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12 GST thoughts of Christmas

12 GST thoughts of Christmas:

1. There’s no GST on gifts (so Santa is probably not GST registered).
2. GST registered businesses can claim back the GST on gifts they buy for staff, suppliers and customers.
3. If you buy someone a gift voucher for Christmas it’s quite likely the IRD won’t get any GST until the person redeems it.
4. If the person you gave the voucher to loses it the IRD might never get any GST.
5. On Boxing Day when you go to the shop to return the present you don’t want the retailer will be able to get a refund of GST from the IRD provided they credit you for the return.
6. However, the retailer will have to pay GST if you use the credit to buy something else.
7. The government gets a double whammy of GST when you buy alcohol for your Christmas festivities or petrol for that family road trip (because GST applies to excise taxes on alcohol and fuel).
8. If you order an expensive gift online from overseas for someone in New Zealand and have it delivered directly to them you may be giving them a GST bill because chances are they’ll have to pay GST on the value of the present before they can pick it up from Customs.
9. Businesses are given an automatic extension of time to file their November GST return so they don’t have to file it on 28 December.
10. GST registered businesses with 31 December balance dates which make exempt supplies may have to come back early from their holidays so they can calculate their annual GST adjustment due on 28 January.
11. If you’re booking an overseas holiday and have to take a domestic flight to get to your departure airport it’s best to book both flights together if you want to save the GST on the domestic flight.
12. There’s no GST on gifts but if someone gives you something expensive while overseas you might have to pay GST when you bring it back with you.

Happy Christmas everyone

Iain

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IRD comments on short term Christchurch rentals

Inland Revenue’s latest Business Tax Update reminds us people renting out houses in Christchurch short-term have to pay income tax on the rent, less deductions. It’s a pity they don’t mention GST because that’s more interesting.

The update is here: http://www.ird.govt.nz/aboutir/newsletters/business-tax-update/2014/btu-issue-057-11-14.html#06

An extract of the relevant section is quoted at the bottom of this post.

So, in a nutshell, if you own a house in Christchurch and someone rents it of you for, say, one month, fully furnished while their own home is repaired you have to declare the income from that and pay any income tax due. Not exactly a bombshell is it? Sure, a few people might genuinely be stunned by the revelation they have to pay income tax on income they receive from renting out their house, even for a short term. But my guess is for most people the Update might as well be telling them how to extract nutrient from eggs by suction.

The really interesting, and more contentious, point is how GST applies.

Providing residential accommodation in “dwellings” is not subject to GST. However, providing accommodation in “commercial dwellings” is subject to GST (assuming the registration threshold is satisfied).

A “dwelling” is a place the person occupies as their “principal place of residence” and excludes any “commercial dwelling”.

A “principal place of residence” is a place the person occupies as their “main residence for the period to which the agreement for the supply of accommodation relates”.

A “commercial dwelling” includes hotels, motels, boarding houses, hostels, B&B’s and similar premises.

If you rent a house out to someone for, say one month, fully furnished, while they have their own place repaired, are you providing anything more than accommodation that is similar to hotel or motel accommodation, i.e. short term furnished accommodation? Is the tenant occupying your place as their “main residence” during the rental period or is it secondary temporary accommodation while their “main residence” is repaired?

I think there is some doubt over how the GST Act applies in these situations. Sure, most will not be within the annual $60,000 GST registration threshold. However, some of the house owners may be registered for GST in their own right for other purposes, or may even wish to register for GST in relation to the temporary rental activity. Whether they should or can is unclear.

I’d like to see clarity on less obvious issues like these when the IRD is publishing notices telling taxpayers of their obligations.

Cheers

Iain

Extract from Business Tax Update November 2014

Renting out your own home short term

There’s a demand for temporary rental properties in Canterbury because of thousands of families needing accommodation while they wait for earthquake repairs on their homes. Some homeowners are meeting this need by offering furnished homes for short-term rental.

If you rent out your own home, even for a short time, any income you receive is liable for income tax, so you must include it in your tax return.

However, you can claim a deduction for any expenses you incur while your property is rented out. But you can only claim that proportion of ongoing costs for the time your property is rented out. For example, if you rent your home out for three months, you can claim the rates, insurance, interest and any agent’s fees you incurred during that period.

Find out more on what expenses you can claim”

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GST on lotteries, raffles, sweepstakes and prize competitions

The IRD has just released for consultation a “Questions we’ve been asked” draft paper on the GST treatment of lotteries, raffles, sweepstakes and prize competitions.

You can find it here: http://www.ird.govt.nz/resources/a/1/a1b5b4ef-32bc-4315-9c80-09d5b70712f1/qwb0121.pdf

Submissions are due by 24 October.

I recommend all not for profit organisations and others running raffles, lotteries or prize competitions have a read and make sure they understand the implications.

If the entity on whose behalf the raffle, sweepstake or lottery is being run is registered for GST, or required to be registered for GST, then that entity is required to account for GST on the proceeds.

GST is calculated based on net revenue after deducting cash prizes payable. Where prizes are purchased GST incurred on those purchases can be claimed as an input tax deduction. Obviously GST cannot be claimed on donated prizes.

Even if the prizes were donated GST will still apply to the raffle/sweepstake/lottery proceeds.

According to IRD someone conducting a raffle which will have revenue exceeding the GST registration threshold of $60,000 will be liable to register for GST and account for GST.

Much of what is in this document won’t come as a surprise to most raffle/lottery organisers and they will already be complying.

However, a point needing more clarity in my view is when a one-off raffle organised by someone which takes place over a short period of time will be considered a “taxable activity” for GST purposes, thus requiring the organiser to register and account for GST on the raffle (assuming the proceeds are over $60,000.

Cheers

Iain

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12 GST thoughts of Christmas

12 GST thoughts of Christmas:

1. There’s no GST on gifts (so Santa is probably not GST registered).
2. GST registered businesses can claim back the GST on gifts they buy for staff, suppliers and customers.
3. If you buy someone a gift voucher for Christmas it’s quite likely the IRD won’t get any GST until the person redeems it.
4. If the person you gave the voucher to loses it the IRD might never get any GST.
5. On Boxing Day when you go to the shop to return the present you don’t want the retailer will be able to get a refund of GST from the IRD provided they credit you for the return.
6. However, the retailer will have to pay GST if you use the credit to buy something else.
7. The government gets a double whammy of GST when you buy alcohol for your Christmas festivities or petrol for that family road trip (because GST applies to excise taxes on alcohol and fuel).
8. If you order an expensive gift online from overseas for someone in New Zealand and have it delivered directly to them you may be giving them a GST bill because chances are they’ll have to pay GST on the value of the present before they can pick it up from Customs.
9. Businesses are given an automatic extension of time to file their November GST return so they don’t have to file it on 28 December.
10. GST registered businesses with 31 December balance dates which make exempt supplies may have to come back early from their holidays so they can calculate their annual GST adjustment due on 28 January.
11. If you’re booking an overseas holiday and have to take a domestic flight to get to your departure airport it’s best to book both flights together if you want to save the GST on the domestic flight.
12. There’s no GST on gifts but if someone gives you something expensive while overseas you might have to pay GST when you bring it back with you.

Happy Christmas everyone

Iain

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Insurance claims

A lot of issues are appearing with insurance claims and leaky homes settlements.

A recent bulletin from the Australian Tax Office is a good example of why it’s important to get it right.

The ATO’s bulletin deals with a situation where a home owner makes an insurance claim for damage to their house following floods. The insurance company disputes liability and says the insurance policy does not cover the claim. However, on a “no liability” basis the insurance company decides to make an “ex gratia” payment to the home owner in full and final settlement of their claim. The issue is whether the insurance company is entitled to a GST credit on the amount of the settlement payment.

The ATO decided the credit is available under the Australian legislation.

The same issue arises in New Zealand but our legislation is quite different. Also, the IRD are on record as saying out of court settlements without admissions of liability are often not subject to GST. This could create a problem here. The home owners of course will use the settlement money to pay for repairs which will be subject to GST. So the Government will collect GST on the payment. It is logical in my view to allow the insurance company a GST credit for the insurance payment because if no credit is allowed the GST becomes an added business cost of the insurance company. That is contrary to GST basic principles.

I hope the IRD and insurers get this right.

Iain

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Refunds

A lot of refunds are changing hands at the moment. All sorts of arrangements are being cancelled because of mother nature and today we read Contact and Telecom have discovered billing errors which will require refunds being paid to customers.

A word of caution: if you are GST registered and paying or receiving a refund make sure you are on top of what you have to do for GST purposes. Whether you are entitled to a refund of GST previously accounted for or have to pay back GST already claimed you should make sure you understand the GST timing and documentation requirements.

Iain

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Tax free shopping zone for Christchurch?

A tax free zone in Christchurch has been suggested by a new business owners’ group there.

I think it is a well intentioned idea which poses some reasonably big challenges in practice.

The intention is to encourage businesses (and shoppers)to return to the CBD during the re-development.

The boundary issue is the most obvious practical consideration. Where will the lines for the tax free zone be drawn? Every time there’s a boundary in tax there are winners and losers. There are also those who will modify their behaviour to take advantage of the boundary.

If the plan went ahead we’d almost certainly see some businesses around the fringes of the CBD lobbying to be included in the tax free zone. Shops just a few metres from each other could conceivably have quite different tax treatments.

We might also see some who take up temporary residence in the tax free zone to take advantage of the concession as long as it is in place.

There are other issues to sort out when designing the tax free zone. For example, does it apply to purchases from those businesses situated within the zone or only those purchases which physically occur within the zone? In other words, does it apply to internet purchases from a business which is inside the zone?

A technical issue is whether the proposal involves an “exemption” from GST or “zero rating”. They are quite different. In my view “zero rating” is more likely to produce the benefits the proponents of the idea want. Technically this means prices would be subject to GST but at a rate of 0%. That is less complicated for the businesses and produces quicker benefits than an “exemption” from GST.

Also, will the tax free status apply to business transactions as well as sales to private consumers?

It has been suggested ordinary commercial transactions would still be subject to GST. If that’s the case retailers will have to monitor which sales are which and, if they get it wrong, could be penalised under current law. This is important because there would be a financial incentive for some businesses outside of the CBD to take advantage of the tax free zone by buying business inputs within the zone. This could have the perverse result of giving those businesses an advantage over their competitors who are not able to buy within the zone. I’m sure that’s not what the supporters of the tax free zone would want.

Care will also be needed towards the end of the tax free period. Removing tax exemptions is challenging. When people know the change is coming they’ll respond. There is bound to be a jump in retail activity just before the change. There’ll also be some who seek to take advantage of the tax free period for as long as possible by manipulating the rules, perhaps by entering in to pre payment arrangements and such like.

These are merely some of the practical design issues which admittedly can be dealt with if there is political will to support the idea.

Iain