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Late payment fees or penalties?

Yesterday’s tax bill proposes a new provision saying “a fee charged for the late payment of an account” is treated as subject to GST.

It will be back dated to 2003 to prevent the Government being inundated with refund claims.

My issue is with the drafting. It applies to “late payment fees” but according to the commentary does not apply to “penalty or default interest”. Yet there’s nothing in the proposal to help taxpayers determine the difference.

I’ve been thinking through some examples and frankly I don’t think it’s always obvious when something is a “fee” for late payment and when something might be a “penalty” for late payment. There are no relevant definitions in the legislation.

If the IRD is not careful this could backfire on them. On a literal interpretation of the new provision it seems to me there’s a more than reasonable argument it applies to IRD “late payment penalties” under the Tax Administration Act. These penalties are not “interest” because use of money interest is imposed under different sections in addition to late payment penalties. When they were introduced we were told late payment penalties recognised the extra administrative costs incurred by the department when taxpayers paid their tax accounts late. That description is amazingly similar to the language in the Official’s Commentary on the new bill which talks about a late payment fee representing the “cost of administering the late payment”.

If IRD late payment penalties are subject to GST then businesses who have incurred them over the last few years might be entitled to ask the IRD for a tax invoice once this legislation is enacted and claim an input tax credit for the GST component.

This is a classic sledgehammer to crack a nut and needs more thought.


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Warning for small operators

A recent Australian court case serves as a warning for very small businesses. The NZ rules are similar.

The taxpayer bought a former fauna park intending to convert it to educational and accommodation use. However the taxpayer didn’t get around to kick starting their new business. They incurred expenses of owning the property and claim GST on those expenses on the basis they were for its business. The only income they had was described by the court as “miniscule” (about 6k) and related to hiring the facility out for a birthday party.

The court decided the level of commercial activity was insufficient to conclude the taxpayer’s expenses related to a business. They were therefore denied the GST credits they claimed on their ongoing costs of the property.

New Zealand has rules requiring sufficient activity to be carried on before GST credits can be claimed on expenses. There are specific rules excluding activities which are really “hobbies”.

Anyone holding significant real estate interests who generates very little income from their property needs to be very careful if they are claiming GST on their holding costs.