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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.




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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.






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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


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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!



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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.



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Starting a new business?

If you’re thinking about starting a new business be careful how much you spend on “preparatory and exploratory” work.

An Australian tax court has just concluded that a couple could not claim back GST on “preparatory and exploratory” expenditure because their business had not yet come into existence.

The couple had bought a rural property they wanted to use for an eco-tourism business. They spent money preparing a business plan, registered a business name, consulted an accountant and lodged a development application with the local council.

However, because they had not yet produced any income from the property the court said their business had not started and they couldn’t claim back the GST.

Could a similar result occur in New Zealand? Yes it could. A person cannot be registered for GST in New Zealand unless they carry on a taxable activity. This is a question of fact and courts will look at the intention of the taxpayer to supply goods and services for money.

Where there is a considerable time difference between incurring preparatory and exploratory expenses and actually earning revenue there is a risk the IRD could refuse GST registration and GST claims for those expenses.

In the Australian case the couple bought the land in 2003 and by 2012 had still not actually derived any income. That’s probably at the extreme end of the scale. Nevertheless there is a real risk for people starting businesses dependent on Resource Management Act approvals because it can be years before they are even allowed to start work developing their property.

Be careful out there.



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If they take it, have you “supplied” it?

The Inland Revenue Department has published a draft view on whether a GST “supply” occurs when land is compulsorily taken by a Public Authority under the Public Works Act.

At issue is whether a compulsory acquisition of land results in a “supply” being made by the person whose land is taken and whether that “supply” is a “sale”.

If it’s a “supply” and the land owner is GST registered then GST is likely to apply. In most cases this won’t matter because the GST rate will be 0%.

However, if the land owner is not GST registered the acquiring authority (usually a Government entity) may be entitled to claim a GST “credit” if the acquisition is considered to be a “supply by way of sale”.

Practically speaking this is mainly just one Government entity (IRD) paying another Government entity so you have to wonder why it is important. However, that won’t always be the case. The principles could apply to some local authority bodies for example and some statutory bodies.

The IRD is looking for views on this. See here
According to the IRD a compulsory acquisition of land is a “supply by way of sale” for GST purposes.

This view isn’t unchallengable. The Australian Tax Office has previously taken the view a compulsory acquisition is not a “supply” because the transferor takes no action to transfer their interest to the acquiring authority [see ATO GSTR2006/9]. However they have more recently backed away from this view in light of an Australian case, Hornsby Shire Council v FC of T 2008 ATC 10-061 which came to a different conclusion.

I think the IRD have got it right. Compulsory acquisition is simply a mechanism by which title to a property passes and it is a “sale” because consideration is provided for the transfer of the property, albeit under some duress in many cases.


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Good news for non resident businesses

Non resident businesses looking to establish supply chains into New Zealand have to go through hoops to register for GST here and recover the GST on their NZ expenses. Often it means they’re at a disadvantage when compared to businesses established in New Zealand.

Yesterday Revenue Minister Peter Dunne said the Government intended to implement a proposal in an August 2011 Discussion Document to relax the rules for non-residents GST registering in New Zealand. This isn’t about giving non-resident businesses something they couldn’t already get. It’s about making it easier for them with less administration. That’s good for the businesses and good for Government Administration.

It’s also good for New Zealanders who do business overseas. If this change goes ahead we will be more aligned with Australia and other countries around the world with VAT based systems. In some of those countries New Zealand exporters cannot recover VAT costs because our system does not reciprocate. This change means NZ businesses will find it easier to claim back refunds of VAT overseas.

Not a game changer but definitely an improvement.


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GST and non-profit bodies

Inland Revenue released their updated “Public rulings work programme” on 5 October. This is where they announce key policy areas they are working on at the moment. It means we can expect some sort of discussion document, legislative announcement or ruling on certain aspects of tax.

Once again there’s an item relating to non-profit bodies and GST. In the programme Inland Revenue have described it like this:

QWB00078 GST – non-profit bodies and section
Does a non-profit body need to conduct a taxable activity and make supplies in the course of that
taxable activity to claim input credits?

All GST registered non-profit bodies need to be alert to this. The question posed by Inland Revenue implies they are thinking about whether non-profit bodies should have less ability to claim GST on expenses.

Section 3A(4A) of the GST Act was enacted in 2002 as a concession for non-profit bodies. Broadly speaking it meant a GST credit could be claimed by a non-profit body on any expense as long as that expense was not incurred for the principal purpose of making exempt supplies (being supplies of residential accommodation or financial services).

This was quite generous because other GST registered businesses actually need to show a connection between the expense and their business outputs before they can claim a GST credit. This concession means non-profit bodies could claim GST on expenses which generally related to their non-commercial or charitable activities as long as they weren’t mainly connected to supplies of residential accommodation or financial services.

Section 3A(4A) was technically repealed from 1 April but its effect still exists in a new section 20(3K).

All non-profit entities need to consider how this might impact their budgets.

Inland Revenue have not given a timetable for release of any proposals or discussion document so it’s a waiting game at the moment. At some stage in the next 12 months it would appear we can expect some movement. Then there should be an opportunity for those affected to have their say.


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Tax refunds – how long should you wait?

The Federal Court in Australia has ruled the requirement for the Australian Tax Office to pay out GST refunds “within a reasonable period” did not allow them to withhold payment until they had completed an investigation into the accuracy of the refund claims. This was so even though the ATO had concerns about the veracity of the refund claims. See Multiflex Pty Ltd v FC of T 2011 ATC 20-284.

Compare that to the New Zealand position. Our GST legislation has a 15 working day time limit for the IRD to pay GST refunds unless the Department decides it wants to investigate the taxpayer’s return. As a result of our Supreme Court’s decision in Contract Pacific Limited V CIR (2011) 25 NZTC 20-006 the IRD effectively can now withhold GST refunds indefinitely if they decide to investigate the taxpayer’s return. There is nothing in our legislation requiring the IRD to have any basis for wanting to investigate a return before they can withhold a GST refund and the effect of the Court’s decision is that once the IRD has given the required notice of its investigation there are no time limits imposed on how that investigation is conducted.

These are two starkly contrasting approaches to an important aspect of public administration.

I’m not convinced having a tax administration with effectively an unshackled entitlement to withhold payment of taxpayers’ refunds reflects well on New Zealand’s overall attitude to taxpayer rights. This is an area of the GST law which needs to be reviewed in my opinion.