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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 refunds for tourists

I recently traveled through Europe and Singapore.

Now I’m not the world’s biggest shopper by any means but I did spend enough to consider applying for a VAT refund as I left the EU.

But consider it is all I did. When I saw the queues and paper work involved I decided it just wasn’t worth the hassle.

On the other hand, the Singapore refund scheme is amazingly easy and quick, so I took advantage of it.

This is probably a case of size making a difference. The European VAT system is much more complex than Singapore’s, especially with several countries involved.

Nevertheless, what stood out with the Singapore system was their greater use of technology which avoided a lot of paper work, sped up the process and shortened queues considerably.

Well done Singapore!



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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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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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Online trading – again

Once again the issue of internet purchases coming in to NZ GST free is hitting the news.

See here

In my view this needs to be addressed. The size of the problem will only increase. Having any kind of exemption like this distorts our GST system and favours some at the expense of others.

But in finding a solution we have to consider the treatment of services which are imported into NZ. More and more imports of physical goods like books/DVD’s are being replaced by electronic downloads.

There’s a huge difference between the treatment of importing a physical book and importing an electronic book.

The GST free threshold for private imports of physical books is up to $400. However, electronic books with a value up to $60,000 can be imported privately before any GST applies. The same applies to any physical product for which there is an electronic alternative.

In my view Governments with VAT/GST systems need to be addressing these border issues on a multilateral basis, in a similar way to how double taxation is dealt with by Double Tax Agreements between States.

That will be a lengthy process however and in the meantime hard practical solutions are required if a country is going to ensure foreign retailers compete fairly with domestic retailers for the same consumer dollar.

Yes there will be administration and collection costs but that could be the cost of having a system which is fair to all.


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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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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.