Chapter 2 - The zero-rating rule

2.1 Section 11A of the GST Act specifically prescribes the various situations when services are zero-rated for GST purposes.

2.2 Section 11A(1)(k) specifies one of these situations. It requires services to be zero-rated if they are supplied to a non-resident who is off-shore. Four requirements must be satisfied before the service can be zero-rated:

• The recipient of the supply must be a non-resident at the time the services are performed.
• The recipient must be outside New Zealand at the time the services are performed.
• The services cannot be supplied in connection with any New Zealand land or moveable property situated in New Zealand.
• The services cannot be an acceptance of an obligation to refrain from carrying on a taxable activity, to the extent that the activity would have occurred within New Zealand.

2.3 The first two requirements are relevant for the analysis of matters discussed in this issues paper.

Exception for non-resident companies or un-incorporated bodies

2.4 Section 11A(3) of the GST Act provides an exception to the requirement that the recipient of the supply must be outside New Zealand at the time the services are performed. The exception applies only to non-resident companies or unincorporated bodies. It does not apply to natural persons (individuals).

2.5 The exception states that the recipient of the supply will be deemed outside New Zealand if the recipient’s presence is minor or the presence is not effectively connected with the supply.[4]

When are services performed?

2.6 The zero-rating rule in section 11A(1)(k) of the GST Act requires that the recipient of the supply must be a non-resident who is outside New Zealand “at the time the services are performed”. In the case of a supply that occurs over a period of time (such as immigration services) the time the services are performed is interpreted as the period during which the supplier provides the services. This can be considered to be the period between the time the services commence and the time the services are completed.[5]

2.7 There are two main policy reasons why the rule looks at the period of supply in determining the status of the recipient and therefore whether services are zero-rated or standard-rated.

2.8 First, the requirement is consistent with the destination principle. As stated previously, the principle requires that goods and services are taxed in the jurisdiction where they are consumed. A practical way of determining whether services are consumed in a particular jurisdiction is to look at the person’s resident status and presence during the period the services are supplied. For example, if the recipient is a resident and present in New Zealand during the period of service, that recipient is considered to have consumed that service in New Zealand and the services will, therefore, be standard-rated.

2.9 Secondly, there would be clear avoidance opportunities if the status of the recipient was determined at one particular point of time – that is, at the time of invoicing or payment for services. For example, in order to avoid tax, the recipient could ensure he or she is out of New Zealand at the one point of time when the person’s status was determined.

2.10 However, assessing the tax status of the transaction over the period that the service is being performed can be difficult in practice and lead to uncertainty over the price paid (or received) for the service. The effect of the rule is that it requires the supplier to have knowledge of the recipient’s physical location and the recipient’s residence status during the period of service. This can be particularly difficult if the service is provided over an extended period of time. These issues are discussed in the following chapters.

Apportionment of a supply

2.11 It is also worth noting that, if there is a single supply (no distinction between parts of the supply) there is no ability to apportion the supply between a portion that would be standard-rated, and a portion that would be zero-rated.[6] So if there is a single supply of services to a non-resident who is off-shore, the supply is required to be zero-rated if the recipient enters New Zealand during the period of service.

2.12 The courts have held that there is a general ability to apportion zero-rated parts of a supply under the GST Act where, on the facts, there is a true distinction between parts of a supply. However, this ability to apportion is restricted to circumstances when, as a matter of fact and degree, a sufficient distinction exists between the different parts of the transaction to make it reasonable to separate them.[7]

2.13 The draft interpretation statement concluded that it is unlikely the visa application services would be able to be apportioned, as generally all of the services are performed as part of one supply (the supply of services to facilitate obtaining a visa).[8] However, following external consultation it was considered that, in particular cases, there might be some scope for apportionment.

2.14 Section 9(3)(a) does, however, allow a supply of services to be treated as successive supplies. The section deems a supply to take place successively where there is an agreement for periodic payments. In this case, it would be necessary to determine the correct GST treatment for each successive supply.[9]

2.15 In example 1 the consultant is able to zero-rate the services supplied during the first, third, and fourth months the services were supplied, as Jane was off-shore during these times. However, the consultant is required to standard-rate the supply during the second month of service, as Jane was present in New Zealand during that time.

4 Section 11A(3) of the GST Act.

5 Inland Revenue draft interpretation statement GST on immigration services, pg 5.

6 Section 11A(1)(k) of the GST Act contains no apportionment provisions.

7 Auckland Institute of Studies Ltd v CIR (2002) 20 NZTC 17,685 (HC).

8 Inland Revenue draft interpretation statement GST on immigration services, pg 10.

9 Inland Revenue draft interpretation statement GST on immigration services, pg 12.