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Taxation GST and Remedial Matters Bill

GST: transactions involving nominations

ZERO-RATING TRANSACTIONS WHEN THE RECIPIENT IS NOT KNOWN AT THE TIME A CONTRACT IS ENTERED INTO

Clauses 10, 18 and 20


Issue: Vendor’s obligations

Submissions
(Corporate Taxpayers Group, Deloitte, Russell McVeagh, KPMG, Ernst & Young)

It is not uncommon for sale and purchase agreements to be entered by a “purchaser or nominee”.

When a nominee is involved, the vendor will likely need to determine the GST registration status and other information requirements of both the purchaser and their nominee, as it may not immediately be clear who will be the actual purchaser in the transaction. A further complication arises when a nominee is not known at the time the contract is entered into.

Submitters consider that vendors’ obligations should be clarified for transactions involving a nominee.

Comment

The nomination rules proposed in the bill will determine whether a supply should be treated as made to a contractual purchaser or a nominee, depending on which party to a transaction provides consideration for the supply. These rules are expected to work well in transactions that do not involve land, as the GST treatment of those supplies would not depend on the nomination and will simply help to determine which party is eligible to claim deductions.

In respect of transactions that involve supplies of land, the vendor has to obtain a representation from the purchaser that they:

  • are registered for GST;
  • are acquiring the land to be used for making taxable supplies; and
  • do not intend to use the land as a principal place of residence.

On the basis of those representations, the vendor must be able to determine whether a supply should be standard-rated or zero-rated. The use of the land can really only be based on the intentions of the ultimate recipient.
In order to avoid any confusion regarding which supply should determine the correct GST treatment in transactions that involve land, officials recommend that, in those transactions, the supply should always be treated as between the vendor and the nominee (that is, the ultimate recipient).

In addition, for the purposes of the proposed section 78F, the purchaser should be able to provide representations to the vendor regarding the registration status and intentions of the ultimate recipient of the supply on a prospective basis.

If the purchaser does not intend to receive the land themselves but knows the identity of the nominee who will settle the transaction, they will be able to make representations to the vendor regarding the registration status and the intentions of the nominee.

The vendor will be able to rely absolutely on representations made by the contractual purchaser, and to apply the GST treatment on the basis of the information provided.

If the purchaser does not have the relevant information about the nominee and the time of supply is triggered earlier than the date of settlement, the correct tax treatment of the transaction may have to be reconsidered.

If a supply is zero-rated and the ultimate recipient is registered for GST and has met the other tests, zero-rating has achieved the right outcome.

If a supply is zero-rated and the ultimate recipient is not registered for GST, the correct outcome has not been achieved. As a consequence, the recipient would be required to register for GST and account for the output tax on the transaction under proposed section 5(23).

Alternatively, if the supply was standard-rated this will either achieve the correct outcome or given rise to the need for a vendor credit note.

Recommendation

That the submissions be accepted and:

  • that in nominee transactions involving land, the supply always be treated as being made from the vendor to the nominee (the ultimate recipient); and
  • the purchaser should, on a prospective basis, be able to make representations regarding the registration status and intentions of the relevant recipient of the supply if it is a person other than the purchaser (a nominee).

 


Issue: Transactions involving an undisclosed agent

Submission
(Russell McVeagh)

It is submitted that in some situations, there may be a need for the anonymity of the ultimate recipient of a supply, such as for commercial or competition reasons. In these circumstances, the ultimate recipient of a supply (undisclosed principal) may, for commercial or competition reasons, be acting through an undisclosed agent to acquire land. It is not practical for the agent to disclose the registration details of the undisclosed principal or to inform the supplier that they act for an undisclosed principal. The question arises as to how the new zero-rating rules will apply to transactions where land is acquired by an undisclosed agent.

Comment

As noted earlier in this report, officials recommend that the vendor may absolutely rely on representations made by the purchaser regarding their registration status and intentions in respect of land, and to apply the appropriate GST treatment on the basis of those representations. If those representations are not made, the ultimate recipient either will be liable to account for the outstanding output tax under section 5(23) (if the supply is incorrectly zero-rated) or (more likely) will be able to seek redress from the vendor if the GST has been paid to the vendor and the transaction is one that should have been zero-rated.

It is considered that the proposed rules provide a sufficient mechanism for transactions to be conducted by undisclosed agents.

Recommendation

That the submission be noted.

 

Issue: Ability to issue debit/credit notes

Submissions
(PricewaterhouseCoopers, New Zealand Institute of Chartered Accountants)

Inland Revenue should confirm that debit and credit notes can be issued to correct situations when a tax invoice has been issued to the wrong party to the transaction so that the nominations provisions can work as intended. (New Zealand Institute of Chartered Accountants)

The application of the zero-rating rules will depend on to whom the supply is made. The question is whether section 25 (relating to the provision of debit/credit notes on a change to a supply) is robust and flexible enough to deal with recasting nominee transactions that were initially zero-rated and that need to be charged with the GST at the standard-rate, or vice versa. (PricewaterhouseCoopers)

Comment

Officials have recommended an amendment to the bill to allow a vendor to rely on representations made by a contractual purchaser regarding the registration status and intentions of the ultimate recipient (nominee).

However, it is important to provide a mechanism for the parties to change the GST treatment of a supply prior to settlement or to rectify the incorrect GST treatment following settlement if a nomination or the provision of incorrect (or no) information triggers a different GST treatment. Section 25 ought to allow for the vendor, following settlement, to adjust the GST on the supply to provide the correct outcome. For example, if a transaction is standard-rated when it should have been zero-rated, the vendor should issue the purchaser a credit note and claim back the GST.

Officials consider that section 25 should be amended to clarify that it does in fact apply in this way. This change would apply in all situations, not just when a nominee is involved.

Recommendation

That the submissions be accepted.

 

THE APPLICATION OF SECTION 60B

Clause 18


Issue: The ambit of the proposals

Submission
(Corporate Taxpayers Group)

The bill clarifies the applicable GST treatment for nominations; however, proposed section 60B does not appear to cover assignments. The Group assumes the bill was never intended to cover assignments of transactions, but notes that this is a further area of uncertainty similar in nature to the current issues with nominations.

While clarity as to the GST treatment of assignments is not required in this bill, it does seem the opportune forum in which to provide certainty. The Group suggests that the bill should simply apply the same clarification being given to nominations to assignments.

Comment

The proposed rules are intended to apply to transactions that involve nominations. The submission that there are remaining aspects of uncertainty for other transactions involving more than two parties is noted.

Recommendation

That the submission be noted.

 

Issue: Interaction between section 60 and section 60B

Submission
(Ernst & Young)

The interaction of the proposed rules with the existing agency provision in section 60 needs to be clarified.

Comment

Section 60 applies to agency arrangements whereas the proposed section 60B will apply to transactions that involve nominations. The determination as to which section applies to a transaction has to be made by reference to the relevant facts.

Recommendation

That the submission be noted.

 

Issue: Bare trustee

Submission
(PricewaterhouseCoopers)

Section 60B should not apply if the nominee is a bare trustee. Bare trustees are typically ignored for GST purposes and a supply is taken to be made to the principal (purchaser). It should be made clear that section 60B only applies if a nominee takes title in their own right.

Comment

A “bare” trustee is a trustee who has no active duty beyond conveying the property to the beneficiary at some future time determined by the trust. Officials consider that if the bill is changed to provide that the supply is always to the nominee in the case of land, the insertion of a bare trustee should be consistent with this approach.

Recommendation

That the submission be declined.

 

NOMINATION MADE AFTER THE TIME OF SUPPLY HAS BEEN TRIGGERED

Clauses 15 and 18


Issue: Nominations made after the time of supply

Submissions
(Corporate Taxpayers Group, Russell McVeagh)

While the proposed rules appear to work well for nominations that occur before the time of supply, it is not clear that the rules will work effectively when the nomination is made after the time of supply. It is submitted that the legislation needs to clarify the intended outcome in those situations. (Russell McVeagh)

The Group suggests that it is unclear as to what will occur when the time of supply has been triggered prior to the nominee being registered. There appears to be a risk that no GST credit will be able to be claimed. The Group would like officials to clarify the intended outcome when the time of supply has been triggered prior to the nominee being registered for GST. (Corporate Taxpayers Group)

Comment

Nomination will be most commonly used in transactions that involve supplies of land.
In such transactions, we have recommended that the nominee always be treated as the end recipient and that prospective representations by the purchaser be allowed.

In transactions not involving land, the proposed nomination rules will clarify which party – the purchaser or the nominee – is entitled to a deduction.

It is suggested that if a nomination is made after the time of supply has been triggered, the possible outcomes are as follows.

  • Both the purchaser and the nominee are registered. The purchaser contributes the full purchase price. The purchaser is entitled to the deduction.
  • Both the purchaser and the nominee are registered. The nominee contributes the full purchase price. The nominee is entitled to the deduction.
  • The purchaser is registered and the nominee is unregistered. Either the purchaser or the nominee contributes the full purchase price. Neither the purchaser nor the nominee is entitled to the deduction.
  • The purchaser is unregistered and the nominee is registered. Either the purchaser or the nominee contributes the full purchase price. The nominee is entitled to the input tax deduction.

We do not consider that further clarification of the nominee provisions is warranted.

Recommendation

That the submissions be declined.

 

Issue: Timing of the registration status

Submission
(Ernst & Young)

The submitter seeks clarification of when B’s (purchaser) and C’s (nominee) registration status have to be compared for the purposes of section 60B.

Comment

It is expected that the registration status has to be confirmed at the relevant time of supply – in many cases, settlement. The ability to provide information about the recipient’s registration status and the other relevant matters in land transactions should provide greater clarity in most cases.

Recommendation

That the submission be noted.

 

Issue: Tax invoices

Submission
(Ernst & Young)

The question is raised as to the effect on the supplier’s obligation in respect of tax invoices under section 24, particularly in relation to the prohibition on issuing more than one tax invoice for each taxable supply and the requirement for most tax invoices to include details of the recipient of the supply. The proposed new section 24(7B) refers only to the nominated person’s obligation to maintain records if a tax invoice is unavailable.

Comment

The Commissioner relies on tax invoices and other records for ensuring that a recipient of a supply is entitled to input tax deductions. In transactions that involve nominees, a tax invoice will commonly be issued by a vendor to the contractual purchaser, especially when the nominee is not yet known. In this circumstance, the proposed section 24(7B) will allow the nominee to rely on other records to establish the particulars of a supply and their entitlement to an input tax deduction.

For transactions involving land, the nominee will, as the ultimate recipient, generally not be entitled to deduct input tax because of the zero-rating treatment. For transactions not involving land, if the supply is deemed to be to the contractual purchaser, the contractual purchaser, having provided the consideration, should have the requisite tax invoice.

Recommendation

That the submission be declined.

 

OTHER DRAFTING MATTERS

Clause 18


Submissions
(New Zealand Institute of Chartered Accountants, PricewaterhouseCoopers, Russell McVeagh)

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. They will be raised with the bill’s drafter.

Recommendation

That the submissions be noted.