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Inland Revenue

Tax Policy

Chapter 2 - Proposed new rules

2.1 This chapter describes the new rules that the Government is proposing to introduce. These include:

  • a GST exemption to remove bodies corporate from the GST system;
  • a “look-through” rule to allow GST-registered unit owners to claim back GST on supplies provided to the body corporate by third parties (such as insurance) to the extent to which these relate to the unit owners’ taxable activity; and
  • a “savings” provision and date-of-registration rule that apply to bodies corporate that registered for GST before 6 June 2014 (the date the proposed changes were announced).

2.2 To further clarify how the proposed rules might work, suggested draft legislation has been prepared and presented in Appendix 1.

GST exemption for goods and services that a body corporate provides to its unit owners under the Unit Titles Act 2010

(Clause 1 / proposed new section 14(1)(f))

2.3 It is proposed that a supply provided by a body corporate to its unit owners will be an exempt supply for GST purposes.[3]

2.4 To be exempt, the supply must relate to a power or duty of the body corporate as listed in section 84 of the Unit Titles Act 2010. This requirement ensures that the new exemption does not create incentives for unit owners to arrange for their body corporate to provide them with a broader range of goods or services. For example, if the body corporate supplied meals, education or medical care, it would not be appropriate for these to be exempt supplies.

2.5 The proposed exemption should generally prevent bodies corporate from registering for GST. This is because they will not carry on a taxable activity in relation to their exempt supplies to unit owners and so will not be able to register for GST in relation to these activities.

2.6 The proposed exemption is designed to provide certainty and to eliminate the compliance costs that would otherwise arise if bodies corporate were required to register for GST. These compliance costs would have affected a large number of property owners. For example, if we assume a typical annual body corporate fee is around $3,000, a body corporate comprising 20 or more units could have been required to register. Information from Land Information New Zealand suggests there are about 1,300 bodies corporate with 20 or more units, comprising around 72,000 unit owners who would potentially be affected. Inland Revenue has estimated that it costs small businesses about $2,000 a year to comply with GST. This suggests that the potential total compliance cost savings could be around $2.6 million a year.

2.7 It is likely that some bodies corporate are currently registered for GST. These bodies corporate will become de-registered as a result of the proposed exemption. In some cases this could lead to adverse consequences. For example, a body corporate may be required to pay GST on any assets they own. If problems do arise in practice, it is proposed that transitional rules could be developed to provide relief.

2.8 Some bodies corporate may carry on a separate taxable activity (such as a business venture) that is unconnected to providing goods and services to its unit owners under the Unit Titles Act. Under these circumstances, a body corporate could still register for GST, but the exempt supplies that they provide to their owners under the Unit Titles Act would not be included in their taxable activity. As a consequence, the body corporate would not be able to claim any input tax credits for any inputs used in making these exempt supplies.

Proposed application date

(Clause 1(2))

2.9 For a body corporate that has not actually been registered for GST before 6 June 2014, the exemption would apply from 1 October 1986. This would mean these bodies corporate would not be required to register for GST and, in fact, would not be able to register for GST at any point in time.

Savings provision for bodies corporate currently registered for GST

(Clause 1(2))

2.10 A “savings” provision will be provided for bodies corporate that are currently registered for GST. These bodies corporate would apply the new exemption from 6 June 2014 and apply the existing law for earlier periods.

2.11 The savings provision would apply to bodies corporate that have actually been registered for GST (so they have a GST number) before 6 June 2014.

2.12 The savings provision means the proposed exemption would not apply to tax positions that have been filed in GST returns before 6 June 2014.

2.13 The existing law provides the Commissioner of Inland Revenue with a discretion to determine the date that a person becomes registered for GST. (See section 51(4) of the Goods and Services Tax Act 1985.)

2.14 However, this discretion is unlikely to provide sufficient certainty for those bodies corporate that have registered for GST before 6 June 2014. This uncertainty is partly a result of the fact that the definition of a “registered person” includes a person who is liable to be registered for GST.

2.15 To provide certainty, an optional rule is proposed for bodies corporate that have registered for GST that will allow them to elect to be treated as being registered for GST from a certain date (usually 1 April 2010).

Date of registration for bodies corporate covered by the savings provision

(Clause 2 / proposed new sections 51(4B) and (4C))

2.16 The “date of registration” rule would apply to bodies corporate that registered for GST on a date between 1 April 2010 and 6 June 2014, and who would also be covered by the savings provision.

2.17 It would allow these bodies corporate to elect to be treated as being registered for GST from the later of:

a) the date of their first taxable period beginning after 1 April 2010; or
b) the date that they first became liable to be registered for GST under section 51(1) of the GST Act 1985.

2.18 So, for example, if a body corporate became liable to register for GST in April 2012 they could only register from April 2012. If they became liable to register in 1998 they could only register from 1 April 2010.

2.19 Allowing these taxpayers to backdate their GST registration to April 2010 is broadly consistent with the four-year time-bar for amending a GST assessment in section 108A of the Tax Administration Act 1994.

Look-through rule to allow the underlying owners to claim input tax deductions if they are GST-registered

(Clause 3 / proposed new section 60C)

2.20 A potential concern with GST exemptions is that they can create “tax cascades” (where the total tax cost would increase with each additional step in the supply chain).

2.21 The GST system eliminates these tax cascades by allowing businesses to claim back the GST cost of their inputs.

2.22 For example, if a homeowner runs a GST-registered business from their home, such as workshop or home office, and they purchase house insurance they may be able to claim a GST input credit to the extent to which the insurance relates to the portion of the house that they use for their business.

2.23 In the case of a unit title property, the Unit Titles Act requires the body corporate to arrange insurance. In this scenario, a business may insure its business premises indirectly as part of its body corporate fees. Because there is no GST charged on the body corporate fee, the business may find itself unable to claim back the GST cost of the insurance.

2.24 To remove these tax cascades a “look-through” rule has been developed. The look-through rule would treat any supplies that are received by the body corporate (such as insurance or maintenance), to be provided directly to the underlying owners in proportion to each unit owners’ ownership interest in the body corporate.

2.25 The look-through rule would apply to supplies made after 6 June 2014.


3 In this document, references to a “body corporate” refer to a body corporate of a unit title development created under section 75 of the Unit Titles Act 2010.