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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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IRD comments on short term Christchurch rentals

Inland Revenue’s latest Business Tax Update reminds us people renting out houses in Christchurch short-term have to pay income tax on the rent, less deductions. It’s a pity they don’t mention GST because that’s more interesting.

The update is here: http://www.ird.govt.nz/aboutir/newsletters/business-tax-update/2014/btu-issue-057-11-14.html#06

An extract of the relevant section is quoted at the bottom of this post.

So, in a nutshell, if you own a house in Christchurch and someone rents it of you for, say, one month, fully furnished while their own home is repaired you have to declare the income from that and pay any income tax due. Not exactly a bombshell is it? Sure, a few people might genuinely be stunned by the revelation they have to pay income tax on income they receive from renting out their house, even for a short term. But my guess is for most people the Update might as well be telling them how to extract nutrient from eggs by suction.

The really interesting, and more contentious, point is how GST applies.

Providing residential accommodation in “dwellings” is not subject to GST. However, providing accommodation in “commercial dwellings” is subject to GST (assuming the registration threshold is satisfied).

A “dwelling” is a place the person occupies as their “principal place of residence” and excludes any “commercial dwelling”.

A “principal place of residence” is a place the person occupies as their “main residence for the period to which the agreement for the supply of accommodation relates”.

A “commercial dwelling” includes hotels, motels, boarding houses, hostels, B&B’s and similar premises.

If you rent a house out to someone for, say one month, fully furnished, while they have their own place repaired, are you providing anything more than accommodation that is similar to hotel or motel accommodation, i.e. short term furnished accommodation? Is the tenant occupying your place as their “main residence” during the rental period or is it secondary temporary accommodation while their “main residence” is repaired?

I think there is some doubt over how the GST Act applies in these situations. Sure, most will not be within the annual $60,000 GST registration threshold. However, some of the house owners may be registered for GST in their own right for other purposes, or may even wish to register for GST in relation to the temporary rental activity. Whether they should or can is unclear.

I’d like to see clarity on less obvious issues like these when the IRD is publishing notices telling taxpayers of their obligations.

Cheers

Iain

Extract from Business Tax Update November 2014

Renting out your own home short term

There’s a demand for temporary rental properties in Canterbury because of thousands of families needing accommodation while they wait for earthquake repairs on their homes. Some homeowners are meeting this need by offering furnished homes for short-term rental.

If you rent out your own home, even for a short time, any income you receive is liable for income tax, so you must include it in your tax return.

However, you can claim a deduction for any expenses you incur while your property is rented out. But you can only claim that proportion of ongoing costs for the time your property is rented out. For example, if you rent your home out for three months, you can claim the rates, insurance, interest and any agent’s fees you incurred during that period.

Find out more on what expenses you can claim”

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Certainty in construction

Planning ahead and attention to detail in contractual documentation are essential for retirement village operators wanting clarity of what GST costs they are up for.

That was the key GST message at this week’s Retirement Villages Association finance forum focussing on construction and development. Another outstanding event incidentally run by the able team at the Retirement Villages Association: www.retirementvillages.org.nz.

There aren’t many businesses in New Zealand with more GST headaches than retirement village operators. They live in a complex GST world. Getting it wrong can be expensive not to mention extremely time-consuming.

When constructing a facility, retirement village operators cannot claim GST credits on some construction costs, can claim back all GST on some costs and have to claim a portion of GST on other costs provided they continue to monitor and adjust that portion annually.

Knowing what they can and can’t claim and what costs they have to monitor every year makes for better sleep. Those operators who include GST in their planning when budgeting, concluding contracts and setting up systems will have an easier time and more clarity over their financial position. This involves people throughout their organisation with an appreciation of the GST issues working together. The legal, finance, IT, procurement, sales and property teams need to be working together.

When all systems, processes and controls are set up to deliver a correct and consistent GST outcome life is a lot easier and less risky for a retirement village operator.

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