Chapter 10 – Technical and remedial issues


10.1 This chapter seeks feedback on several proposals which involve more minor or technical changes to the GST Act. These proposals relate to:

  • GST grouping rules;
  • input credits on goods not physically received yet at the time GST return is filed;
  • second-hand goods input tax credits on supplies between associated persons;
  • providing more flexibility for the Commissioner to approve the end date of a taxable period;
  • members of non-statutory boards; and
  • challenge rights in relation to a decision of the Commissioner to re-open time-barred GST returns.

10.2 We also welcome submissions with suggestions for other technical amendments or remedial matters which could improve or correct the operation of provisions in the GST Act.

GST grouping rules

10.3 The GST grouping rules are intended to reduce distortions that might arise between a single entity, a branch structure and a group structure. For example, by disregarding intra-group taxable supplies, a group of companies is treated in the same way as a single company that might make taxable supplies between different departments or branches. In the case of a single company, the supply would be a “self-supply” and disregarded. The grouping rules ensure that in the case of a group of companies, the supply may similarly be disregarded.

10.4 The GST grouping rules are also intended to reduce compliance costs. For example, the representative member is responsible for filing a single consolidated GST return on behalf of all members in the GST group, which reduces compliance costs for group members who do not all need to file separate GST returns. Also, by disregarding supplies between group members for GST purposes, the cost of accounting for these intra-group supplies is reduced.

Clarify how the GST grouping rules relate to the other provisions in the GST Act

10.5 There is currently no legislative guidance on how the grouping rules should interact with the other parts of the GST Act. We note that there are two different interpretations – the first interpretation (the narrow interpretation) is that other provisions are applied before the grouping rules. Under the second interpretation (the wide interpretation), the grouping rules are applied before other provisions.

Applying other provisions first (the narrow interpretation)

10.6 Under this approach, by deeming the representative member to make a group member’s supply, the supply is still treated as “made” by the group member and simply attributed to the representative member.

Applying the grouping rules first (the wide interpretation)

10.7 By deeming the representative member to make a group member’s supply, the supply is treated as “made” by the representative member.

Comment

10.8 These two possible interpretations and some examples of where they produce differing outcomes are further explained in IRRUIP 13 Consequences of GST Group Registration issues paper which was released in April 2019.

10.9 In most cases, it does not matter which interpretation is applied. The outcome and analysis are the same under both interpretations.

10.10 In some cases, the wide interpretation provides an outcome that is more consistent with the purpose of the grouping rules. For example, the wide interpretation is more likely to reduce distortions that might arise between a New Zealand resident single entity, a New Zealand resident entity with an offshore branch, and a group structure with a New Zealand-resident representative member.

10.11 Another case where the wide interpretation helps achieve the policy intent is where a holding company group member is used to raise capital on behalf of another group member which is the operating company. In this case the holding company may only make exempt supplies of financial services, so under the narrow view could be unable to claim input tax deductions for capital raising costs. This is because the taxable supplies of the operating company group member would not be considered when determining if section 20H[3] can be applied by the holding company. Under the wider view, the taxable supplies made by the operating company would be considered, which is consistent with the policy intent of the capital raising deduction rules.

Suggested solution

10.12 We consider it would be useful to add a provision to clarify how the GST grouping rules should be applied in relation to the other provisions in the Act.

10.13 Specifically, the new provision could clarify that the GST grouping rules in section 55(7) should be applied prior to the application of other provisions in the Act. This would be consistent with the wide interpretation that is described in IRRUIP 13 Consequences of GST Group Registration.

Allow the representative member to issue invoices on behalf of all group members

10.14 A practical issue that arises from the wide interpretation is whether there is an ability for the representative member to issue tax invoices on behalf of other group members. This is because section 55(7)(h) states that grouping does not affect a registered person’s obligations under section 24. Section 24 requires a registered person to issue tax invoices.

10.15 Requiring each individual group member to issue their own tax invoices in cases where their supplies are deemed to be made by the representative group member would reduce some of the benefits that GST grouping has in reducing compliance costs by allowing GST accounting to be consolidated within the representative member.

Suggested solution

10.16 Officials consider an amendment to allow the representative member to be able to issue a tax invoice on behalf of all members, regardless of whether or not those members are registered or unregistered would be appropriate.

Input tax credits on goods not physically received yet at the time the GST return is filed

10.17 Section 20(3C) provides that where goods are acquired by a registered person, an input tax deduction is allowed to the extent to which the goods are “used for, or are available for use in” making taxable supplies.

10.18 The issue is whether goods are “available for use” if the registered person has not yet physically acquired those goods by the time they file their GST return. For example, they may have paid for or received an invoice for purchase of the goods, but the goods may not have been delivered to them yet.

10.19 Section 20(3C) was introduced in 2010. The previous rule required the registered person to consider the “principal purpose” of the goods.

10.20 This suggests that from a policy perspective section 20(3C) is intended to limit the deduction to the extent to which the goods will be used to make taxable supplies (as opposed to a non-taxable use such as private use or exempt supplies).

Suggested solution

10.21 It was not intended to exclude input tax credits in cases where the person has not yet obtained physical possession of the goods. Therefore, it is proposed that section 20(3C) be amended to clarify that the requirement is met to the extent to which the goods are “used for, or are expected to be used for, or are available for use in,” making taxable supplies.

10.22 We consider this would be a remedial amendment which should apply retrospectively from 1 April 2011, as this is the date from which section 20(3C) first applied.

Second-hand goods input tax credits on supplies between associated persons

10.23 Section 3A(3)(a) of the GST Act limits a second-hand goods input tax credit on supplies between associated persons to the lesser of:

(i) the tax included in the original cost of the goods to the supplier; and

(ii) the tax fraction of the purchase price; and

(iii) the tax fraction of the open market value of the supply.

10.24 In many cases the supplier may have purchased an asset for which they were not charged any GST (although GST costs can be embedded in the cost of the asset). As example 25 illustrates this can lead to section 3A(3)(a)(i) denying the ability to claim any second-hand goods input tax credit:

Example 25: No ability to claim a second-hand goods input credit for an associated supply

A developer sells a property to Sam for $1.15 million, including $150,000 of GST.

Sam is not registered for GST (or, if registered does not use the property to make taxable supplies). Two months later Sam sells the property for $1.15 million to John. As this sale is not subject to GST, there is no GST included in the sale price to John.

John lives in the property for five years and then sells the property for $1.5 million to his sister, Jasmine who will re-develop the property to use it as the premises for her business of making taxable supplies.

Currently, section 3A(3)(a)(i) would limit the second-hand goods input tax credit to the GST included in the original cost to John, which was zero – therefore Jasmine is unable to claim any second-hand goods input tax credit.

The correct policy result is that Jasmine should be able to claim a second-hand goods input credit based on the tax fraction (3/23rds) of the original cost to John which would be a $150,000 second-hand goods input credit.

Suggested solution

10.25 Officials consider it would be appropriate for an amendment to section 3A(3)(a)(i) so that the second-hand goods input tax credit is limited to the tax fraction (3/23rds) of the original cost of the goods to the supplier. We consider this amendment should apply prospectively from the date of enactment.

Providing more flexibility for the Commissioner to approve the end date of a taxable period

10.26 A taxable period generally ends on the last day of a month, but under section 15E(2) a registered person may apply to the Commissioner for approval to have a taxable period ending on a different day, so long as that day is not more than seven days before or after the last day of the month.

10.27 Many businesses like to use a “4-4-5” accounting period[4] which in some cases could end on a date in the month that is outside the seven days before or after the last day of the month. In these situations the Commissioner cannot approve a different taxable period end date under section 15E(2). Therefore, the taxable periods for these businesses’ GST returns may not align with their accounting periods which increases their compliance costs.

Suggested solution

10.28 Officials propose removing the requirement in section 15E(2) that the approved date must be within seven days before or after the last day of the month. This would allow the Commissioner to approve a taxable period end date for a broader range of dates, and could better cater for “4-4-5” accounting periods.

Members of non-statutory boards

10.29 Section 6(3) of the GST Act excludes several activities from being taxable activities. Examples of exclusions from the meaning of “taxable activity” include those for employees, directors, Members of Parliament and members of local authorities and statutory bodies. The rationale for these exclusions is to minimise compliance and administration costs as the contracts for these positions would be (at least predominantly) business-to-business, there would be compliance and administration costs for very little revenue if such persons were required to register for GST.

10.30 The issue is that the scope of the exclusion for board members in section 6(3)(c)(iii) appears to be narrower than was intended.

10.31 Section 6(3)(c)(iii) excludes from the meaning of “taxable activity” any engagement, occupation, or employment as a Chairman or member of any local authority or any statutory board, council, committee or other body.

10.32 The question is whether this exclusion is limited to members of statutory boards and other statutory bodies, or whether it equally applies to members of non-statutory bodies. The current view being applied by Inland Revenue is that section 6(3)(c)(iii) only applies to members of statutory bodies. Therefore, members of non-statutory boards are treated differently to members of statutory boards despite the well-documented policy intention to exclude board members more generally from having a taxable activity.

Suggested solution

10.33 The exclusion for members of statutory boards and other statutory bodies could be widened so that it clearly applies to members of non-statutory boards.

Challenge rights in relation to a decision of the Commissioner to reopen time-barred GST return

10.34 Section 108A of the Tax Administration Act 1994 prohibits the Commissioner from amending a GST assessment to increase the amount assessed if four years have passed from the end of the taxable period in which the return was filed. The Commissioner may however amend a GST assessment at any time if the Commissioner considers the person knowingly or fraudulently failed to disclose all of the material facts that are necessary for determining the amount of GST payable for a taxable period.

10.35 Section 138E(1)(e) of the Tax Administration Act sets out that a right of challenge against a decision made by the Commissioner under section 108A to reassess a time-barred GST assessment is not conferred under Part 8A. However, taxpayers do have the right to challenge a decision made by the Commissioner under section 108 to reopen a time-barred income tax assessment. The consequence of this is that a Commissioner-initiated reassessment for income tax is a “disputable decision”, whereas her decision to reopen for GST is not. A decision by the Commissioner to reopen a time-barred GST assessment can therefore only be challenged by way of judicial review on very limited grounds.

10.36 The reasons for section 108 being a disputable decision arose from the decision in Maxwell v Commissioner of Inland Revenue [1962] NZLR 683. In Maxwell, the Court of Appeal ruled that under the law as it was then, the decision could not be challenged on the grounds it was incorrect but opined that this was an unsatisfactory state of affairs. Shortly afterwards, the relevant legislation was amended to provide that this type of decision was the then-equivalent of a disputable decision.

10.37 Until very recently Inland Revenue’s view had been that an income tax reassessment under section 108 could only be challenged on essentially judicial review grounds (such as where the Commissioner did not truly hold the requisite opinion, the Commissioner took the wrong grounds into consideration, or the Commissioner misdirected herself as to the relevant law). Under this view, the taxpayer could not challenge whether the returns were in fact fraudulent, wilfully misleading or omitted income. On this basis the difference between a challenge to an income tax reassessment compared with a GST reassessment was simply a technical one as to what form of proceedings (Part 8A challenge or judicial review) would be used to advance the challenge, rather than the grounds on which the challenge could be made.

10.38 However, two cases Edwards v Commissioner of Inland Revenue [2016] NZHC 1795 and Great North Motor Company Limited v Commissioner of Inland Revenue [2017] NZCA 328 have made it clear that a taxpayer may challenge an income tax assessment on the basis that it was time barred and the Commissioner was not permitted to make a reassessment under section 108. In these cases, the Court must review from the beginning whether the return in question was in fact fraudulent, wilfully misleading or omitted income. As noted in the decisions, this outcome is consistent with the scheme of the challenge provisions in the Tax Administration Act and with the Commissioner’s role in the section 108 decision.

10.39 The consequence of this is that there are two very different approaches to challenging a time bar for income tax as opposed to GST. There is no reason why a taxpayer should have much more limited scope to challenge a decision by the Commissioner under section 108A to reopen a GST return based on the Commissioner’s opinion that the taxpayer has, for instance, fraudulently failed to disclose necessary matters in the return.

Suggested solution

10.40 Section 108A could be removed from the excluded provisions listed in section 138E(1)(e) of the Tax Administration Act to ensure that challenges to both time bar provisions (sections 108 and 108A) can be made on the same grounds.

Questions for submitters

  • What are your views on these issues and the suggested solutions?
  • Are there other technical or remedial issues with the GST legislation that officials should consider?
 

[3] The provision of the GST Act which contains the rules for the treatment of GST incurred in making financial services for raising funds.

[4] The 4-4-5 accounting period divides a year into four quarters of 13 weeks grouped into two four-week periods and one five-week period. Its advantage over a regular monthly calendar is that the end date of the period is always the same day of the week, which is useful for shift or manufacturing planning.