GST and bodies corporate
Issue: Support for the proposal
Clauses 248 to 254
Submissions
(Chartered Accountants Australia and New Zealand, KPMG, PwC, Retirement Villages Association)
Four submitters expressed their general support for the proposals.
We believe this proposal is a sensible solution and will provide bodies corporate with clarity and certainty. We wish to record our thanks to the Minister of Revenue and officials for listening to feedback on earlier proposals and for developing a well thought-out solution. (Chartered Accountants Australia and New Zealand)
We support the proposed changes introduced in relation to bodies corporate. In particular, excluding from the definition of “body corporate” a body corporate that is part of a retirement village registered under the Retirement Villages Act 2003. (Retirement Villages Association)
Comment
Officials note the general support for the proposed amendments.
Recommendation
That the submissions be noted.
Issue: Definition of “body corporate”
Clause 249
Submissions
(PWC, KPMG, Chartered Accountants Australia and New Zealand)
The bodies corporate amendments apply from 1 October 1986, which is necessary to preserve past tax positions taken by bodies corporate. Due to the retrospective nature of the rules, they apply to bodies corporate established under both the Unit Titles Act 1972 and Unit Titles Act 2010.
However, as currently drafted, the rules may not apply to bodies corporate that were established under the Unit Titles Act 1972, after the commencement of the Unit Titles Act 2010. This is because the Unit Titles Act 2010 defines “body corporate” as a body corporate of a unit title development created under section 75 of that Act. A body corporate created under the Unit Titles Act 1972 is not a body corporate created under section 75, as instead it is deemed to be a body corporate by section 219 of the Act.
Comment
Officials agree with the submissions, and recommend that the rules be amended to ensure that they apply to bodies corporate established under the Unit Titles Act 1972, and that the new definition of body corporate applies only for the purposes of the new rules.
Recommendation
That the submissions be accepted.
Issue: Definition of “funds”
Clause 250
Submission
(PWC, Chartered Accountants Australia and New Zealand)
If a body corporate decides to register for GST, or is required to do so, proposed section 5(8AB) provides that the total value of a body corporate’s funds on the day of registration will be treated as consideration received for the supply of services in the course or furtherance of its taxable activity.
A definition of “total funds” for these purposes should be included in the amendments and the definition should be the same as that in the Unit Titles Act 2010.
Comment
Proposed section 5(8AB) ensures that bodies corporate cannot obtain a tax advantage from the ability to choose to register for GST. In the absence of section 5(8AB), a tax advantage could be achieved by a body corporate accumulating untaxed funds while it is not registered and then registering immediately before it spends the funds to claim input tax deductions.
There are some risks associated with a narrow definition of “total funds” as a body corporate could re-characterise its funds to avoid the application of GST upon registration. The Unit Titles Act 2010 defines “funds” as “the operating account, the long-term maintenance fund, the optional contingency fund, and the optional capital improvement fund”. This definition is tailored to the purposes of that Act and may not be sufficiently broad to encompass the total funds of the body corporate, which would include all cash and non-cash investments held by the body corporate.
Officials recommend that the meaning of “funds” for the purposes of proposed section 5(8AB) should be clarified as including money and investments held by the body corporate.
Recommendation
That the submission be accepted, subject to officials’ comments.
Issue: Income tax treatment of bodies corporate
No clause
Submission
(Chartered Accountants of Australia and New Zealand, EY)
The income tax treatment of bodies corporate should be clarified by the Commissioner. For example, there is some uncertainty as to how any distributions should be treated in the hands of the unit holders for income tax purposes.
Comment
The income tax treatment of bodies corporate is an interpretative matter that is outside the scope of the proposals in this bill. Inland Revenue would welcome discussions with bodies corporate about this issue.
Recommendation
That the submission be noted.
Issue: Guidance on the amount of output tax deemed upon registration
Clause 250
Submission
(Chartered Accountants Australia and New Zealand)
Inland Revenue should provide guidance to make it clear that the effect of proposed section 5(8AB) in treating the total value of the body corporate’s funds as consideration received for services supplied upon registration is that output tax must be paid on 3/23 of those funds, rather than 15 percent.
Comment
Officials agree that the effect of proposed section 5(8AB) is to treat the total value of a body corporate’s funds on the day it becomes “a registered person” as consideration received, deeming output tax to be paid on the fraction of 3/23 of the funds. This is consistent with the meaning of “consideration” under the GST Act which includes the tax fraction of the value of the supply (see section 10(2) of the GST Act for the meaning of “value of supply”). This information will be included in the Tax Information Bulletin when the new rules are enacted.
Recommendation
That the submission be noted.
Issue: The effect of receipt of insurance payments by bodies corporate
Clause 253
Submission
(Chartered Accountants Australia and New Zealand)
Section 5(13) of the GST Act 1985 provides that, where a registered person receives a payment under an insurance contract in the course or furtherance of their taxable activity, the payment is deemed to be consideration received for a supply of services performed by that registered person.
It should be clarified that receipt of insurance payments by a body corporate would not create a liability to register for GST under section 5(13), either by acknowledging that current law is sufficient to deal with the issue or by an amendment to the current rules as part of this bill.
Comment
Under the proposed rules, bodies corporate will be required to register for GST if their supplies to third parties exceed the $60,000 registration threshold. The intention is that the receipt of insurance payments by an unregistered body corporate should not in itself create a liability to register for GST.
Recommendation
That the submission be noted.
Issue: Remedial amendment to the transitional rules relating to the treatment of dwellings
No clause
Submission
(New Zealand Law Society)
The Taxation (GST and Remedial Matters) Act 2010 amended the definitions of “dwelling” and “commercial dwelling”. Section 21HB of the GST Act was subsequently inserted as a transitional rule that enables persons affected by the change in these definitions to elect not to treat a supply of accommodation, in certain circumstances, as a taxable supply.
The Law Society is concerned that the changes to section 21HB do not achieve their desired effect, because it appears that section 21HB(4) requires that the property was previously treated as a “dwelling” and is now treated as a “commercial dwelling”. However, not all dwellings (for example, a holiday home) affected by the amendment are now treated as “commercial dwellings”.
A remedial amendment should be made so that the transitional rule also applies where a property was previously treated as a dwelling and is now no longer treated as a dwelling because of the changes to the definitions, as GST liability can also arise in this situation.
Comment
Officials agree with the submission. Section 21HB(4) was inserted by the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 to allow a person affected by the change in the definitions of “dwelling” the option of not including a commercial dwelling as part of their broader taxable activity.
It has since been identified that this transitional rule does not capture situations when a property that was previously treated as a dwelling no longer fits into either the definition of “dwelling” or “commercial dwelling” as a result of these changes.
Officials recommend that an amendment should clarify that the transitional rule applies where a person is no longer able to treat a property as a dwelling because of the amendment to the definition by the Taxation (GST and Remedial Matters) Act 2010. This amendment should take effect from 1 April 2011, the same date as section 21HB came into effect.
Recommendation
That the submission be accepted.
Issue: Adjustments for assets acquired prior to registration
Clauses 248 to 254
Submission
(Matter raised by officials)
Section 21B of the GST Act should not apply to allow a body corporate that registers for GST to make an adjustment and claim an input tax deduction in relation to goods and services acquired before the body corporate registered for GST.
Comment
Officials consider that section 21B should not apply to a body corporate that registers for GST, which would otherwise allow them to make an adjustment and claim an input tax deduction in relation to goods and services acquired prior to registration.
The policy intent behind the proposed rules is to ensure that bodies corporate are GST-neutral, which is achieved by imposing an output tax liability on the total funds held by the body corporate at the time of registration. This prevents a body corporate from obtaining a tax advantage by accumulating untaxed funds prior to registration, and then registering so that it can claim input tax deductions when the funds are spent.
However, a body corporate could achieve the same result by using untaxed funds to acquire goods and services prior to registration, and then making adjustments to deduct amounts in relation to these assets once it is registered. Therefore officials consider that a body corporate that registers for GST should not be able to make an adjustment under section 21B for goods and services acquired prior to registration.
Recommendation
That the submission be accepted.
Issue: Definition of body corporate
Clause 249
Submission
(Matter raised by officials)
As “body corporate” is used with a different meaning in the existing definitions of “company” and “equity security” in the Act, the proposed definition of “body corporate” should be clarified as applying only for the purpose of the new rules.
Comment
Officials consider that the new definition of body corporate should apply only for the purpose of the new rules.
Recommendation
That the submission be accepted.