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Bodies corporate and GST

Last week the Revenue Minister issued another Discussion Document on the GST treatment of bodies corporate.

The IRD seems to have come full circle on this one. See here:

Bodies corporate and GST.

It is proposed our GST legislation will exempt a body corporate under the Unit Titles Act from having to register for GST. In fact they won’t even have the option of registering for GST.

I think this is dangerous ground.

The key background is:

– for years the IRD didn’t allow or require residential bodies corporate to register for GST.
– consequently the IRD says most bodies corporate are not registered for GST.
– IRD lawyers reviewed the position and decided this approach was probably wrong.
– the IRD consulted and received submissions expressing concerns about any change to align with the IRD lawyers’ view.
– accordingly, the IRD now proposes legislation to validate their original interpretation that bodies corporate cannot register for GST.
– the reasons given for the law change are the potential compliance costs if bodies corporate have to register and the apparent inconsistency that would arise between bodies corporate and other residential propoerty owners.

1. Compliance costs. Well I don’t buy this argument. If it’s valid then it’s also a legitimate basis for exempting all businesses from GST and that’s not likely to happen is it?

2. Inconsistent treatment. The apparent concern is that ordinary home owners cannot register for GST in relation to their residential property ownership. It is therefore wrong to require a body corporate under the Unit Titles Act to register for GST in relation to the services it supplies to its residential property owners because they are essentially one and the same entity.

This argument doesn’t appear to be based on GST principle.

Bodies corporate would not have to register under existing law if all they did was provide residential accommodation. But, they actually don’t do that. They in fact provide a wide range of other services to their owners including maintenance, administration and representation. They are no different from a third party entity providing similar services to a group of residential property owners. The third party entity would be required and able to register for GST.

The distinction argued for is that a body corporate is owned by the unit title owners to whom it supplies services, i.e. they are in substance the alter ego of one another.

Do we really want a principle in our GST law that the corporate veil should be looked through, a company cannot as a matter of law supply services to its owners?

Where does that stop?

Nice as it might be to relieve a group of small taxpayers from their obligations under the law to me this is just not what our GST legislation should be doing. It creates a pretty difficult precedent.

Reading between the lines this seems also to be about a perceived advantage for some GST registered bodies corporate which received leaky building settlements (not subject to GST), using those funds to repair their owners’ properties and claiming GST input tax credits for the repair costs. If an ordinary home owner received a leaky home settlement (not subject to GST) they would not be able to claim GST credits on their repair costs.

The IRD sees this as a mismatch needing a legislative cure. I don’t think that’s correct. The difference is simply a question of quantification of loss, i.e. how much the leaky home compensation amount should be. For one party, GST is a cost and the compensation covers it. For the other it is not a cost and that would presumably be reflected in the settlement amount. So they are equalised.

Further, depending on how the settlement occurs, it’s possible a GST registered body corporate could well have an obligation to account for GST on the receipt of the payment so there is ultimately no difference between the parties.

This proposed change just doesn’t stack up in my view.

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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Buying and selling houses

If you’re buying and selling houses on a regular basis be careful of GST.

The Tax Review Authority recently backdated GST registration for a couple’s family trust to 1999 because they traded 11 residential properties in 12 years.

The case is reported at: Case 5/2013 [2013] NZTRA 05 TRA 019/11, 30 September 2013.

Over the 12 year period the couple bought sections, built houses, lived in the houses for a while and then sold them, some for losses but mostly for gains.

They told the Authority they had reasons in each case for selling their home such as difficulties with neighbours, noise, ill health of family members, children’s schooling requirements, concerns about build quality and so on. However the Judge didn’t find these reasons credible and concluded the couple engaged in a pattern of building houses, living in them only until they had completed all work on them and then selling them. This was a taxable activity and they had to register for GST and pay GST on their sale proceeds.

The case also concluded the couple’s Family Trust had to pay income tax on the sale proceeds.

Penalties for “gross carelessness” were imposed because the taxpayers ignored an “obvious and serious” tax risk according to the Judge.

In this case the extent of trading activity is probably towards the high end, i.e. almost one property each year. The challenge for other taxpayers is to determine just where the line is drawn.

How many times can you buy a property, do it up, live in it and sell it before you trigger the “taxable activity” test and have to pay GST? This case won’t tell you that but it will give you a steer on what factors the IRD and a court will look at.

Cheers

Iain

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Importing costs

NZ Customs have a feature on their website called “What’s my duty?”. It’s a great tool for calculating how much GST and other charges you might be up for when you buy stuff on line.

Here it is: http://www.whatsmyduty.org.nz/

The calculator isn’t intended to be a final assessment of exactly how much you’ll have to pay. However I still recommend having a look at it. A few dollars difference in price can really affect how much you have to pay and you may find the extra charges on some items that cost just $230 make them a lot more expensive.

For example, a camera bought for just under $400 is unlikely to incur additional charges when it comes into New Zealand. But, if the camera costs $405 the additional charges could be as much as $106! That’s because you get charged GST plus a $46 transaction fee.

If you’ve bought an item of menswear for $220 you probably won’t incur any additional import charges. But if the same item costs you $230 you could end up paying an extra $107 to Customs (duty $23 + GST $38 + fees $46).

So, it pays to check.

Add to that the extra form filling you might have to do and buying from overseas can get complicated.

For example, if you’re importing a car you have to provide documentary proof it meets NZ standards for emissions, frontal impact requirements, fuel consumption, braking and a whole lot of other aspects depending on where the car comes from and how old it is. You have to pass an entry certification inspection, bio security and customs checks.

Then there are the registration fees and greenhouse gas levies, plus the GST of course.

Plenty to think about.

Iain

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Commonsense prevails: well almost

Yesterday the Australian Tax Office issued a practice statement explaining when it would overlook an incorrect GST input claim made by a business.

You can read it here

On the face of it the practice statement reeks of commonsense.

The supplier wrongly applies GST to the transaction and so over pays their GST. The recipient over claims their GST but would have been entitled to the claim anyway if the transaction was subject to GST. The ATO doesn’t have to refund the over paid GST to the supplier so they turn a blind eye to the over claimed GST by the recipient and everyone’s left where they would have been if the mistake had never been made. In the document they call it “preserving the status quo”.

I really like the way the ATO is prepared to come out and say when they will use their “powers of general administration”. Their intention is admirable: to adopt a pragmatic approach to tax administration where being overly technical would result merely in extra administration and costs without any net effect on tax collected.

In New Zealand the IRD does in practice demonstrate the same sort of common sense approach to compliance, agreeing not to go to great lengths to unwind historic wrongs if there is no net tax at stake [although not always it must be said]. What we don’t see so much of though are published statements from the IRD saying when they will turn a blind eye to past wrongs in the interests of administrative expediency.

As sensible as the ATO position seems to be though I do have a slight quibble with it. I’m not sure it’s quite as straightforward as the document suggests.

The ATO’s statement is based on an assumption that the pricing of the transaction between the supplier and recipient explicitly took GST into account. In other words, it assumes the parties turned their minds to GST and adjusted the contract price to add GST. In my experience that isn’t always the case.

Often parties contract on the basis prices include GST (and any other taxes). The price is driven by market considerations and is the agreed price regardless of whether GST applies. So, if a supplier has incorrectly treated the transaction as being subject to GST, from a contractual perspective, it would not be right for the tax authority to insist the supplier refund a GST component to the recipient. Yet that is a strong driver of the ATO’s position.

The ATO assumes the mistake made by the supplier in over paying their GST must be corrected by a refund to the supplier being passed on by the supplier to their customer. Because of that, the ATO come to the conclusion it’s administratively acceptable simply to allow the customer to keep the refund claim they wrongly made and for the ATO not to refund the over paid GST to the supplier.

In my view, if the supplier has mistakenly reduced their margin by accounting for GST on a transaction which should not have been subject to GST and the parties clearly contracted on a GST inclusive basis without turning their minds to GST, then rather than “preserving the status quo”, the ATO’s approach could well leave the supplier out of pocket and the recipient with a windfall.

Cheers

Iain