One of the questions that we are frequently asked is around the rules relating to GST and charities.
I have written the attached issues paper to assist charities with the complex GST rules.
One of the questions that we are frequently asked is around the rules relating to GST and charities.
I have written the attached issues paper to assist charities with the complex GST rules.
There was an interesting article in the Herald yesterday showing that majority of people are unhappy with the tax changes.
A nationwide HorizonPoll survey of 1558 people between November 16 and 19 found 8.2 per cent felt better off because of the changes, 53.5 per cent thought they were worse off while 35.6 per cent felt their situation was unchanged.
Of lower income households, 71.5 per cent earning less than $20,000 a year felt worse off while 60 per cent of those earning between $20,000 and $30,000 felt the same.
Among households earning between $100,001 and $150,000, 39.3 per cent a year felt worse off (19.6 per cent better off) and 53.2 per cent of those in households with incomes of $200,000 plus felt worse off (24.6 per cent better off).
Of households earning $30,000 to $50,000, 5.5 per cent felt better off, 54.3 per cent worse off.
Among middle-income households earning $50,001 to $70,000 a year, 11 per cent felt better off, 45.9 per cent worse off.
A further poll on the Herald website shows that the split is more 50/50 than the Horizon Poll and at the time of writing had 12,000 votes.
I find these results surprising as the middle classes would be significantly better off under the tax realignment. How much you are better off, depends on what percentage of your income you spend of course, and an earlier survey showed most people were using their extra money to pay off debt. That being the case they would be better off after the changes.
Perhaps the poll results show a perception problem for the Government, that the increase in GST attracted more headlines than the decrease in PAYE, or perhaps the left did a good job in convincing workers that the tax cuts benefited the rich.
Personally I think the move was in the right direction, although the timing of the GST increase hits hard especially at the petrol pump where prices had only recently increased due to the carbon tax. In a recession perhaps putting a greater price on spending is the way to help realign Kiwis behavior.
In a landmark case released last week the Supreme Court has ruled that the IRD can hold onto GST refunds indefinitely until it determines that the refund is payable.
Given the IRD retrospectively changed the law, I think the taxpayer was always facing an uphill battle on this one.
Case Reference: Contract Pacific Limited v Commissioner of Inland Revenue (SC114/2009)  NZSC136
Contract Pacific had filed a GST refund claim of more than $7.5 million dollars to the Commissioner of Inland Revenue.
The Commissioner sent a cheque for the claimed refund on February 5, 2001, but before it was presented to the company it was cancelled.
The Commission said it had sent the cheque by mistake, but had given the correct notice of its intention to investigate Contract Pacific’s tax return, as required by law.
Contract Pacific had claimed that when the Commissioner sent it the cheque, he was paying the due refund; a claim dismissed by the Supreme Court.
Contract Pacific is an inbound tour operator (that is, it sells holiday packages to overseas wholesalers who on-sell them). Amendments to the Goods and Services Tax Act 1985 (GST Act) in 1999 made it clear that GST was payable on these supplies with effect from May of that year. Concluding that it had unnecessarily accounted for GST between July 1993 and April 1999, Contract Pacific filed a GST return seeking a refund of the GST it had paid during that period.
Under s 46(1)(a) of the GST Act, a claimed refund must be paid within 15 working days of receipt of the return unless the Commissioner has, within that 15 working day period, either given notice of his intention to investigate the return (under s 46(5) of the GST Act) or requested further information of the taxpayer (under s 46(4) of the GST Act).
In this case, the Commissioner gave timely notice of an intention to investigate the return under s 46(5) and some months later requested further information from Contract Pacific about its claim. In February 2001, the Commissioner by mistake sent Contract Pacific a cheque for the refund which had been claimed. This cheque was cancelled before it was presented.
A further and retrospective amendment to the GST Act provided that supplies by inbound tour operators to overseas customers had always been subject to GST but there was an exception in relation to refunds which had been paid before May 2001. Contract Pacific claimed that when the Commissioner sent the cheque to it in February 2001, he was relevantly paying the refund and, on this basis, sued the Commissioner on the cheque. In order to succeed in this claim, Contract Pacific had to establish first, that the Commissioner was obliged under ss 20(5) and 46 of the GST Act to refund GST and secondly, that the issuing of the cheque amounted to the payment of a refund. The Supreme Court judgment addresses only the first of these points.
The High Court held that as the Commissioner’s request for further information was not made within the 15 working day time limit provided for in s 46(4) it triggered an obligation to make an immediate refund. The Court of Appeal set aside that judgment and held that having given timely notice of investigation, the Commissioner was entitled to make a further request for information as part of that investigation.
This Court has unanimously dismissed Contract Pacific’s appeal from that decision. It has held that the Commissioner’s request for information did not lie outside the investigation process contemplated by s 46. More fundamentally, however, it has also concluded where either s 46(4) or (5) has been engaged, the governing subsection as to payment is s 46(1)(b) and the refund does not become payable until the point in time stipulated in s 46(1)(b) which is when the Commissioner has determined that the refund is payable.
Since the Commissioner was never of that opinion, the refund never became payable.
A full copy of the case after the jump:
The Government recently introduced the Taxation (GST & Remedial Matters) Bill into Parliament. The bill contains important changes to three areas of the GST Act.
(i) Zero-Rating on Land Sales
Last year the Government put out a discussion document on ways to combat the situation where the seller of the land is in liquidation or otherwise insolvent and is unable to pay the GST on land sales due to priority security over the land and the recipient can claim the input tax. At that time they proposed to do this by a mechanism called a Domestic Reverse Charge (“DRC”).
The feedback received on that proposal was mostly negative and commentators said that we already had a mechanism in our current legislation to deal with “phoenix schemes” (by extending the zero-rating legislation).
It is positive to see that the Government listened to this feedback and will use a zero-rating mechanism. The proposal is that where a GST registered person supplies taxable activity land to another GST registered person who will use the land in their taxable activity, the sale will be zero-rated. This means the vendor collects no GST on the sale and the purchaser will receive no GST input tax credit on the purchase. To qualify for zero-rating the vendor must obtain the purchaser’s GST registration details and confirm that they are acquiring the land to use in a taxable activity.
(ii) Transactions Involving Nominations
Nominations have been a troublesome area for GST purposes. There have been different views as to whether a nomination gives rise to supply, especially where the contract is unconditional at the time of execution.
The Government wanted to clarify the GST treatment of nominations.
A new section 60B is inserted which proposes to simplify the treatment of nominations:
§ If the supply is settled by the purchaser, there is a supply to the purchaser only, and only the purchaser can claim the GST input credit, any nomination is ignored and is treated as a separate transaction.
§ If the transaction is nominated to a third party (the nominee), and the nominee pays the full price for the supply, then the transaction will be treated as being between the vendor and the nominee, and only the nominee will be able to claim a GST input credit. The vendor will issue a tax invoice to the nominee where requested.
§ If the purchaser and the nominee each pay part of the purchase price, then there will be two supplies, one from the vendor to the purchaser, and then one from the purchaser to the nominee. If the purchaser has not claimed an input credit for the purchase price they can agree in writing with the nominee that the transaction is a supply to the nominee only, and therefore only the nominee can claim a GST input credit.
These changes are welcome as they reflect the commercial reality that there is often only one supply from the vendor to the nominee and clear up any confusion around nominations.
(iii) Input Tax Change of Use Rules
Currently an input tax credit is only available where a taxpayer purchases an asset for the principal purpose of making taxable supplies. The proposed amendments to the GST Act will result in a taxpayer only being able to claim an input credit to the extent the asset is intended to be used for taxable purposes.
A taxpayer is then required to make an adjustment if their actual use varies from the percentage already claimed.
Take an example where a taxpayer purchases a vehicle which they will use 40% in their taxable activity. Under the current rules no GST input is available as the asset is not used for the principal purpose of making taxable supplies (however period-by-period adjustments can be made). However, under the new rules, an input credit will be available for 40% of the purchase price.
Whilst this seems like a win for taxpayers in that it simplifies the process to claim a GST input credit, there is also a significant responsibility placed on taxpayers to monitor their use of the asset and make a change of use adjustment when their use of the asset changes. Based on similar Australian rules, most taxpayers do not make adjustments when their use changes and therefore open themselves up for exposure to penalties if an audit occurs, whereas under the current rules period-by-period adjustments are required.
GOODS AND SERVICES TAX (GST) INCREASE
From 1 October 2010 the rate of GST will increase to 15%. The change in the rate of GST has wide ranging effects on all GST registered persons and consumers. Businesses will be required to implement systems to deal with the rate increase and also ensure that GST is calculated correctly on all supplies.
Effects of GST Rise on Consumption
Historically it can be seen that consumer spending has risen prior to an increase in GST:
These figures suggest that consumers bring forward their expenditure when facing a rise in the rate of GST, especially in large ticket items such as cars where even a small change in the tax rate can mean a big saving by bringing forward that expenditure.
Effects of GST Rise on Businesses
The rise in the rate of GST should not have any effect on profits for most businesses as GST is a value-added tax which is levied on consumption. Businesses may therefore feel a small impact in their cash flow in the short term while the change makes its way through the economy.
However, there are some GST registered persons to whom the change in the rate of GST will have a real effect such as:
We comment on these situations further below.
The biggest impact on businesses will be in relation to administrative requirements and the systems they need to have in place to ensure GST is calculated correctly and GST returns are correctly completed.
All businesses will need to:
For businesses who prepare GST returns on a payments basis, special calculations will be required for 30 September 2010. These are detailed below.
Time of Supply
The standard time of supply rule is set out in Section 9(1) and it states that a supply of goods and services shall be deemed to take place at the earlier of the time an invoice is issued by the supplier or the recipient or the time any payment is received by the supplier.
There are additional provisions which determine the Time of Supply for particular types of supplies, including periodic supplies, delayed settlements and lay-by sales.
Section 9(3) states that where services are supplied under any agreement which provides for periodic payments, they shall be deemed to be successively supplied for successive parts of the period of the agreement or the enactment, and each of the successive supplies shall be deemed to take place when a payment becomes due or is received, whichever is the earlier.
Therefore, for construction contracts and building contracts there are deemed to be multiple supplies and the standard time of supply rule applies to each supply, i.e. the earlier of an invoice being issued or a deposit being paid for that supply.
Where a delayed settlement has occurred it is crucial that the standard time of supply rule is considered to determine whether the time of supply occurs before or after 1 October 2010. We note that where a payment is received and is held beneficially for the vendor, this can constitute the receipt of a payment and, consequently, represents the time of the supply.
Lay-by sales are subject to their own time of supply rule in Section 5(5) and are deemed to take place when the property is transferred to the buyer. Accordingly, if taxpayers don’t pay for sale goods in full prior to 1 October they will find that they are faced with paying a further 2.22%.
Persons on a Payments Basis – Transitional Return
Where a taxpayer is on a payments basis a special return will be required for the period ending 30 September 2010. In that return an adjustment is required for all GST on accounts payable / accounts receivable as at 30 September 2010. If the amount is a credit (because debtors exceed creditors) it is offset against any GST payable and, if there is still a credit, it is carried forward to the next GST period.
Where a GST return spans the 1 October 2010 change, a taxpayer is required to submit two GST returns – one up to 30 September 2010 accounting for supplies at 12.5% and one from
1 October 2010 to the end of their period accounting for supplies at 15%.
Situations where the GST Increase may impact Businesses
Section 78(2) of the Goods and Services Tax Act allows taxpayers to increase the amount of GST charged under a contract unless the contract specifies otherwise. If quoting on a contract, the price should be the GST exclusive price with “plus GST”.
In some cases market conditions may mean the supplier cannot adjust their prices to pass on the GST to their customers, resulting in a real loss of GST to the supplier.
For example, the GST rate increase is unlikely to directly affect residential property prices: a property will be worth the same to a potential purchaser on 30 September and on 1 October. Similarly for some consumer goods there may be “price points” which the market will be reluctant to exceed.
For a property developer part-way through developing a property when the GST rate is increased, the impact will be substantial: For example, on a $600,000 house, where the increased GST cannot be passed onto the consumer, the situation will be as follows:
|Example 1||Example 2|
|GST @ 12.5% on sale||66,667|
|GST @ 15% on sale||78,261|
Therefore, should the property developer complete the property and sell it before 1 October 2010 (the date of the GST rise), there would be $11,594 less GST to pay. The 12.5% GST rate applies to supplies made on or before 30 September 2010. The developer would either need to settle the sale before 1 October 2010 or receive a deposit for the sale prior to 1 October 2010. If a contract for sale and purchase was entered into before 1 October but did not go unconditional until after 1 October, the developer could pass the increased GST cost onto the purchaser even if the contract was inclusive of GST.
When assets are no longer used for business purposes, there is a deemed sale and GST is payable based on the market value at that time. After the GST increase, the business would be liable to account to the IRD at the 15% GST rate as opposed to the 12.5% rate which they were originally refunded by the IRD.
For example, a home stay operation has claimed GST on their residential property because they are offering short stay accommodation to the public. When this ceases GST is payable
Accordingly, taxpayers who are voluntarily registered should consider whether they wish to deregister prior to 30 September. Whilst there is provision in the legislation to make change of use adjustments in GST periods commencing after 1 October at the old rate, only taxpayers making output tax adjustments are likely to want to avail themselves of this provision and can expect to be required by the IRD to provide proof that the change of use actually occurred prior to 1 October.
The National Government today released their second budget. The budget contained significant changes to the tax system following on from the work done by the Tax Working Group (“TWG”).
Summary of tax changes:
1. Reduction in personal income tax rates
2. GST increases from 12.5% to 15%
3. Company and PIE tax rates fall from 30% to 28%
4. Removal of depreciation claims on buildings
5. Removal of loading on depreciation
6. Changes to the QC/LAQC regime
7. Thin capitalisation changes
8. Extra funding for IRD
9. Compulsory zero rating on land transactions – GST
10. Working for Families changes.
The Tax Working Group found that New Zealand’s tax system risked becoming unsustainable and relied too heavily on those taxes most harmful to growth such as corporate and personal income taxes. It also lacked integrity and fairness. The Working Group found compelling evidence of widespread avoidance, mostly through taxpayers exploiting differing tax rates. In addition, sectors with low effective tax rates, notably property, have expanded at the expense of the rest of the economy.
The Government therefore wanted to achieve two key aims; the first being a ‘fair’ tax system, and the second that the budget was fiscally neutral. As a result of the budget it is estimated that all household income groups will receive on average around a 0.5% to 1% increase in their real disposable income.
1. Personal Tax Cuts
Personal income tax rates will be cut from 1 October 2010 as follows:
|Income||Current Rates||New rates|
|$0 – $14,000||12.5%||10.5%|
|$14,001 – $48,000||21.0%||17.5%|
|$48,001 – $70,000||33.0%||30.0%|
The Government’s intention is that lower personal tax rates reward effort and give people an increased incentive to up-skill, develop new products and services, and get ahead under their own steam.
As these rates change part-way through the year, they have some retrospective effect, e.g. the top personal rate for this year will be 35.5%.
2. Rise in the Rate of GST to 15%
GST was implemented introduced on 1 October 1986 and was increased to 12.5% on 30 June 1989. This marks the first increase in the GST rate since then. The rate of GST will increase from 12.5 per cent to 15 per cent from 1 October 2010. The Government’s commentary is that the additional revenue earned from the increased rate of GST will be used to pay for the personal tax cuts.
The increase has serious implications for contracts entered into prior to 1 October 2010 where time of supply occurs after 30 September 2010 – for example construction contracts.
3. Reduction in Company and PIE rates to 28%
In a surprising move the Government announced that the company tax rate would reduce to 28% from the 2011/12 tax year. This move pre-empts the action announced by the Australian Government last week that they would be reducing their corporate tax rate to 28% by 2014 (although the Henry Review recommended a 25% rate in the medium term).
The Government will allow dividends issued after the new company rate takes effect to be imputed at the existing 30 per cent rate for two years if company tax has been paid at the 30 per cent rate.
The Government’s reasons for the reduction are to be closer to the OECD average of 26.3% and to remain competitive with Australia. Furthermore, they believe it encourages investment in New Zealand and creates jobs.
4. Removal of Depreciation on Buildings
Depreciation is allowed as a deduction against income under Part EE of the Income Tax Act 2007. It is supposed to allow a deduction against income for the decrease in value of an asset used in a taxpayer’s business to generate income. A motor vehicle depreciates over time, and the depreciation regime is intended to allow a deduction approximately equal to the reduction in value of the vehicle over the income year.
It was announced today that taxpayers will no longer be able to claim depreciation on commercial or residential rental properties with effect from the start of the 2011/12 tax year where the building has an economic life of 50 years or more.
The TWG’s argument for removing depreciation on buildings is that buildings generally increase in value over time rather than decrease. This, coupled with the fact that taxpayers can claim deductions for repairs and maintenance to repair the building, means that taxpayers have been entitled to a deduction against their income where no economic loss has been suffered.
The Government states that “building owners will still be able to claim deductions for repairs and maintenance to maintain the condition and value of their properties”. They will also still be able to claim depreciation deductions for “fit outs” not considered part of the building. The Government intends to review the treatment of commercial “fit out” and, if necessary, amend the rules prior to 1 April 2011 to address any uncertainty in this area.”
5. Removal of Loading on Depreciation
Businesses will no longer be able to claim the 20% loading on depreciation rates for new assets.
The change will apply to assets purchased after Budget day. The old rates will continue to apply for assets purchased before this date.
The Government’s reason for removing the 20% depreciation loading was because it distorts people’s decisions about what capital assets to invest in. For example, if a business buys a new car or computer it gets the advantage of the depreciation loading, but not if it buys a second-hand piece of machinery. These sorts of distortions have a real cost to the economy.
6. Changes to the QC/LAQC Regimes
Qualifying Companies (QCs) and Loss Attributing Qualifying Companies (LAQCs) will become flow-through entities for tax purposes – similar to limited partnerships. The objective here is to preclude taxpayers relieving income tax at the top marginal rate when there is a loss and paying tax at the corporate rate when the QC has a profit.
Changes will take effect from income years starting on or after 1 April 2011.
7. Thin Capitalisation Changes
The safe harbour in the inbound thin capitalisation rules – or so-called “thin cap” – will be reduced from 75 per cent to 60 per cent. This means foreign owned companies will only be able to claim tax deductions for interest payments on debt up to 60 per cent of their local asset value. The only exception is if the total multi-national group’s debt ratio is higher than this.
8. Extra Funding for IRD
Inland Revenue will get a $119.3 million funding boost over four years, starting in 2010/11, to increase its audit and compliance activity around debt collection, the hidden economy and property transactions.
9. Compulsory Zero-Rating of Land – GST
Last year the IRD released a paper seeking feedback on a Domestic Reverse Charge (DRC) on high value transactions (>$50m) to stop the use of so-called “phoenix” arrangements. It seems that the submissions made were not in favour of a DRC for several reasons; one being that there was already a mechanism under the Goods and Services Tax Act where a transaction could be made without giving the purchaser a large input credit, namely a zero-rated transaction.
Previously zero-rating was only available for the sale of going concerns (amongst other transactions) and there has been widespread confusion as to when a transaction can be zero-rated. Despite this, however, it would appear that the Government favours zero-rating land transactions, announcing today that transactions between registered persons involving the transfer of land will be zero-rated for GST. This change will take effect from 1 April 2011.
10. Changes to Working for Families
There have been some major changes to how Working for Families (WFF) will be calculated. Investment losses, including losses from rental properties, will no longer be able to be used to reduce family income and therefore enable eligibility for WFF payments from 1 April 2011.
Furthermore, trust income will be counted as part of a family’s total income for the purposes of WFF from 1 April 2011.
This article out in the Herald yesterday that talks about rent to buy arrangements.
The interesting part from a tax point of view is on page 3:
Hamilton accountant Ross Barnett says his client is facing a test case over how the Inland Revenue will treat GST liability when a rent-to-own scheme is signed. Usually a trader buys a property with the intention of reselling it, so claims GST on the purchase, and pays GST on the resale profit.
If the trader finds a buyer who wants to rent-to-own the property, they account for GST on any amount paid toward the purchase price. When the tenant opts to buy, GST is returned on the sale price less the amounts already paid.
An Inland Revenue spokesperson confirmed to the Herald on Sunday that if the arrangement provided that part of the rental payments would be put toward the purchase price of the property, then it is likely that the property trader would need to account for GST “on the entire price of the property as soon as they receive any payment toward the cost of the property. This will be the case even if the amount of rent paid is not sufficient to cover the cost of the GST.”
Barnett says the hard thing for developers or traders is that they’re dealing with an option. “Fifty per cent of them would probably fall over… so they end up paying GST when no actual sale occurs.”
I would agree with Mr. Barnett. I don’t see how the IRD can class an option as anything other than a right for the tennant to purchase the property.
Watch this space, Tax Blog will keep you up to date on breaking developments on this story.
LIFE STYLE EXTRA (UK) – Keira Knightley faces a tax bill over a goodie bag.
The ‘Pirates of the Caribbean’ actress was stunned toView the profile for Keira Knightley on Celebrity Spotlight realise she would have to pay a £2,000 VAT bill after being handed a bag of freebies worth £6,000 at a charity dinner.
The Silver Spoon Hollywood Buffet gives guests free gifts in return for their endorsement.
The bag contained diamond earrings worth £4,000, Franco Sarto shoes and a Gorjana necklace. There was also a Magaschoni cashmere jumper, a designer watch, Spanx underwear, a Cusp bikini, Cover Mineral make-up and Plank yoga mats.
A source told Britain’s Daily Star newspaper: “Keira had no idea new US tax laws mean American-based celebrities have to pay tax on free gifts. That’s why the Oscars committee are axing goodie bags.”
The 21-year-old star gladly paid the £12 entrance fee to the Los Angeles event, all of which goes to charity.
However, she is fuming that she will have to pay out a fortune for any freebies worth more than £145 when she returns to the UK.
The source added: “Keira was not impressed. She took the bag to be polite. You don’t expect to be charged for a freebie. She wouldn’t mind if it’s going to charity, but it’s not.”
And the rest of us would be happy with a 6,000 pound gift bag…
Thousands of demonstrators took to the streets of Hong Kong on Sunday to protest against the government’s proposal to introduce a Goods and Services Tax in the territory.
This march indicates that a GST would seriously impact trades and businesses and they are very anxious to tell the government that they do not wish it to implement it,” she commented.
In a statement, the Financial Services & the Treasury Bureau said that the proposals put forward in the tax reform consultation document are not meant to be conclusive, but are intended to stimulate “rational and informed discussion” on the issue.
But such a tax could open the door to tax dodging.
As Financial Secretary Henry Tang Ying-yen rolled out the GST proposal Tuesday, the Customs and Excise Department was muted on how the proposed levy might affect smuggling in Hong Kong, a city whose early history is closely tied with piracy.
“It is inappropriate for customs and excise to comment on issues relating to GST at this moment when public consultation is still going on,” a department spokesman said.
Tang’s consultation document makes it clear exports will not be taxed in order to “preserve our overall competitiveness as a leading logistics and trading hub.”
But goods entering Hong Kong “for home consumption” will be subject to the tax. Importers who bring in goods for transshipment elsewhere – a sizeable 75 percent chunk of all imports, calculated by value – will have their GST payments refunded.
The government is also proposing a package of special arrangements to relieve cash flow issues for the import- export sector, including specially designated temporary warehouses and deferred payments schemes.