. The only adjustment should be in relation to the GST-exempt rental actually derived, not the potential GST-exempt rental.
Comment
The reference to “rental income” in the bill is intended to refer to any rental income derived from the exempt activity – typically, from the supply of accommodation in a “dwelling”. Furthermore, the requirement to calculate the “market value of rental income that would have been derived if the land had been used for that purpose” is intended to apply to situations when the land is used for a non-taxable purpose that may not provide the person with any income, for example, a developer using the property as their own residential accommodation prior to the sale.
Section 21D will be amended to clarify that it is only for the purposes of taking into account exempt or non-taxable supplies.
Recommendation
That the submission be accepted.
Issue: Compliance costs of obtaining market value of land
Submissions
(New Zealand Institute of Chartered Accountants, Corporate Taxpayers Group)
Obtaining the market value of land at the time of making the adjustment can be costly if an accurate assessment is required. For the purposes of determining the adjustment for land required when the land is also used for non-taxable purposes, the land rating valuation would provide a reasonable estimate if used on a consistent basis. (New Zealand Institute of Chartered Accountants)
The requirement to obtain the above market valuations on an ongoing basis (when an adjustment is required) will result in material compliance costs. (Corporate Taxpayers Group)
Comment
Officials concur with the submission that if the market value of the land is not readily identifiable, the requirement should be able be satisfied by using other fair and reasonable methods that may provide a reasonable approximation of the market value of the land and the bill should be amended accordingly.
Recommendation
That the submissions be accepted in part.
GST TREATMENT OF GOODS AND SERVICES ON DISPOSAL
Clause 14
Submission
(KPMG)
The legislation should clarify whether an entity that is making exempt supplies is still required to make an adjustment under section 21E.
Comment
If a registered person disposes of, or is treated as disposing of, goods or services, they may be able to claim an additional amount of input tax (new section 21E). The amount that can be claimed on disposal cannot exceed the total amount of input tax to which the person would be entitled if they had acquired the goods or services solely for making taxable supplies.
Section 21E(1)(b) specifies that the adjustment is required only if the person disposes of the goods or services in the course or furtherance of a taxable activity. Therefore, the adjustment will not be required if the disposal is in the course or furtherance of making exempt supplies.
Officials consider that the legislation is sufficiently clear in this regard.
Recommendation
That the submission be declined.
MAKING ADJUSTMENTS IN RESPECT OF GOODS NOT YET USED
Clause 13
Submission
(Ernst & Young)
Section 20(3C) refers to the extent to which the goods and services “are used” for making taxable supplies. The question arises whether this terminology intended to include items intended to be used for such purposes, but which are not yet applied in the taxable period in which they are acquired (such as raw materials not yet used for making goods).
Comment
Officials accept that taxpayers should be able to claim a full deduction in respect of goods and services “available for use” for making taxable supplies, and the proposed legislation should be amended to that effect.
Recommendation
That the submission be accepted.
OTHER DRAFTING MATTERS
Clauses 13 and 14
Submissions
(PricewaterhouseCoopers, Russell McVeagh, Ernst & Young)
A number of technical changes need to be made to the current draft legislation. The majority of those are minor drafting matters that are needed to ensure that the legislation works as intended.
Comment
Officials have considered all the changes proposed in the submission and agree that most of them are necessary.
Recommendation
That the submissions be accepted.
INPUT TAX DEDUCTIONS IN RESPECT OF SECOND-HAND GOODS
Submission
(BDO Wellington)
Section 3A(3)(a)(i) of the GST Act should be amended so that the input tax is limited to the GST output tax paid by the last registered seller of those goods, if in fact there was any previous GST output tax.
Comment
Officials note that the submission is outside the scope of the matters in the bill. Officials will consider whether the issue should be recommended for inclusion in the Government’s policy work programme.
Recommendation
That the submission be noted.