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Surprise in body corporate treatment?

A Product Ruling (BR Prd 14/08) published by IRD on 28 July is fascinating as much for what it doesn’t say as the conclusions reached.

Facts briefly:

– Unit title building in Christchurch.
– Mostly commercial property.
– Destroyed in earthquake.
– Body corporate insured building and paid the premiums (including GST). The Body Corporate was the named “insured” not the individual unit owners.
– Claim made. Settlement reached. Insurer paid out in full and final settlement.
– Rather than reinstate the building the Body Corporate resolved to distribute the settlement funds to all unit owners in proportion to their interests.
– The majority of unit owners are registered for GST but the Body Corporate is not.
– CERA purchased the unit owners’ interests at current market value (on an “as repaired” basis) less the amount of the insurance settlement distributed to each Owner.

Ruling:

The IRD have ruled –

1. GST registered owners do not have to account for GST on the receipt of their share of the insurance settlement distributed to them by the Body Corporate.
2. The distribution of the insurance settlement proceeds by the Body Corporate to each GST registered owner is not subject to GST.

This Ruling is fascinating. I don’t necessarily disagree with it but I am intrigued.

It’s a Product Ruling, which means it’s public. Surely it could have been a private ruling?

An entire paragraph is repeated. It’s very unusual for the IRD to have typos that big in rulings. They are generally checked and re-checked.

If the insurer gets to claim an input tax deduction for the settlement payment to the Body Corporate (which it seems to me could be the case) and if the GST registered Owners had used the funds to repair the building isn’t there a potential for a double claim of input tax deductions? They could claim input credits on the repair costs and yet according to the Ruling no one has an output tax liability on the receipt of the settlement. Now, I know that’s not what happened because the building wasn’t repairable. However, if that were not the case would the GST result have been any different?

Also, the Body Corporate paid the insurance premiums and wasn’t registered for GST. That seems odd. So, the GST registered Owners were not able to claim GST input tax deductions for the insurance premiums (because it seems the Ruling has concluded there was no agency relationship between the Body Corporate and the Owners). I wonder how many commercial unit title buildings in New Zealand arrange their insurance this way? I wonder if some Owners are in fact claiming GST input tax deductions whereas this Ruling seems to suggest they wouldn’t be entitled to. Seems like a pretty strange state of affairs.

I’ve got to be missing something here. Can someone help me out?

cheers

Iain

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NZ businesses are getting it wrong

I’m seeing increasing evidence of misunderstanding over how the zero rating rules apply.

From 1 April 2014 non-resident businesses can register for GST in NZ under a new system which allows them to claim GST refunds on business related costs. Historically a business had to supply goods or services in NZ before it could register and claim back GST on its costs here. That is no longer the case.

I’ve been working with a number of overseas businesses wanting to take advantage of the new system.

What’s starting to emerge is surprising. A number of these overseas businesses are looking to reclaim GST they should never have been charged in the first place.

The most common mistake I’ve seen is made by NZ service providers contracting with an overseas business. They’ve charged 15% GST when the transaction should have been zero rated.

To be fair, the zero rating rules are not the easiest in the legislation to follow. There’s quite a lot of case law on them which speaks to some of the complexities.

There seems to be a common misunderstanding that because services are performed in New Zealand (i.e. the work is done here) GST has to apply at 15%. That’s not necessarily the case. Only some services performed here and supplied contractually to a non-resident business are taxed at 15%.

If you’re providing services to overseas businesses I suggest you check how you are dealing with GST. If you’re incorrectly charging it at 15% you may find Inland Revenue comes knocking when your customer tries to register under the new system and claim back GST that should not have been charged.

Cheers

Iain

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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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Are you ready for the 1st of April 2014?

Change to tax law is as certain as tax itself.

The 1st of April is a favourite of governments around the world for ushering in tax changes.

Here’s a snippet of some changes that are coming into force in GST, VAT and other indirect taxes on 1 April:

Albania – Supplies of medical services and medicines will be exempt from VAT, alcohol and tobacco excise taxes will rise and energy drinks will become subject to excise tax.

Cook Islands – The standard VAT rate will increase from 12.5% to 15% and import charges on some foodstuffs will reduce to zero.

France – CO2 content will become the basis for calculating excise taxes on energy products.

Japan – The rate of Consumption Tax will increase from 5% to 8%.

Lithuania – Excise duty on alcohol products will increase.

New Zealand – Non-residents will be able to claim refunds of GST for New Zealand business expenses under an enhanced registration system.

South Africa – Foreign suppliers of electronic services to residents in South Africa will have to register for VAT and charge South African VAT.

So, a busy day for indirect tax changes. Don’t be fooled!

The South African measure is especially interesting and deserves more comment in a separate post.

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

 

 

 

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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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GST refund claims: keep it real.

You can’t claim GST back on an expense unless you actually receive whatever it is you are paying for.

That’s the message from the Australian Federal Court in a decision released on 1 November [Professional Admin Service Centres Pty Ltd v FC of T].

In that case the taxpayer agreed to contribute towards a man’s legal costs in return for sharing in any compensation he was awarded if successful. The taxpayer tried to claim the GST back on its payments.

The Court agreed with the Tax Office and refused to allow the GST claim because the taxpayer had no contract with the lawyers and did not actually receive the legal services itself.

The taxpayer had also tried to claim GST back on management fees it was “charged” by a related entity. The Court refused this claim as well because the evidence pointed to the fees being a “sham”. No actual services were provided to the taxpayer and no payment was made by it.

A New Zealand court would probably arrive at the same conclusion.

GST depends a lot on the contractual arrangements entered into by the parties. If goods or services are not actually acquired by the person making the payment it’s unlikely they can claim the GST back on the expense (except in some specific “agency” arrangements).

Much care is required around cost sharing arrangements and charges for “management services”. Make sure the contractual terms are consistent with being able to claim back GST and also make sure what you’re paying for is real!

cheers

Iain