GST remedials
Issue: Retirement villages and rest homes
Clause 161
Submission
(The Selwyn Foundation, KPMG)
The amendment to the “dwelling” and “commercial dwelling” definitions in conjunction with the proposed “wash-up rule” will require retirement villages and rest homes to refund input tax deductions claimed on acquiring properties during the period between 1 April 2011 and 31 March 2015. These deductions were claimed in good faith owing to a previous change to the dwelling definition in 2011. It is recommended an amendment be made that would either apply the dwelling amendments to:
- supplies of goods and services on properties acquired/constructed/developed from 1 April 2015; or
- goods and services supplied from 1 April 2015, and input tax deductions claimed on construction costs incurred before 1 April 2015 should not be repaid under the current apportionment, or wash-up adjustment; or
- goods and services supplied from 1 April 2015, and a “savings” provision should be introduced whereby output tax previously paid is taken into account when performing the wash-up adjustment.
Comment
This issue arises due to the interaction of two separate legislative changes in the bill:
- The first change is an amendment to the “dwelling” and “commercial dwelling” definitions which is intended to restore the pre-1 April 2011 GST-exempt treatment of residential units in retirement villages and rest homes. Officials understand the majority of the retirement village industry is supportive of this change as exemption was always the intended outcome.
- The second change is a “wash-up” rule which will require taxpayers who have applied the apportionment rules to account for any unclaimed input tax or pay output tax when the use of the asset changes exclusively either to taxable or non-taxable use.
The submitters have pointed out that the amendment to restore the exempt treatment of residential units in retirement villages and rest homes will trigger the wash-up rule. This would only arise for those taxpayers that have been treating the supply of these residential units as taxable from 1 April 2011. Officials understand it is only likely to affect a small number of taxpayers.
For these taxpayers the application of the GST apportionment rules and the proposed “wash-up rule” will primarily negatively affect them by requiring them to repay input tax deductions claimed after 1 April 2011 on GST incurred in acquiring residential units and related expenditure.
Considering these taxpayers claimed these deductions and made commercial decisions during this period based on a legitimate interpretation of the law, it seems appropriate to provide some form of relief.
Officials recommend giving affected taxpayers[16] the choice whether to continue to treat the supply of residential units in retirement villages and rest homes as taxable.
This approach recognises that affected taxpayers have made long-term commercial decisions on the basis that the supply of these residential units would be taxable. However, we recommend that taxable treatment would only apply to residential units acquired before 1 April 2015; the supply of residential units acquired after that date would be exempt.
Alternatively, affected taxpayers could decide to return to exempt treatment. For these taxpayers, officials recommend the introduction of a “savings” provision that would turn off the application of the proposed wash-up. These taxpayers would not be required to return input tax deductions in one lump-sum payment. Instead, the regular apportionment rules would apply to take into account the change of use brought about by the dwelling amendment, thereby allowing the payments to be spread.
For taxpayers that have been treating the supply of residential units as taxable during the period between 1 April 2011 and 31 March 2015, output tax paid would not be refunded and input tax deduction claimed and expensed during that period would not need to be returned. These proposals relate solely to supplies made during that period.
Recommendation
That the submission be accepted in part, subject to officials’ comments.
Issue: Dwelling definition
Clause 161
Submission
(New Zealand Institute of Chartered Accountants, KPMG)
Amendments to the “dwelling” and “commercial dwelling” definitions deal only with the uncertainty surrounding the GST treatment of residential units in retirement villages and rest homes. However, uncertainty still exists in respect of the GST treatment of similar types of independent living units such as student accommodation and accommodation for people with intellectual or physical disabilities. This should be rectified in the current bill or the next tax bill.
Comment
Officials do not agree with the submissions. Similar submissions were made, specifically related to student accommodation, when the definitions of “dwelling” and “commercial dwelling” were amended in 2011. It was considered preferable for the dwelling definitions to describe the nature of the accommodation rather than the types of occupant of the premises.
This approach better achieves the policy objective which is to prescribe exempt treatment to the provision of accommodation that is an economic equivalent to owner-occupied homes.
Officials still consider this argument to be valid and that the amendment suggested by submitters would be an undesirable departure from the current approach.
Recommendation
That the submission be declined.
Issue: Requirement to be registered
Clause 169
Submission
(Ernst & Young, New Zealand Institute of Chartered Accountants)
The scope of the amendment to section 21HB of the Goods and Services Tax Act (GST) should be extended to include those who are already GST-registered.
The amendment allows suppliers affected by the 1 April 2011 changes to the “dwelling” definition the option of not including a commercial dwelling as part of their broader taxable activity. The amendment as proposed will only apply to taxpayers who are not GST-registered, but the issue more commonly arises for those individuals who are already registered in relation to other activities. These taxpayers are less able to structure their affairs to limit the impact of the previous law change.
However, taxpayers whose newly defined commercial dwelling would constitute a “taxable activity” in its own right should not be given relief. Accordingly, an exclusion would be appropriate when the rental income exceeds the GST registration threshold.
Comment
Officials agree that the suggested amendment to section 21HB, as currently drafted, would have limited application as it would only apply when the change in definition caused a person to exceed the $60,000 GST registration threshold.
We agree with the submission that the scope should be broadened so that it applies to persons who are already GST-registered. These people would not be required to account for GST on their newly defined commercial dwellings so long as their rental income from those dwellings is below the $60,000 threshold.
Recommendation
That the submission be accepted.
Issue: Wash-up rule – definition of actual deduction
Clause 168
Submission
(Tax Team)
The definition of “actual deduction” in the proposed “wash-up” rule should refer to adjustments made up until the end of the adjustment period when taxpayers are required to perform the wash-up calculation.
Comment
The proposed “wash-up” rule would require taxpayers who have applied the apportionment rules to account for any unclaimed input tax or pay output tax when the use of the asset changes exclusively to either taxable or non-taxable. To qualify for the “wash-up”, taxpayers need to sustain the 100 percent change-of-use from the adjustment period in which the use changes and the following adjustment period (up to two years).
Officials agree with the suggested amendment. Currently, the definition of “actual deduction” only includes adjustments made up to the date on which the use was changed. However, taxpayers would be required to make adjustments up until the date the wash-up was required to be carried out, which could be up to two taxable periods after the change of use.
To achieve an accurate wash-up calculation, the actual deductions made after the date the use changed should also be taken into account.
Recommendation
That the submission be accepted.
Issue: Wash-up rule – registration after acquiring goods and services
Clause 168
Submission
(KPMG)
If a person, or partnership, becomes registered after acquiring goods and services, the taxpayer must wait until the first adjustment period in order to claim change-of-use calculations. This method of calculation would result in a timing delay for the taxpayer and is inconsistent with the position for a taxpayer who is already registered.
It is recommended that the adjustment should be made when the taxpayer is registered and first uses goods or services to make taxable supplies.
Comment
Officials disagree with the submission. To qualify for the “wash-up”, taxpayers need to sustain the 100 percent change-of-use from the adjustment period in which the use changes and the following adjustment period (up to two years).
This time period is required to demonstrate a genuine change of use and must be demonstrated whether or not the taxpayer has just registered for GST, or has always been registered.
Recommendation
That the submission be declined.
Issue: Procurement of a lease
Clause 165
Submission
(Real Estate Institute of New Zealand, PricewaterhouseCoopers)
The bill amends section 11(8D) so that a payment to procure a lease is subject to the GST zero-rating of land provisions. The application of this amendment should be clarified, specifically whether the amendment is intended to capture payments in relation to a new commercial lease agreement in the absence of any transfer of business.
Comment
The proposed addition to section 11(8D) is intended to apply only to situations when a third party has paid to procure an existing lease (such as in a business sale). Officials agree that a further amendment should be made to section 11(8D) to clarify this policy intent.
Recommendation
That the submission be accepted.
Issue: Section 11(8D) – drafting suggestions
Clause 165
Submission
(New Zealand Institute of Chartered Accountants)
There should be no “if” at the start of section 11(8D)(b)(ii) and the circular wording of section 11(8D)(c) should be removed.
Comment
Officials agree with the submission.
Recommendation
That the submission be accepted.
Issue: Surrenders and assignments of land
Clause 165
Submission
(PricewaterhouseCoopers)
The proposed amendment to the zero-rating of land rules should be designed to ensure that only surrenders and assignments of interests of land are subject to the zero-rating of land rules. Any other surrender and assignment (for example, contractual releases) that do not involve transfer or disposals of interests in land should be governed by ordinary GST principles.
Comment
Officials agree with the policy approach outlined in this submission but we consider the draft legislation is sufficiently clear to achieve the correct policy outcome. Further guidance will be provided in the Tax Information Bulletin to be published after enactment.
Recommendation
That the submission be noted.
Issue: Surrender of an interest in land
Clause 165
Submission
(KPMG)
The scope of what is a “surrender of an interest in land” contained in section 11(8D) is unclear. A surrender of an interest in land should include:
- payments from a tenant to a landlord to obtain the landlord’s consent for the tenant’s surrender of the lease; and
- payments from a landlord to a tenant for surrender of the tenant’s interest in the land.
The phrase “surrender of an interest in land” should be defined to ensure both of the above examples can be zero-rated.
Comment
Officials agree with the submission in part. The policy intent of section 11(8D) is to capture both types of surrender payments as described by the submitter. Officials will consider whether the current wording of section 11(8D) achieves this and recommend an amendment in a later tax bill if required.
Recommendation
That the submission be declined subject to officials’ comments.
Issue: Other rights and obligations in respect of land
Submission
(New Zealand Institute of Chartered Accountants)
Consideration should be given to providing further guidance on the treatment of certain other rights and obligations where their classification as “land” is unclear. Examples include mining permits and transferable fishing quota.
Comment
The submission does not specifically relate to an amendment in the bill. However, officials will further consider and engage with the submitter on this issue.
Recommendation
That the submission be noted.
Issue: Deemed supply of land on disposal
Clause 163
Submission
(PricewaterhouseCoopers, Offen Advisors Ltd, New Zealand Institute of Chartered Accountants, Deloitte)
A number of submissions have been received on the amendment to section 5(16) (Deemed taxable supply of land on disposal). These include:
- The amendment is not necessary as the current law is adequate.
- The amendment would have the effect of a capital gains tax.
- Taxpayers should not be required to account for output tax when selling a private asset.
- The output tax payable should be capped to the input tax claimed.
- GST-registered persons should have the option to choose not to claim input tax on land in order to avoid the payment of output tax when the land is sold. This option should also be available under the equivalent rules for mixed-use assets.
- The meaning of “course and furtherance” should be clarified.
- The relationship between the amendment to sections 5(16) and 14(1)(d) (exempt supply of a dwelling), 11(1)(mb) (zero-rating of land), and 21FB (the proposed new wash-up rule) should be clarified.
Comment
The purpose of the amendment to section 5(16) is to address an avoidance concern where taxpayers can change the use of an asset before sale to avoid the application of output tax. The amendment would require taxpayers to pay output tax on the sale of land when any input tax deduction had been claimed in respect of the acquisition of the land.
Submitters have raised valid concerns over the practical application of the proposed amendment, particularly the GST implications of selling essentially private land where a relatively small input tax deduction had been claimed in the past.
Officials consider the new wash-up rule and the general anti-avoidance provision will address many of the concerns underlying the amendment to section 5(16). Therefore, officials recommend the amendment to section 5(16) be removed from the bill at this time.
Officials will further engage with taxpayers about how we could address the avoidance concern while also taking into account the practical concerns raised by submitters. At the same time we will also consider whether similar issues arise under the recently enacted mixed-use asset GST rules.
Recommendation
That the submission be accepted subject to officials’ comments.
Issue: Zero-rated services supplied to non-residents
Clause 166
Submissions
(New Zealand Institute of Chartered Accountants, KPMG)
In the proposed section 11A(3B) the words “not directly connected with” should be replaced with “not directly in connection with”. The phrase “not directly in connection with” is better understood in law. (New Zealand Institute of Chartered Accountants)
Guidance should also be given as to when a presence is not directly connected with the supply. (New Zealand Institute of Chartered Accountants)
The term “directly connected with the supply” needs to be defined to prevent uncertainty over the application of this measure. (KPMG)
Comment
Officials agree with the submission that the wording of proposed section 11A(3B) should be amended to the better understood phrase “not directly in connection with”.
Officials understand that, in practice, it could be unclear whether a non-resident’s presence in New Zealand would be regarded as not directly connected with the supply. However, we do not think the term should be defined; instead such a determination would depend largely on the facts of each case.
The policy rationale behind the amendment is to deal with situations when it is unreasonable for the supplier to be aware that the non-resident is in New Zealand during the time the services are performed, and therefore, whether the services should be zero-rated.
Further guidance will be provided in a Tax Information Bulletin if the proposed amendment is enacted.
Recommendation
That the submissions be accepted in part.
Issue: Scope of the hire purchase definition
Clauses 123 and 180
Submission
(New Zealand Institute of Chartered Accountants)
The proposed amendment to the definition of “hire purchase agreement” is more than a mere clarification; it broadens the definition to include those agreements where a purchase is considered but not “expressly contemplated”.
Comment
Officials agree that for some taxpayers the amendment may require them to change GST systems and procedures. However, the amendment is required to address a drafting error which arguably means a person’s upfront agreement to purchase the goods is required in order for an arrangement to be a hire purchase agreement. This interpretation is inconsistent with the original policy intent so an amendment is necessary to ensure the law achieves the correct policy outcome.
Recommendation
That the submission be noted.
Issue: Apportionment rules
Submissions
(BDO Wellington Ltd)
The various threshold rules in the GST apportionment rules should provide for the aggregation of the costs of goods and services.
Secondly, if the GST transitional rules require the “old apportionment rules” to still be used for goods and services, the “old apportionment rules” should also continue to be applied to further costs incurred in relation to the same goods and services.
Comment
These submissions do not relate to any provision in the bill. However, officials will further consider and engage with the submitter on these matters.
Recommendation
That the submissions be declined.
Issue: Agency rules
Submission
(Deloitte)
An amendment to the agency rules should be made to ensure there is consistency between when an agent acts for the seller and an agent acts for the purchaser.
Comment
The submission does not relate to any provision in the bill. However, officials will consider this issue for inclusion in a future GST omnibus consultation paper.
Recommendation
That the submission be declined.
Issue: Credit and debit notes
Submission
(Matter raised by officials)
A remedial amendment is required to fix a drafting oversight in the credit and debit note provision in relation to land which has been incorrectly standard-rated when it should have been zero-rated.
Comment
Section 25 relates to the issuing of a credit or debit note when GST has been accounted for incorrectly.
A remedial amendment is required to section 25(4) to ensure that when the supply of land has been incorrectly standard-rated when it should have been zero-rated, the recipient of the supply must correct any input tax claim in relation to that supply.
Recommendation
That the submission be accepted.
Issue: Zero-rating tooling costs
Submission
(Matter raised by officials)
A remedial amendment is required to ensure services that are carried out on tools can be zero-rated when the tools are used in New Zealand solely to manufacture goods that will be exported.
Comment
The Taxation (Livestock Valuation, Asset Expenditure, and Remedial Matters) Act 2013 extended the application of the zero-rating rules to tools used in New Zealand solely to manufacture goods that will be for export and supplied to a recipient who is a non-resident and not GST-registered.
A remedial amendment is required to ensure that when services are carried out on tools that are to be zero-rated under the new provision, the services can also be zero-rated. This is consistent with the treatment of services in relation to exports more generally and the policy intent of GST neutrality in cross-border trade.
Recommendation
That the submission be accepted.
Issue: Non-resident registration rules
Submission
(Matter raised by officials)
The Taxation (Livestock Valuation, Asset Expenditure, and Remedial Matters) Act 2013 introduced rules under which non-resident businesses can register for New Zealand GST and claim input tax deductions for GST incurred. This ensures that GST is neutral for these businesses in the same way as it is for domestic businesses. The new rules take effect from 1 April 2014.
Officials have identified a potential fiscal risk with the design of these new non-resident registration rules: The new rules may enable registered non-residents to sell high-value goods to New Zealand private consumers without the net imposition of GST.
This could be achieved by the non-resident treating themselves as the “importer” of the goods so that the GST liability falls on the non-resident rather than on the final consumer. The non-resident is then able to claim an input tax deduction for the GST incurred on importation. Because the goods were offshore at the time of supply, GST would not be required to be returned on the sale, therefore no net GST will be collected despite a final consumer receiving the imported good.
Comment
Officials recommend an amendment be made to prevent GST-registered non-residents from claiming input tax deductions in relation to GST levied by the New Zealand Customs Service. Instead, when the non-resident acts as an “importer”, the recipient of the good will be treated as if they had paid the GST and will be entitled to an input tax credit for the GST if they are GST-registered and receiving the goods as part of their taxable activity.
It is recommended that the amendment applies from 1 April 2014, the same date the new registration rules come into effect.
Recommendation
That the submission be accepted.
Issue: Wash-up rule
Clause 168
Submission
(Matter raised by officials)
An amendment to the proposed “wash-up” rule is required to ensure the timing of the wash-up occurs at the end of the second adjustment period after the use has changed.
Comment
The proposed “wash-up” rule requires taxpayers who have applied the apportionment rules to account for any unclaimed input tax or pay output tax when the use of the asset changes exclusively to either taxable or non-taxable use. To qualify for the “wash-up”, taxpayers need to sustain the 100 percent change of use from the adjustment period in which the use changes and the following adjustment period (up to two years).
As currently drafted, taxpayers are required to carry out the wash-up calculation at the end of the third adjustment period following the change of use. This was not the intended policy outcome; instead, taxpayers should be required to carry out the wash-up calculation at the end of the second adjustment period following the change of use.
Officials recommend an amendment be made to ensure the correct policy outcome is achieved.
Recommendation
That the submission be accepted.
16 Taxpayers that have been treating the supply of residential units as taxable for GST purposes from 1 April 2011.