Chapter 5 - Services directly in connection with land

5.1 New Zealand’s GST system is based on the destination principle, under which supplies of goods and services are taxed in the jurisdiction where the goods and services are consumed. This means services supplied to non-residents who are outside New Zealand will generally be zero-rated, as the services will be consumed overseas.

5.2 An exception applies where the service supplied is so closely connected with land that the location of the land is the most appropriate place of taxation. Section 11A(1)(k) zero-rates services supplied to non-residents who are outside New Zealand at the time the services are performed, unless the services are directly in connection with land or moveable personal property situated in New Zealand. Similarly, services that are supplied directly in connection with land situated outside New Zealand will be zero-rated under section 11A(1)(e).

5.3 It should be noted that owning land in New Zealand can, in certain circumstances, affect the residence status of a person receiving services. This is because the definition of “resident” for GST purposes includes a person that carries on a taxable activity or any other activity in New Zealand, while having a fixed or permanent place in New Zealand relating to that activity. For example, a person who carries on an activity of developing, dividing or dealing in land, or residential or commercial rental of a property, will be deemed to be resident in New Zealand for GST purposes.

5.4 It is clear that services will be supplied directly in connection with land when they have a direct physical effect on land, such as the construction, repair or maintenance of a building. It has been less clear how the test applies to supplies of professional or other services that do not in themselves have a direct physical effect on land.

5.5 Leading cases on the meaning of “directly in connection with” include Malololailai Interval Holidays New Zealand Ltd v CIR[7] and Wilson & Horton Ltd v CIR.[8] The courts have found that a service is not supplied directly in connection with land when it merely brings about or facilitates a transaction with a direct effect on land, or when the service could be described as being “one step removed” from such a transaction.

5.6 In light of these principles, Inland Revenue issued a Public Ruling on legal services provided to non-residents relating to transactions involving land in New Zealand, which concluded that these services are zero-rated.[9] This includes legal services relating to transactions that involve the change of ownership of land, such as the drafting of agreements for the sale and purchase of land.

5.7 This interpretation is arguably inconsistent with the policy intent of the provision. The “directly in connection with land” test uses the location of land as a proxy for the place that a service is consumed, when the service has a very close relationship to land. The test was not intended to create a distinction between services that have a physical effect on land and other services that affect the legal nature of land, such as legal services that facilitate a change to the ownership of land.

5.8 The adoption of a “one step removed” test may also arguably result in certain other professional or intellectual services falling outside the scope of the provision, even though the service is supplied with the underlying purpose of affecting the physical or legal nature of land.

5.9 For example, one interpretation would be that services provided by real estate agents in facilitating a change in ownership of land are “one step removed” from a direct transaction. Similarly, architectural services could be argued to be “one step removed” from a transaction with a direct effect on land, being the construction of a building. Other professional or intellectual services will, on the other hand, have a direct effect on land, including those which define the nature or value of property, such as surveying and valuation services.

5.10 The OECD International VAT/GST Guidelines are intended to drive international consistency in the treatment of the place of supply for cross-border services and intangibles. This will best ensure that, in applying the destination model, double taxation and double non-taxation is mitigated.

5.11 For these reasons, this chapter reviews the “directly in connection with land” test.

International approaches

OECD International VAT/GST Guidelines

5.12 The OECD International VAT/GST Guidelines state that for supplies of services that are directly connected with immovable property, taxing rights may be allocated to the jurisdiction in which the immovable property is located.[10] The use of “directly connected” does not have an independent meaning in this context and is intended to narrow the scope of the rule to services that have a “very close, clear and obvious link or association” with immovable property.

5.13 The relationship with immovable property must be at the heart of the supply for the required level of connection to be present; it cannot be merely one aspect of a supply of services. The guidelines state that this connection would be satisfied for certain intellectual services, such as architectural services that relate to a clearly identifiable property.

Australia

5.14 In Australia, a supply that is made to an offshore non-resident will not be GST-free if the supply is directly connected with real property situated in Australia.[11] The Australian Taxation Office (ATO) considers that a supply will be “directly connected with real property” when the direct object of the supply is the real property, including in the sense that the supply changes or affects the nature, value or ownership of the real property.[12]

5.15 Following the interpretation in Malololailai, the ATO considers that the supply of real estate agent services will not be directly connected with real property when it is merely a supply of marketing services in finding a willing purchaser for the property. However, a supply when a real estate agent is selling or auctioning real property for a non-resident will be directly connected with the property if the agent has the authority to sign the sale agreement on behalf of the non-resident.

5.16 A supply of architectural services to design a building for a particular site is considered to be directly connected with real property, as it has the purpose of affecting the nature of the real property. The ruling also considers that legal services that are directly connected with the disposal, acquisition or transfer of an interest in real property, such as conveyancing services or the preparation of a lease agreement, will be directly connected with real property.

Canada

5.17 Canada excludes supplies of a service in relation to real property situated in Canada from zero-rating. This includes supplies of an advisory, professional or consulting service in relation to real property situated in Canada.[13] In applying this test, the Canada Revenue Agency considers whether the service is designed to serve a particular need or requirement arising from the property, and whether the relationship between the purpose or objective of the service and the property is reasonably direct.[14] A supply of services will generally be “in respect” of a Canadian property if the service is aimed at dealing with the transfer of ownership of, claims on or rights to the property, or determining the title to the property.

European Union

5.18 In the European Union, the place of supply of services that have a “sufficiently direct connection” with immovable property is where the property is situated.[15] Services are considered to have a sufficiently direct connection with immovable property where they are:

• derived from immovable property and that property makes up a constituent element of the service and is central to, and essential for, the services supplied;
• provided to, or directed towards, immovable property, having as their object the legal or physical alteration of that property.[16]

5.19 Services which have a sufficiently direct connection under this test include the services of real estate agents in intermediating the sale or leasing of property, and architectural services that relate to a particular property. Legal services relating to the transfer of a title to property, or to establish or transfer interests or rights in property will also have a sufficiently direct connection to the property, even if the underlying transaction resulting in the legal alteration of the property is not carried through.

Policy considerations

Which services should be considered to have a direct connection with land?

5.20 The key consideration is which services have such a strong connection with land that its location should be treated as their place of consumption.

5.21 The “directly in connection with land” test was intended to encompass services that have a very close relationship with land, such that they are effectively consumed where the land is located. However, it is arguable that the test currently has limited application to intellectual or professional services, even when the service is supplied with an underlying purpose or objective of affecting the physical or legal nature of land.

5.22 A number of these services may be “one step removed” from a direct transaction that affects land but have a strong connection with land as their consumption would affect the nature or value of land. In considering whether the connection to land has been satisfied, a better approach may be to instead look at the service in the broader context of the purpose or objective that it serves, rather than looking to whether the service itself has a direct legal or physical effect on land. This approach would be in line with the OECD VAT/GST Guidelines, and with the approaches of other jurisdictions such as Australia, Canada and the European Union.

5.23 The “directly in connection with land” requirement could be altered to include services where there is a direct relationship between the purpose or objective of the service and the land. This would include services that have the purpose of affecting the nature or value of land or affecting the ownership of any interest in land.

5.24 In particular, the following services would be regarded as having such a sufficiently close connection with land that they could be considered to be consumed where the land is located:

• the assessment of the risk or integrity of land;
• intermediation in the sale or lease of land, including by real estate agents and property managers;
• architectural or design engineering services that relate to a particular site, including the drawing up of plans for a building or part of a building;
• legal services relating to transactions involving the transfer of title to land or the establishment or enforcement of an interest in land (such as the drafting of agreements for the sale and purchase of land, lease agreements or construction agreements).

Which services should not be considered to have a direct connection with land?

5.25 A service should not be considered to be supplied directly in connection with land when it does not clearly relate to designated land in New Zealand. This would include services such as:

• advice or information about property prices or investment in the property market in general;
• market research relating to the economic viability of a particular project;
• architectural services which do not relate to a particular site;
• advice on the tax implications of investing in property generally.

5.26 Further, a service would not be regarded as supplied directly in connection with land if the part of the service that relates to land is only an incidental aspect of the supply. For example, this may be the case when legal services are provided to establish a trust that will subsequently hold land.

Suggested solution

5.27 We are suggesting that an amendment be made to clarify or alter the scope of the services that are supplied “directly in connection with land”, to include services where there is a direct relationship between the purpose or objective of the service and land. This would include services which have the purpose or objective of affecting or defining the nature or value of land, protecting land, or affecting the ownership or any interest in or right over land.

5.28 This would mean that the services of real estate agents, architects and legal services in respect of land in New Zealand would not be zero-rated when supplied to offshore non-residents. Similarly, where these services are supplied in relation to land that is situated outside New Zealand, they would be zero-rated. This change would not affect the use of the phrase “directly in connection with” elsewhere in the GST Act.

5.29 A service would not be supplied directly in connection with land if it does not relate to a designated property, or when the part of the service that relates to land is only an incidental aspect of the supply.

5.30 The application date for the amendment is expected to be 1 April 2017. However, there are possible concerns in relation to the treatment before that date – for example, uncertainty as to the correct position for some services (excluding legal services) may gave rise to refund claims from the purchaser to the vendor or from the vendor to Inland Revenue. Submissions are therefore sought on the appropriateness of a “savings” provision for past tax positions.

7 (1997) 18 NZTC 13,137.

8 (1994) 16 NZTC 11,221.

9 BR Pub 15/03 “Goods and Services Tax - legal services provided to non-residents relating to transactions involving land in New Zealand” Tax Information Bulletin Vol. 27, No. 3 (April 2015).

10 OECD International VAT/GST Guidelines, April 2014.

11 A New Tax System (Goods and Services Tax Act) 1999 (Cth), section 38-190(1).

12 GST Ruling 2003/7, Goods and Services Tax: what do the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' mean for the purposes of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999?

13 Excise Tax Act 1985, Schedule VI, Part V, sections 7 and 23.

14 GST/HST Policy Statement P-169R, Meaning of in Respect of Real Property Situated in Canada and in Respect of Tangible Personal Property that Situated in Canada at Time the Service is Performed, for Purposes of Schedule VI, Part V, Sections 7 and 23 to the Excise Tax Act.

15 EU Directive 2006/112/EC, Article 45.

16 Council Implementing Regulation (EU) No 282/2011, Article 31a.