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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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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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It wouldn’t happen in New Zealand – or would it?

An Australian court says a taxpayer has not commenced a subdivision activity until they have the funds needed to purchase the land. The costs spent beforehand on planning permits and market valuations were preliminary or preparatory to starting any business.

That’s according to a Melbourne tax court in Bryxl Pty Ltd v FC of T [2015] AATA 89.

This is a big deal for the taxpayer because it means they can’t claim GST credits for the planning and preparatory expenses. Their GST registration was cancelled and they had to pay penalties.

New Zealand’s GST legislation says “anything done in connection with the beginning … of a taxable activity is treated as being carried out in the course of .. the taxable activity.”

That would indicate the Bryxl Pty Ltd might have got a different result in New Zealand.

But not necessarily. In Case P73 (1992) 14 NZTC 4,489 a New Zealand tax court said commencement work can only be added to a taxable activity. It cannot, by itself, amount to a taxable activity. So, if the taxable activity never actually gets up and running the work done in connection with the beginning of that activity cannot be treated as part of any taxable activity.

For GST purposes therefore, the amounts spent on the pre-commencement activities fall into a black hole and there is no entitlement to claim an input tax credit unless the business or taxable activity actually gets up and running.

Who knew that?

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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Taxing energy drinks unconstitutional

A recent decision in France has concluded a government tax on energy drinks contravenes the country’s constitution.

Under France’s tax laws a tax was imposed on energy drinks with at least 220 mg of caffeine per 1,000 ml.

The tax was challenged and the Constitutional Council was asked to rule.

The Council gave its decision on 19 September.

In its decision the Council indicates the goal of improving public health was the policy foundation for the tax and concludes it is acceptable, in pursuing that goal, to distinguish between drinks based on caffeine content.

However, in this case, some drinks which had higher caffeine levels than 220 mg per 1,000 ml were exempt from the tax because they weren’t “energy drinks”. This was a problem according to the Council because in effect drinks that were substantially the same in terms of caffeine content were not treated equally for tax purposes and this differential treatment was not justified.

Therefore, the Council ruled the tax is contrary to France’s Constitution.

The lesson for tax policy makers – it’s not what you do, it’s how you do it. The problem was created because caffeine was used as the determinant for imposing the tax. If a characteristic unique to “energy drinks” had been used instead then it’s possible a different outcome might have been reached.

Iain

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Bodies corporate and GST

Brian Fallow’s opinion piece in today’s Herald on residential bodies corporate and GST is timely.

See here: http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=11231055

This issue baffles me. Why is it so complicated and why is it taking so long for the IRD to reach a settled position?

Maybe I’m missing something, but like Fallow, I think the legal analysis isn’t that complex. Bodies corporate are separate entities from the apartment owners and they provide services to the owners in return for levies. Even if those services are mandated by legislation it seems to me, there is a supply and it is for consideration.

You wouldn’t have to look far to find examples where the IRD has insisted on a company registering for GST because it was supplying goods and services to related shareholders. If no charge was made for the supplies the IRD is entitled to deem consideration to be provided at market value if the shareholder is not GST registered.

This issue isn’t without a downside for the bodies corporate and the apartment owners though. Leaving aside the issue of leaky home settlements (and I agree with Fallow on that), those deriving fees of more than the registration threshold are required to register for GST in my view and that could mean a net GST cost to the owners, especially if the body corporate employs staff.

Our GST system is applauded for being broad based and here we have the IRD arguing for a narrowing of the base. An unusual situation in my view.

Comments most welcome on this one.

Iain

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Grant versus fee!

The Woking Museum and Arts and Crafts Centre is a charity set up to “advance the education of the public in local national and international history and arts and crafts”. In 2003 it entered into an agreement with the Woking Borough Council [In the UK] to “provide arts museum and cultural services and a public information service within the Borough of Woking”. The Council agreed to make annual payments to the Centre in return.

The UK Customs and Excise decided the payments made by the Council should not be subject to VAT. They argued the Centre was not a business and the payments were grants rather than “consideration” for supplies of services.

On 10 February 2014 the First Tier Tribunal hearing the case between the Council and the Centre decided the payments are subject to VAT for a number of reasons. Key to the Tribunal’s decision were the following conclusions:

1. The agreement entered into by the parties was a contract for the provision of services by the Centre to the Council and not a grant because there are mutual obligations characteristic of a contract.

2. The services delivered by the Centre provided a direct benefit to the Council in that artefacts of the Council were preserved in the museum by the Centre under an obligation to make space available for them.

3. The arrangements were commercial in nature and the fact the Centre is a charity does not render the relationship un-economic. The purpose and results of an activity are immaterial in determining whether that activity is “economic”.

This sort of analysis is as relevant in NZ as it was to this decision.

There are many organisations providing public benefit services under contracts with local authorities and government bodies. It is not always clear whether those arrangements are subject to GST and in fact we’ve had case law of our own on these sorts of issues.

The crux is how the payment should be treated. Is it a grant or a payment for services? In the end the arrangements and circumstances of each case will determine the outcome but the analysis above should provide some insights into what factors are important.

cheers

Iain