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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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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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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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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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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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Insurance claims

A lot of issues are appearing with insurance claims and leaky homes settlements.

A recent bulletin from the Australian Tax Office is a good example of why it’s important to get it right.

The ATO’s bulletin deals with a situation where a home owner makes an insurance claim for damage to their house following floods. The insurance company disputes liability and says the insurance policy does not cover the claim. However, on a “no liability” basis the insurance company decides to make an “ex gratia” payment to the home owner in full and final settlement of their claim. The issue is whether the insurance company is entitled to a GST credit on the amount of the settlement payment.

The ATO decided the credit is available under the Australian legislation.

The same issue arises in New Zealand but our legislation is quite different. Also, the IRD are on record as saying out of court settlements without admissions of liability are often not subject to GST. This could create a problem here. The home owners of course will use the settlement money to pay for repairs which will be subject to GST. So the Government will collect GST on the payment. It is logical in my view to allow the insurance company a GST credit for the insurance payment because if no credit is allowed the GST becomes an added business cost of the insurance company. That is contrary to GST basic principles.

I hope the IRD and insurers get this right.

Iain