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Vat audits- the whole story

EY’s digitally interactive report on managing indirect tax disputes is definitely worth a read.

http://www.ey.com/indirectcontroversy

The report has a host of useful information about modern indirect tax audits, common errors and how smart businesses are managing their indirect taxes to stay clear of nasty surprises.
Iain

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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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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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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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Exporters beware!

There’s no GST on exports, right?

Wrong! Sometimes GST does apply to exports.

Here’s an example:

NZ Ltd agrees to sell products to UK Ltd. UK Ltd is going to use the parts in the creation of a sculpture in the UK.

NZ Ltd invoices UK Ltd and receives payment before the parts leave New Zealand. NZ Ltd delivers the parts to UK Ltd’s agent in New Zealand who uses them in initial design and fabrication of the sculpture in New Zealand.

UK Ltd’s agent then organises shipment of the partially completed sculpture at UK Ltd’s expense.

NZ Ltd wants to “zero rate” the sale of the parts to UK Ltd because they are exported and UK Ltd has bought them to use overseas. UK Ltd also wants the sale to be zero rated because they are not registered for GST in New Zealand and therefore couldn’t claim a refund of the GST. Will the IRD allow NZ Ltd to zero rate the sale?

No.

Even though exports as a general rule are not subject to GST, with some commercial arrangements that is not the case. The scenario outlined above is one example. In that case the IRD would be quite justified in insisting on having GST paid on the sale.

And so held the Taxation Review Authority in a decision released on 5 August dealing with almost identical facts.

Zero rating does not apply because NZ Ltd did not “enter the goods for export” and did not “export” them. Both are required. One refers to completing the Customs documentation as consignor and the other to the shipment of the goods.

Another problem for NZ Ltd was the parts were actually “consumed” in NZ because they were supplied to UK Ltd who then used them in NZ as part of initial fabrication of the sculpture here before shipping that partially completed sculpture. The product being exported was not the same product sold by NZ Ltd to UK Ltd.

There are lots of traps in the zero rating rules. Be careful.

The case is XX (An exporter) v CIR [2013] NZTRA 04

Iain