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Inland Revenue

Tax Policy

Chapter 1 - Introduction


1.1 New Zealand’s GST applies to the widest possible range of goods and services, with minimal exceptions. This reduces the extent to which GST alters consumption and production decisions in New Zealand, thereby creating economic efficiency and reducing compliance and administrative costs.

1.2 Because GST is designed to tax consumption rather than production, one of the basic principles of the tax is that businesses should not be subject to GST when producing goods and services[1]. This is achieved through the credit-invoice mechanism, which ensures that the economic incidence of the tax is removed on most business purchases. The mechanism also prevents the tax from “cascading” as goods and services are supplied between businesses that are registered for GST.

1.3 Transactions between businesses should, therefore, be GST-neutral unless exemptions apply (for example, the supply of financial services in some cases). The terms “GST-neutral” and “business-to-business neutrality”, for the purposes of this document reflect the fact that GST paid by a business can be claimed against the GST payable on taxable supplies. A business is “neutral” about the purchase of goods and services if the GST it pays does not become a permanent business cost. Business neutrality is also an appropriate concept to apply to the revenue received by the government in the sense that input tax should generally be matched with a corresponding payment of output tax.

1.4 The goal of business-to-business neutrality has not, however, always been achieved. This is of most concern to both businesses and the government in transactions involving the supply of significant assets, such as land. For businesses, an example would be a transaction not qualifying under the legislation for zero-rating as a “going concern” or an invoicing error that results in a purchaser’s expected input tax entitlement (sometimes referred to as a GST “refund” or GST “credit”) being denied. Because the assets are significant, they are infrequently traded and can create GST consequences that businesses may not have expected or planned for.

1.5 For the government, because Inland Revenue regularly refunds GST-registered persons for excess input tax deductions, a substantial risk to the tax base can be created through the actions of a small minority of taxpayers. The risk arises from this group entering into tax-aggressive structures that involve no corresponding GST payments to Inland Revenue. By taking advantage of the GST system in this manner these taxpayers redirect revenue that could be used by government for public benefit to their personal benefit.

1.6 In considering these concerns, this document focuses predominantly on transactions involving land. It also considers a number of other issues aimed at clarifying and providing greater consistency for these transactions.

Purpose of this discussion document

1.7 In June 2008, officials released an issues paper, Options for strengthening GST neutrality in business-to-business transactions, which suggested a number of options to help resolve GST neutrality concerns and improve the operation of GST in general. This discussion document draws upon the analysis in the issues paper and in the submissions that followed.

1.8 The officials’ paper discussed a number of options that the government will not be proceeding with. These include the proposals to widen Inland Revenue’s set-off powers, give Inland Revenue power to impose caveats on land, limit access to the invoice basis of accounting, extend the current treatment of associated persons for the purposes of second-hand goods deductions and place a cap on registering accommodation-based activities. While these options may have addressed the tax base risks, they have been rejected as being either too broadly targeted or because of their potential negative effect on normal business operations.

1.9 This discussion document proposes changes in the following areas:

  • the application of domestic reverse charges;
  • the application of section 19D of the GST Act;
  • timeframes for releasing refunds;
  • transactions involving nominations;
  • sale of property in satisfaction of debt;
  • input tax entitlements and adjustments for change-in-use; and
  • supplies of accommodation.

1.10 Because of the detailed nature of some matters covered in this discussion document, the government is interested in opinions on how these proposals could be presented in legislation. The Appendix to this discussion document contains indicative legislation for the more significant changes proposed.

Summary of proposals

Domestic reverse charge

Introducing a domestic reverse charge to transactions involving land, “going concerns” and assets with a value of $50 million or more.

Strengthening the application of section 19D of the GST Act

Amending section 19D by applying it to the timing of input tax deductions rather than payments.

Timing of refunds

Amending the legislation to specify that the 15 working-day rule refers to the issue of the notice by Inland Revenue rather than receipt by the taxpayer.

Transactions involving nominations

Clarifying the effect of nominations on taxpayers’ entitlement to input tax deductions.

Sales in satisfaction of debt

Extending the rules governing sales in satisfaction of debt to transactions that are “in substance” sales in satisfaction of debt.

Input tax and adjustments for change-in-use

Replacing the existing change-in-use adjustment rules with an approach that apportions input tax deductions according to the relative use of the goods and services.


Amending the definitions of “dwelling” and “commercial dwelling” to clarify the boundaries of those definitions.


1.11 The government invites submissions on the proposals in this discussion document and on the draft legislation provided in the Appendix. It is especially interested in opinions on how the proposals could be improved.

1.12 Submissions should include a brief summary of major points and recommendations. They should also indicate whether it would be acceptable for officials from Inland Revenue and the Treasury to contact you about your submission to discuss the points raised.

1.13 Submissions should be made by 18 December 2009 and be addressed to:

GST: Accounting for land and other high-value assets
C/- Deputy Commissioner, Policy
Policy Advice Division
Inland Revenue Department
PO Box 2198
Wellington 6140

1.14 Submissions may be the source of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. If you think any part of your submission should properly be withheld under the Act, you should indicate this clearly.


1 An obvious exception applies to purchases acquired for the purpose of making exempt supplies, such as financial services.