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It wouldn’t happen in New Zealand – or would it?

An Australian court says a taxpayer has not commenced a subdivision activity until they have the funds needed to purchase the land. The costs spent beforehand on planning permits and market valuations were preliminary or preparatory to starting any business.

That’s according to a Melbourne tax court in Bryxl Pty Ltd v FC of T [2015] AATA 89.

This is a big deal for the taxpayer because it means they can’t claim GST credits for the planning and preparatory expenses. Their GST registration was cancelled and they had to pay penalties.

New Zealand’s GST legislation says “anything done in connection with the beginning … of a taxable activity is treated as being carried out in the course of .. the taxable activity.”

That would indicate the Bryxl Pty Ltd might have got a different result in New Zealand.

But not necessarily. In Case P73 (1992) 14 NZTC 4,489 a New Zealand tax court said commencement work can only be added to a taxable activity. It cannot, by itself, amount to a taxable activity. So, if the taxable activity never actually gets up and running the work done in connection with the beginning of that activity cannot be treated as part of any taxable activity.

For GST purposes therefore, the amounts spent on the pre-commencement activities fall into a black hole and there is no entitlement to claim an input tax credit unless the business or taxable activity actually gets up and running.

Who knew that?

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 on lotteries, raffles, sweepstakes and prize competitions

The IRD has just released for consultation a “Questions we’ve been asked” draft paper on the GST treatment of lotteries, raffles, sweepstakes and prize competitions.

You can find it here: http://www.ird.govt.nz/resources/a/1/a1b5b4ef-32bc-4315-9c80-09d5b70712f1/qwb0121.pdf

Submissions are due by 24 October.

I recommend all not for profit organisations and others running raffles, lotteries or prize competitions have a read and make sure they understand the implications.

If the entity on whose behalf the raffle, sweepstake or lottery is being run is registered for GST, or required to be registered for GST, then that entity is required to account for GST on the proceeds.

GST is calculated based on net revenue after deducting cash prizes payable. Where prizes are purchased GST incurred on those purchases can be claimed as an input tax deduction. Obviously GST cannot be claimed on donated prizes.

Even if the prizes were donated GST will still apply to the raffle/sweepstake/lottery proceeds.

According to IRD someone conducting a raffle which will have revenue exceeding the GST registration threshold of $60,000 will be liable to register for GST and account for GST.

Much of what is in this document won’t come as a surprise to most raffle/lottery organisers and they will already be complying.

However, a point needing more clarity in my view is when a one-off raffle organised by someone which takes place over a short period of time will be considered a “taxable activity” for GST purposes, thus requiring the organiser to register and account for GST on the raffle (assuming the proceeds are over $60,000.

Cheers

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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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

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Buying and selling houses

If you’re buying and selling houses on a regular basis be careful of GST.

The Tax Review Authority recently backdated GST registration for a couple’s family trust to 1999 because they traded 11 residential properties in 12 years.

The case is reported at: Case 5/2013 [2013] NZTRA 05 TRA 019/11, 30 September 2013.

Over the 12 year period the couple bought sections, built houses, lived in the houses for a while and then sold them, some for losses but mostly for gains.

They told the Authority they had reasons in each case for selling their home such as difficulties with neighbours, noise, ill health of family members, children’s schooling requirements, concerns about build quality and so on. However the Judge didn’t find these reasons credible and concluded the couple engaged in a pattern of building houses, living in them only until they had completed all work on them and then selling them. This was a taxable activity and they had to register for GST and pay GST on their sale proceeds.

The case also concluded the couple’s Family Trust had to pay income tax on the sale proceeds.

Penalties for “gross carelessness” were imposed because the taxpayers ignored an “obvious and serious” tax risk according to the Judge.

In this case the extent of trading activity is probably towards the high end, i.e. almost one property each year. The challenge for other taxpayers is to determine just where the line is drawn.

How many times can you buy a property, do it up, live in it and sell it before you trigger the “taxable activity” test and have to pay GST? This case won’t tell you that but it will give you a steer on what factors the IRD and a court will look at.

Cheers

Iain

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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?

Iain

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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.

cheers

Iain

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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
3A(4A)
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.

Iain