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Inland Revenue

Tax Policy

PUBLISHED 12 September 2000

Select committee recommends changes to GST proposals, anti-avoidance "attribution rule"

Parliament's Finance and Expenditure Committee has reported back to Parliament on the Taxation (Annual Rates, GST and Miscellaneous Provisions) Bill, introduced in May. The main changes recommended by the committee relate to the proposed GST legislation and the "attribution rule", a measure designed to counter avoidance of the 39% top personal tax rate.

For our special report on the committee's main recommendations, see FEC recommendations on Taxation (Annual Rates, GST and Miscellaneous Provisions) Bill.

The officials' report on submissions on the bill was also released today and is available at Officials' Report 21 August 2000.

The amended bill, which includes the committee's commentary, is available at Bennetts Government Bookshops.

The bill is expected to be passed in October or November.

FEC recommendations on Taxation (Annual Rates, GST and Miscellaneous Provisions) Bill

The Finance and Expenditure Committee has reported back to Parliament on the Taxation (Annual Rates, GST and Miscellaneous Provisions) Bill and recommended several changes to the legislation proposed in the bill. The main recommendations relate to the proposed GST legislation and to the "attribution rule", a measure designed to counter avoidance of the 39% top personal tax rate.

This report outlines the main changes recommended by the committee. They remain recommendations until the bill has had its second reading.

Goods and Services Tax
The Attribution Rule

Goods and Services Tax

The GST proposals are wide-ranging and include extensive base maintenance, compliance cost and remedial measures. The main amendments to the proposals recommended by the committee are as follows:

Input tax credits for "changes in use" of imported goods

The bill removes any ability to claim an input tax credit when an asset that has previously been outside the New Zealand tax base, and has not therefore been used in making taxable supplies, starts to be used to make supplies in New Zealand.

The provision in the bill will apply from 1 October 1986, subject to a savings provision for claims agreed to in writing by the Commissioner of Inland Revenue before the date of introduction of the bill. The committee recommended clarification of the savings provision so that it will apply to:

  • input tax credit claims which the Commissioner has paid or agreed to pay before the date of the introduction of the bill; and
  • claims of which the Commissioner has not been specifically notified other than by inclusion in a GST return before introduction date.

"Associated persons" definition

The bill amends the existing definition of "associated persons" to include categories of persons between whom there is a degree of connection sufficient to justify their inclusion. Some submissioners expressed concern, based on one interpretation, that the definition in the bill, as it was introduced, is unduly broad. The committee considered that the general scope of the proposed definition is appropriate but recommended two minor amendments to the universal tripartite test to ensure that the definition is not interpreted more broadly than intended.


Under the bill as introduced, taxpayers contemplating the sale of high-value appreciating assets (such as real property) after the legislation is enacted might be encouraged to change the use of their property from business to private, make a one-off output tax adjustment for the change in use and then sell the property in their private capacity. This would effectively avoid the provision in the bill aligning the treatment of assets sold immediately before deregistration and assets retained on deregistration by requiring output tax in the latter case to be paid on a market value basis. To remove such opportunities, the committee has recommended a specific anti-avoidance measure to provide that a deemed supply would not arise if a taxpayer were contemplating the sale of the asset for which a change in use was claimed.

Deferred settlements

The bill addresses a revenue risk caused by the difference between the time at which GST is returned (if the vendor accounts for GST on a payments basis) and an input tax credit claimed. (If the purchaser is on the invoice basis this will be immediately.) The bill was drafted to exclude transactions when settlement is required within 93 days. Submissioners commented on whether there was a need for amendments to target deferred settlements and also noted that the 93-day grace period would not be sufficient for some business transactions. While the committee considered that reform is necessary to prevent the growing number of deferral arrangements, it acknowledged that the proposal could be narrowed in its focus so as to ensure that genuine transactions are not caught. The committee therefore recommended that the time period in which a deferred settlement will not be subject to the proposed amendments be extended from 93 days to 365 days.

Last day of taxable period

The bill, as introduced, limited the extent to which taxpayers are able to use an alternative day as the last day of their taxable period. This change was recommended as some taxpayers have been able to use the existing right to choose an alternative last day of taxable period to obtain sizeable tax timing advantages.

In the submission process, however, new issues were raised concerning the ability of exporters to mitigate the cash flow disadvantages of GST. In the committee's view, these issues require further analysis. The committee has recommended that the relevant clauses be removed from the bill and that officials report to the Government after further consideration of the cash flow impacts of GST on exporters.

One-off adjustments for changes from non-taxable to taxable use

There is currently some doubt as to whether it is possible to make one-off, rather than periodic, adjustments for assets with a value in excess of $10,000. For assets shifting from non-taxable to taxable use the bill, as introduced, did not extend the ability to make one-off claims beyond a proposed threshold of $18,000. This was to protect the revenue.

The committee received a submission, however, that significant compliance costs would arise from this limitation if assets that exceed $18,000 regularly undergo a 100 percent change in use. To address this concern, and at the same time reduce the revenue risk in providing one-off adjustments, the committee has recommended that a one-off adjustment be allowed at the discretion of the Commissioner in these circumstances. Before the Commissioner approves such an adjustment the taxpayer will have to satisfy a number of statutory criteria, including that one-off adjustments are also made for taxable to non-taxable changes in use.

General insurance

To address concerns expressed by the Insurance Council, the committee has recommended the following changes to the bill affecting the treatment of general insurance:

  • The clause that would impose a GST liability on an insured person in relation to an insurance payment to a third party (if registered for GST) should be amended to place the liability instead on the third party when that party receives the payment. This change is recommended to reduce significant compliance costs that the industry might otherwise face.
  • Further amendments should be made to clarify the treatment of subrogation payments received by insurers and the availability of an input tax credit for such payments.

As introduced, the bill provided that payments to registered recipients for losses incurred in the course or furtherance of a taxable activity are taxed. However, the committee considered that the issue needs further consideration in the wider context of financial services. It has therefore recommended that amendments affecting the treatment of interest included in subrogation payments be removed and the issue deferred for further consideration as part of the planned review of the GST treatment of financial services.

Definition of input tax

Some submissions suggested that the reform of the definition of "input tax" did not go far enough to resolve inconsistencies that existed between the application of the Goods and Services Tax Act 1985 and the Customs and Excise Act 1996. The committee has recommended that further legislative amendments be made to make the reforms more effective. These changes will make it easier for agents of non-resident principals (who are selling the non-resident's goods in New Zealand) to claim an input tax credit for GST levied at the border.

The committee has also recommended changes to ensure that:

  • when an asset is imported but is unsuitable for its intended use, a refund of any GST paid at the border is still available;
  • agents involved merely in delivering goods cannot obtain refunds of GST paid in those goods.

Tokens, stamps and vouchers

The bill provides that the supply in relation to a token, stamp or voucher redeemable for goods and services will be recognised when the token, stamp or voucher is acquired. However, to reduce the compliance costs that may arise in some cases, there will be an option for the supplier to account for GST when a token, stamp or voucher with a monetary face value is redeemed.

The committee has recommended the following changes to the bill to clarify the GST treatment of tokens, stamps and vouchers:

  • The option to return GST on the redemption of a token, stamp or voucher will only affect the issuer of the token, stamp or voucher and the supplier of the goods and services specified in the token, stamp or voucher. Therefore a registered person who chooses to on-sell a voucher rather than redeem it for goods and services will be required to return GST when the voucher is sold, not when it is redeemed by the purchaser.
  • The option to return GST on the redemption of a token, stamp or voucher will apply only if it is not practical for the issuer to return GST when it is supplied and the issuer of the token, stamp or voucher and the supplier of the goods and services specified in the token, stamp or voucher agree that GST is to be returned on redemption.

Time of supply for rates

The GST Act deems a supply of goods and services by a local authority to occur when any amount of rates is payable to the local authority. The bill provides that the time of supply will be the earlier of:

  • the date on which an instalment notice is issued if the instalment notice requires payment by a particular date;
  • the date on which payment is required by the instalment notice;
  • the date on which payment is received.

A submission on the bill raised a potential problem with routine notices of levy unintentionally triggering the time of supply. The committee agreed that notices of levy should not trigger a supply for GST purposes in relation to annual rates. It has recommended that a minor amendment be made to the bill to ensure that a GST liability arises in relation to each separate instalment payment, rather than the total amount of rates payable for the year.

Going concerns

The transfer of a going concern between registered persons is zero-rated for GST purposes. The bill as introduced provided that the test for a going concern is applied at the time of supply, and to qualify for zero rating the purchaser must be able to continue to carry on the activity as a going concern. Submissioners considered that the proposed amendment meant that the test would have to be met twice, once when the agreement for the sale and purchase is agreed, and again when the business is transferred, and that this "two tier test" would give rise to additional compliance costs.

The committee agreed that further clarification is desirable and has recommended that the bill be amended to provide that zero rating will apply to the supply of a taxable activity or part of a taxable activity that is a going concern at the time of supply if at that time:

  • the supply is agreed in writing by the supplier and the recipient to be the supply of a going concern; and
  • the supplier and the recipient intend that the supply is capable of being carried on as a going concern by the recipient.

Tax invoices

One submission on the bill considered that the Tax Administration Act should be amended so as to reinstate the failure to issue a tax invoice within 28 days after a request as a specific offence. The committee agreed and has recommended that such failure be an absolute penalty offence so that a fine not exceeding $4,000 could be imposed for the first offence, increasing to $8,000 for the second offence and $12,000 for the third and subsequent offences

The Attribution Rule

The attribution rule is an anti-avoidance measure aimed at ensuring that in defined circumstances a person's income from personal exertion is attributed to that person for tax purposes.

  • The rule was to apply only when all of the following criteria are met:
  • The personal service provider (person C) and the interposed entity (person B) are associated.
  • Eighty percent of the gross income from the services of person B is derived from one source (person A or an associate of person A).
  • Eighty percent of the gross income from the services of person B relates to the services personally provided by person C and related persons.
  • Substantial business assets are not a necessary part of the business structure used to derive the income from services.


Example: Attribution rule

If all four criteria are met, the $99,000 net income of the intermediary will be attributed for tax purposes to Person C, the personal services provider.

This attribution is required for tax purposes only. It is expected that the accounting treatment will frequently follow the tax treatment. In most cases where it could apply, the intermediary's personal service income will be paid out to the personal services provider as salary, so the rule will not actually apply. This outcome is in accordance with the policy.

The Finance and Expenditure Committee has recommended a number of changes to the attribution rule following its consideration of the bill and submissions. These changes result in more targeted legislation while leaving the core rule intact. They include:

Two way transfers of provisional tax

The committee has recommended that transfers of provisional tax from the intermediary to the high income earner and vice versa be allowed. Specifically:

  • These transfers will be allowed where the attribution rule could have applied.
  • Only overpaid tax can be transferred.
  • The transfer can be at the provisional tax payment dates.

This is proposed via a new section MB 9A which largely mirrors the existing section MB 9, which concerns transfers of provisional tax between group companies.

A new threshold

The committee has recommended that the attribution rule not apply when the income of the personal service provider is less than $60,000 after attribution. Although this will not lower compliance costs for individuals whose post-attribution income is around $60,000, where the income is obviously lower it will be clear that the rule does not apply. This will reduce compliance costs.

When two associated persons are providing the services, the income of both has to be under $60,000 for the rule not to apply.

Potential double tax of companies

As introduced, the bill provided scope for the amount attributed to be subject to tax twice when the attribution rule was applied to intermediaries that are companies. Instead, the committee has recommended that when the attribution rule applies, the company is to receive an extra imputation credit at 33% of the amount attributed. This will ensure that any dividend sourced from the personal services income can be imputed and is therefore not subject to double tax.

Ancillary personal services

The committee has recommended that when personal services are provided in association with a product also provided by the intermediary, the attribution rule not apply when the services are an ancillary but integral part of the product.

Other amendments

The committee has also recommended a number of minor amendments including:

  • ensuring that partners who provide administrative services to a partnership are not disadvantaged;
  • eliminating the potential double tax issue for trusts;
  • not applying the rule when both the intermediary and the personal services provider are non-resident;
  • ensuring that assets subject to finance lease and hire purchase can be counted as substantial assets;
  • allowing loss offset from losses carried forward when they have arisen from the derivation of income from personal services - this is targeted at businesses starting up.
  • applying the substantial assets 20 percent private use rule to all assets, not just to vehicles;
  • restricting the application of the relative and associated persons tests.