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GST derails another property sale

Recently from the Court of Appeal, another example of how GST can derail what should have been a simple property sale.

Y & P NZ Ltd v Yang Wang & Chen Zhang [2017] NZCA 280 is a decision from the Court of Appeal about whether caveats registered by the purchasers to protect their interests should remain in place.

They had registered the caveats after the vendor refused to settle because of a dispute over GST.

Here’s what happened:

2 May 2016 – Sale agreements for four properties entered into on a “plus GST, if any” basis. The vendor was registered for GST in relation to the sale. The purchasers stated in the agreements they would not be registered for GST at settlement and did not intend to use the properties to make taxable supplies. Settlement was supposed to be 28 July 2016. That’s enough basis for the vendor to add 15% GST to the settlement price.

25 July 2016 – Vendor sends settlement statements to purchasers requiring settlement with 15% GST added.

27 July 2016 – Purchasers verbally advise the vendor their circumstances have changed, they are registered for GST and will use the properties to make taxable supplies. They ask for amended settlement statements showing GST at 0% and provide the vendor with their GST number. The vendor issues the requested amended settlement statements.

28 July 2016 – Settlement day! Or so it was supposed to be. Instead, the vendor insists that settlement take place on the basis of the original settlement statements with 15% GST added because that was what was required under the 2 May 2016 agreements.

What then followed was a series of lawyers letters, a case lodged by the purchasers requiring specific performance of the contract and the registration by the purchasers of caveats against the titles.

This should have been a simple sale but instead we have a dispute over GST holding up the transaction and ending up in court.

Why did it come to that?

The legal arguments in this case were about whether the purchasers’ caveats should remain in place, presumably while the substantive case for specific performance was unresolved. All we really know from the Court’s judgment is that the parties were arguing over whether the purchaser had provided the required written notification of its GST position to the vendor within the required time.

What intrigues me is, if the vendor really wanted to sell their properties they could have settled on the basis of 0% GST, as requested by the purchasers, without the likelihood of any additional cost to themselves. In fact, the vendor might well have saved themselves the costs involved in dealing with the dispute. Yet for some reason they refused to settle.

Let’s say they had accepted the purchasers’ verbal assurances and settled at 0% GST and it turned out the assurances were wrong and GST of 15% should have been paid. What would have happened? Under the GST legislation, in that event, the onus of paying the GST would have shifted to the purchasers who would have had to pay it directly to Inland Revenue. It’s unlikely, in my view, that Inland Revenue would have required the GST to be paid by the vendor, although it can’t be ruled out.

In any event, the vendor had the chance to minimise their risk by asking the purchaser for an amended statement in writing that they met the requirements for 0% GST to apply. That could have been done on settlement day.

Maybe there’s a lot more to this case than this reasonably short judgment from the Court of Appeal suggests. It’s hard to fathom what really was to stop the transaction settling and why it ended up in a protracted legal dispute. Settlement was supposed to be 28/7/16, this interim hearing took place on 11/5/17 and the Court’s decision is dated 3/7/17 – and it’s still not over.

Here we had, presumably, a willing vendor and willing purchasers and yet they couldn’t get the deal done because of a disagreement over whether a written notice had been given on time.

The fact is, whether 15% or 0% GST applies to a land transaction is determined by the GST Act, not by the parties to the contract and not by whatever statements the purchaser might put in the contract about their GST position. While a vendor is entitled to rely on GST statements made in the contract by the purchaser they do not have to. In my view the vendor had options to achieve settlement without exposing themselves to unacceptable GST risks if their focus were on how they could complete the transaction rather than on why it should not be completed.

Willing parties to a contract should be able to get their deals done safely without having them derailed by GST and without protracted litigation.

 

Iain

 

 

 

 

 

 

 

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Australian Tax Office rules on Bitcoin

The ATO has just issued a ruling on the GST treatment of Bitcoin. Here: http://law.ato.gov.au/atolaw/view.htm?docid=%22GST%2FGSTR20143%2FNAT%2FATO%2F00001%22

In brief:

1. A transfer of bitcoin is a “supply” for GST purposes.
2. Bitcoin is not “money” under the GST legislation.
3. A supply of bitcoin is not a “financial supply”.
4. If bitcoin are supplied in exchange for goods or services the transfer will be treated as a barter.
5. A bitcoin is not a “voucher” for GST purposes.
6. A secondhand goods input credit is not available on the acquisition of bitcoin.

No real surprises there. This had been well signposted.

We await the NZ IRD view which I wouldn’t expect to be much different.

Iain

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28 October deadline for non-residents

Non-residents wishing to register under the special GST registration system have until 28 October to ensure their registration (and refund claims) are backdated to 1 April 2014.

All non-resident businesses who have incurred costs in New Zealand and who are not already registered for GST in New Zealand should consider registering under the new scheme so they can claim refunds of GST.

It’s not necessarily a straightforward process but it can be worthwhile.

Iain

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NZ GST legislation inadequate

The NZ GST Act inadequately deals with online supplies of services and should be fixed immediately.

I’m referring to how the Act treats those selling products online such as e-books, movies, professional advice, teaching materials, photographs and lots of other digital information.

For businesses selling directly to private consumers the issues are more significant.

In certain situations the legislation requires the supplier to determine where their sales are “physically performed”. This affects how GST applies to them.

The concept of “physical performance” does not sit well with how these products are delivered. Is it the place where the supplier is located, where a server in the delivery chain is located, where the consumer is when they download the relevant product, where the consumer resides or some other place? Is there any “physical performance” at all?

I know these issues are being looked at and no doubt we’ll see some reform at some stage.

However, businesses are having to work out how the law applies to them now and it’s just not clear at all.

Iain

 

 

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VAT and online sales

This is a very good item on the wider business implications of proposed changes in Europe to the VAT treatment of online digital media sales.

http://performance.ey.com/2014/02/20/vat-change-online-sales-just-tax-concern/

Cheers

Iain

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Global VAT alignment edges closer

At the Global Forum on VAT in Tokyo last week 86 countries signed up to the first agreed framework for applying VAT to internationally traded services and intangibles. The new guidelines set out core VAT principles to be applied when taxing services and intangibles, will ensure more consistency between countries, will reduce double taxation and will protect the neutrality of business to business (“B2B”) transactions.

While an important step in the right direction, the more vexing question of how to tax internationally traded business to consumer (“B2C”)services and intangibles has been left for another time.

The Global Forum on VAT occurs under the umbrella of the OECD and provides a platform for global discussions on VAT. The first session took place in November 2012. Last week was the second occasion academics, tax administrators. business representatives and others were invited to discuss VAT policy trends and developments.

The main output from this latest session was a set of new OECD Guidelines on applying VAT across borders.

The Guidelines can be downloaded from the the OECD website – here: http://www.oecd.org/ctp/consumption/international-vat-gst-guidelines.htm

The focus of the Guidelines is B2B transactions. They discuss place of supply rules, the well known “destination principle” (B2B services should be taxed in the country where the customer is located) and mechanisms available to countries to allow non established foreign businesses to recover VAT incurred there.

None of this is startling news for New Zealand. We’re already ahead of this stuff thanks to our super charged GST system. Just this month we’ve seen a new streamlined registration and GST recovery system come into place for overseas businesses incurring GST here.

The really challenging question for New Zealand, and every other country with a VAT, is how do you tax B2C services and intangibles traded across borders? Unlike goods there’s no border control in place to capture internationally traded services and there’s no existing registration system to collect the tax from the customer/consumer.

This really is the more urgent question in my view. Countries are attempting to deal with the issue on their own (eg South Africa and the EU) but global cooperation and alignment are critical. Some States in the USA have implemented mechanisms to apply state taxes to inter-state B2C online sales (such as e-books) and the latest evidence suggests these measures are improving the sales of local bricks and mortar retailers at the expense of online retailers such as Amazon.

Last week’s Forum in Tokyo urged the OECD to finalise work on the VAT treatment of B2C services in time for the next Global Forum on VAT in November 2015. That seems like a long time to wait, but as we all know, achieving global consensus on anything is a slow process.

Cheers

Iain