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Easy fix costs Rugby League Club

Keeping up with your tax obligations can sometimes seem a drag: forms to be filled in, changes to keep abreast of and an incessant focus on the detail.

Mistakes can be costly. A few dollars here and there might be overlooked but get it much more wrong and you can be facing penalties for not taking reasonable care.

The IRD doesn’t get penalised for mistakes however. As long as they get it right eventually, failure to comply with the law is of no consequence.

To quote the Court of Appeal:

Ms Deligiannis accepts that the Commissioner has acted incorrectly in accepting GST returns filed by Mr Cullen in the Society’s name for periods before May 2016. But the Commissioner cannot be estopped by her previous errors of law from performing her statutory obligations to apply the revenue statutes correctly

The case was CIRRM Cullen CA239/2017 [2017] NZCA 448 a decision of the Court of Appeal issued on 12 October 2017.

The IRD won the case and the taxpayer was refused a $15,000 refund even though IRD had originally accepted it was due and payable.

The case is a reminder how costly it can be for taxpayers when they don’t get right some pretty basic housekeeping and how the playing field favours the tax collector.

The Tamaki Rugby League Club set up as an incorporated society under the Incorporated Societies Act in 2006. Over the next ten years the Club was struck off the Incorporated Societies Register and later reinstated twice and placed in liquidation once.

The second time it was struck off was in 2012 and it wasn’t reinstated again until June 2016. So, between 2012 and June 2016 it was operated as an unregistered unincorporated body or organisation.

The Club registered for GST while it was a valid incorporated society. It filed GST returns, made payments, and claimed GST refunds even during periods when it was struck off the Register of Incorporated Societies. IRD accepted these returns, processed them and paid out refunds.

The court case came about after the Club filed a return on 10 June 2016 covering the GST period April/May 2016. During April and May 2016 and at the time the GST return was filed on 10 June the Club was not a properly registered incorporated society. It had been struck off the incorporated societies register.

IRD initially accepted the GST refund was due but was not sure to whom it should be paid because the Club was not a validly registered incorporated society and the return had been filed using the GST registration number for the incorporated society.

IRD issued a notice of assessment reducing the refund from $14,951 to $101. A representative of the Club, Mr Murray, filed a Notice of Proposed Adjustment challenging the assessment and the IRD did not issue a Notice of Response. Mr Cullen started a court case asking for a declaration that the GST return was valid.

The High Court had found in favour of the Club deciding that in essence there was an entity, albeit an unregistered one, which was carrying on the taxable activity of the Club and which was entitled to the refund.

The IRD appealed to the Court of Appeal.

The Court of Appeal decided the Club was registered for GST as an incorporated society and there was no separate GST registered entity that was not an incorporated society. It was irrelevant that there might have been another entity carrying on the taxable activity. The fact was, there was no separate GST registration of any such entity. The Court of Appeal also held Mr Murray had no standing to issue the court case on behalf of the Club as an incorporated society. The IRD’s appeal was allowed and the taxpayer lost.

This would not have ended up this way if the Club had maintained its registered status as an incorporated society and not been struck off. In fact, the Club was reinstated as an incorporated society just a few days after the GST return was filed. However, that did not fix the problem. The IRD still won because the letter of the law said the Club did not exist as an incorporated society at the time it filed the GST return and during the period to which the return related.

So the taxpayer wasn’t allowed a slip up. Even though in substance the Club was conducting its activity just as it had before it was struck off and the IRD had been accepting and processing the returns up until June 2016, the fact was, at that date, technically it was not properly registered as an incorporated society and according to the Court of Appeal could not file a GST return while struck off the Incorporated Societies Register.

I’m a bit surprised there isn’t discussion in the judgment about section 51B of the GST Act. Often the full legal submissions are not included so it’s difficult to know whether the Court was asked to consider this section.

Section 51B provides that a person is treated as a registered person for GST purposes if they are not otherwise registered but supply goods or services representing that GST is charged on those supplies. Under the GST Act a “person” includes an unincorporated body of persons.

If the Club had been collecting subscriptions from members and making other supplies and purporting to charge GST on those supplies while not a valid Society section 51B(1)(a) may have operated so that the Club was “treated” as a registered person for GST purposes. There would still be issues to debate over whether a return filed purportedly using another GST registered person’s GST number is sufficient to amount to a “GST return” on behalf of the Club under section 16 or 18 of the GST Act. It was a return of sorts, even if the GST number on it was not the GST number of the unincorporated Club and, of course, the IRD had been accepting them in the past. But, that doesn’t count unfortunately.

Iain

 

 

 

 

 

 

 

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There’s tax in that gold!

New Zealand Inland Revenue says in most cases the sale of gold bullion is taxable.

According to a “Questions we’ve been asked” published by Inland Revenue on 20 September, “in most cases gold purchased in bullion form will be purchased for the dominant purpose of disposal”.

That means in most cases a sale of gold bullion will be subject to income tax. If you sell it for more, that’s tax to pay. If you make a loss, that might mean less tax to pay on other income.

Inland Revenue reckons gold bullion is not known for providing benefits such as ongoing returns while it is held or voting rights etc. So, that means, generally, the dominant purpose for which gold bullion is purchased is its ultimate resale.

However, they accept there may be some cases where a taxpayer can demonstrate eventual sale of the gold was not a dominant purpose for which the gold bullion was bought.

The document gives some examples using cases from other countries. Inland Revenue explains the very limited circumstances they consider would not trigger a tax liability. For example, if the gold bullion is bought to extend and diversify a portfolio in the hope it would be a good long-term investment able to be used if the taxpayer became unable to work then tax might not apply to an eventual sale, particularly if the taxpayer can demonstrate they intend to work until a ripe old age. So it seems it probably needs to be a “just in case” or “rainy day” type of investment which is hoped never to be realised.

It is difficult to work out exactly where the line is drawn because some of the examples given by Inland Revenue seem to be somewhat at odds with one another.

You therefore need to think very carefully before assuming any gain you’ve made selling gold bullion is not subject to tax in New Zealand!

As Inland Revenue point out, the onus is on the taxpayer to prove tax does not apply. Given the taxable presumption Inland Revenue say they’ll apply in practice, you should expect resistance if you’re intending to argue your gold bullion is not taxable.

You can find the Inland Revenue document here

 

Good luck!

 

Iain

 

 

 

 

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IRD wants to hear from employers

IRD wants to know what employers think of their proposals for correcting and adjusting PAYE filings.

This recently released officials’ paper sets out the background and proposals: http://taxpolicy.ird.govt.nz/publications/2017-ip-paye-error-correction/overview

A tax bill currently before Parliament will change how employers meet their PAYE reporting and payment obligations. The entire bill is here: http://taxpolicy.ird.govt.nz/bills/51-249. Employers will be able to use their payroll software to file their PAYE information directly. The objective is to reduce paper based compliance and make it easier for those who have payroll systems that support digital filing.

The officials’ paper on correcting payroll reporting errors follows on from the changes intended in the bill and deals with how calculation, transposition and interpretation errors would be corrected and adjustments made. Depending on the nature of the error the correction may be to the original reporting period or an adjustment could be made in a later reporting period. The officials have set out a number of options under different scenarios.

Getting PAYE right all the time is extremely difficult. There are many complex variables and the officials at IRD recognise this in the approach they’ve taken. Overall the proposals appear balanced and pragmatic. However, not all options will appeal to all employers and it’s important you have your say if you are concerned about the impact on you.

The proposals include clarifying what happens when an employee is mistakenly overpaid and does not repay the employer. There is some uncertainty whether the overpayment is actually income of the employee that should be subject to PAYE. IRD intends to make it clear PAYE remains payable on overpayments of salary and wages when the employee has not refunded the overpayment. This could be a contentious. It some cases it could seem as though the tax collector is benefitting from an error by the employer and the employer is bearing an added cost of their mistake solely because the employee refuses to repay the overpayment (and may even have become uncontactable). There will be lots of scenarios to consider and I’d be surprised if there weren’t some strong submissions on this point.

If you want to make a submission you have until 15 September. Don’t be shy now!

 

Iain

 

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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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Netflix tax: Has Aardvark got GST all wrong?

Long running daily Aardvark questions whether Adobe has misunderstood NZ’s new Netflix tax in this article: http://aardvark.co.nz/daily/2016/0902.shtml#continue

The author says:

“It would appear however, that Adobe seem to think that they ought not be charging GST if a company or individual is GST registered.”

My reading of the legislation suggest it’s Aardvark which has got it all wrong. Adobe is quite correct to conclude it does not have to charge the GST if the customer is a GST registered business. The Netflix tax (consistent with GST principles all over the world) is a business to consumer tax not a business to business tax.

Iain

 

 

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Director personally liable

The High Court recently found a company director liable for over $160,000 of tax and interest owed by the company to the IRD.

The company, a builder of residential houses, racked up nearly $200,000 of unpaid tax, interest and penalties over 3 1/2 years. Eventually liquidators were appointed. The company and liquidators took action against the sole director/shareholder arguing he breached various duties as a director. The director did not defend the claim.

The High Court found the director was liable because:

  • As sole director he knew the company was unable to pay its debts yet allowed it to keep trading.
  • He failed to act in the best interests of the company by not ensuring it met its tax obligations as they fell due.
  • He breached his obligation to avoid reckless trading by allowing the company to keep trading in the face of a growing tax bill.
  • He failed to exercise the care, diligence and skill expected of a reasonable director under the Companies Act 1993.

 

The fact the director had sole responsibility for the management of the company and was its only director created a much clearer link between his failures as a director and the company’s indebtedness.

Full details of the case can be found at MJ Pidgeon Builder Ltd (in liq) v Pidgeon [2016] NZHC 1566, 11 July 2016.

Clearly at the most serious end of the scale but nevertheless a good reminder to directors, particularly those with sole control over the company’s trading, that hiding behind the corporate veil should not be taken for granted when financial difficulties arise.

 

Iain

 

 

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Tax sting in Auckland’s Unitary Plan

There’s a potential tax trap for unwary investors in Auckland’s proposed Unitary Plan. It’s called section CB 14 of the Income Tax Act.

A capital gain from the sale of land is taxed if 20% or more of the gain is the result of the likelihood of a change to the rules of a District Plan or the removal of a condition affecting the land under the Resource Management Act, or a similar occurrence.

We’ve already seen coverage in the media about how values of some properties are going to increase as a result of the proposed zoning changes in the Unitary Plan. Those value increases may have already occurred now the Plan has been publicly notified.

There are exceptions to CB 14 (e.g. it won’t apply if you’ve owned the land more than 10 years) but any investor selling property in Auckland now needs to be especially aware of CB 14.

 

Iain