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GST and online shopping – is there a cure?

The NZ Government has delayed the Customs / IRD report on GST and online trading to allow the issue to be considered as part of the wider review of how global corporates are taxed. I think the merger of the issues was unavoidable. They are closely linked and the ultimate solution will be multilateral.

Nevertheless we’ve just come through another peak retail season with shoppers confirming their increasing appetite for internet purchases. Senior politicians have taken notice of the amount of GST being lost to the government and local retailers wonder why their overseas competitors continue to have this advantage over them.

As I see it, there are two interim solutions:
1. Remove the low value import threshold.
2. Introduce a domestic low value threshold for GST purposes.

Each has its own challenges and each means more compliance costs for someone. The first option appeals more however because it is consistent with perserving the integrity of our existing GST system.



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Good news

Might as well start the year with a bit of good news, even if it’s a little old by now.

On 11 December the Government gave us a xmas present with the announcement by the Minister of Customs the Temporary Import period for yachts, launches and small craft will be extended from 12 months to 24 months.

This means visitors coming to NZ on their yachts or launches can stay here longer without having to pay duty or GST on the value of their vessel. They’ll be able to have more work done by our brilliant marine businesses, will be able to spend more time visiting NZ’s amazing tourist attractions and will be able to spend more money here.

Around 700 private craft visit NZ every year of all shapes and sizes. Marine industry representatives reckon this measure will increase that number by 25%.

This is surely good news. An incentive for visiting yachties to stay longer.

Cheers and Happy New Year


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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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At least it’s a start

More pressure from retailers for the Government to remove the iow value import threshold for goods. http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11171599

This isn’t going to go away. It’s part of the wider debate on how to tax the digital economy. I think faster progress is required. Other countries including the EU, US, South Africa and most of the OECD already tax digital goods and services, softward, books, movies, music, hosting services and more. New Zealand does not unless the purchaser acquires more than $60,000 worth in a 12 month period.
New Zealand has moved a step closer with a new GST registration system for non-residents whcih comes into force in April 2014. If changes are made to the “place of supply” rules for services and enforcement issues are dealt with there’s a lot of revenue potential for the Government. The cost of administering a reduction in the low value import threshold for goods will seem tiny in comparison.

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Time to make GST compliance easier?

The Australian Labor Party has announced that from 1 July 2014 businesses with turnover of less than $20m will be able to lodge their GST activity statements annually http://www.alp.org.au/cutting_red_tape_reducing_the_burden_of_the_gst.

That’s ten times the current threshold of $2m.

There is no option for NZ small to medium sized businesses to lodge GST returns annually. A business with a turnover of less than $500,000 may lodge it’s NZ GST returns on a 6 monthly basis (2 returns per year). For turnovers up to $24m businesses in NZ can lodge GST returns on a two monthly basis (6 returns per year). Above $24m and they have to lodge returns every month.

I think an annual return option should be available in New Zealand and the threshold should be higher than $500,000. I don’t know what the proper level would be but the IRD will have data about business numbers etc needed to work that out.

A profitable business turning over just $500,000 each year with standard employment costs might have net GST of about $45,000 payable each year (depending on a number of factors). While payments can be required to be made periodically (as is the case in Australia) is it really necessary for that business to incur the cost of two returns each year?


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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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At least it’s a start

There’s a lot of chatter about South Africa’s proposed law requiring foreign businesses to charge VAT on sales of digital products to South African residents. If passed the law will cover things like music, videos, software and games sold on line.

At the moment, like many countries, South Africa’s VAT system struggles to cope with on line sales. New Zealand is the same. There are reverse charge rules but these just don’t work effectively for this sort of thing.

So the proposed answer is to force foreign on line businesses to register for VAT in South Africa if they receive funds from South African bank accounts for on line sales or they sell to South African residents.

A lot of people have rightly pointed to the practical difficulties enforcing a law like this. There’s no question they are pretty challenging. But frankly I can’t see countries like South Africa giving up just because it’s difficult. This is a growing issue and it’s a major inequality in all VAT systems. It needs to be dealt with.

The US has just passed an Act covering the same issue in relation to their State sales taxes. It’s called the Marketplace Fairness Act of 2013.

The EU has also legislated in this area, and yes, it’s obviously a little less challenging when it’s within one economic union.

The debate in Australia is increasing as it is in New Zealand. We now know the NZ IRD are looking at the issue.

Technology and more inter-governmental cooperation on tax matters will make it easier so I think it’s a fair bet we’ll see attempts made to reign this one in sooner rather than later.


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VAT global expansion continues

Suriname is the latest country to announce an intention to replace a turnover tax with VAT.
The new tax is expected to apply from 2014 and basic food items are likely to be zero rated.
The policy and tax administration arguments for VAT are pretty compelling. Also, zero rating some domestic consumption, while not “pure” provides governments with a convenient lever for achieving policy outcomes.
We await with interest which way the US will go.


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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.