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Time to tidy up the GST Act?

The GST Act needs to be tidied up and made more user-friendly in my view.

I read the GST Act every day. Sad, I know.

Anyway, it used to be pretty simple to navigate around but lately I’ve been finding it a bit more of a challenge. (No smart comments about aging please).

In the copy I have the first 20 sections take up more than half of the total pages. The remaining 67 sections the other half. There are some very long sections in that first part and confusing numbering because of amendments over the years.

There are seven sections numbered 15, six numbered 19, eight numbered 20, twelve numbered 21 and nine numbered 78.

Section 5 has fifty-two subsections!

I know it’s not earth shattering stuff, and doesn’t change the substance of the law, but it just would be nice if, for its thirtieth birthday (2015) this dearly loved piece of NZ tax legislation were rewritten and tidied up.

Cheers

Iain

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Taxing energy drinks unconstitutional

A recent decision in France has concluded a government tax on energy drinks contravenes the country’s constitution.

Under France’s tax laws a tax was imposed on energy drinks with at least 220 mg of caffeine per 1,000 ml.

The tax was challenged and the Constitutional Council was asked to rule.

The Council gave its decision on 19 September.

In its decision the Council indicates the goal of improving public health was the policy foundation for the tax and concludes it is acceptable, in pursuing that goal, to distinguish between drinks based on caffeine content.

However, in this case, some drinks which had higher caffeine levels than 220 mg per 1,000 ml were exempt from the tax because they weren’t “energy drinks”. This was a problem according to the Council because in effect drinks that were substantially the same in terms of caffeine content were not treated equally for tax purposes and this differential treatment was not justified.

Therefore, the Council ruled the tax is contrary to France’s Constitution.

The lesson for tax policy makers – it’s not what you do, it’s how you do it. The problem was created because caffeine was used as the determinant for imposing the tax. If a characteristic unique to “energy drinks” had been used instead then it’s possible a different outcome might have been reached.

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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GST for schools – consultation

This item discussed a draft ruling from IRD on the GST treatment of payments made by parents to schools. The ruling has now been finalised with no significant changes. Anyone looking after the GST compliance and systems for a school needs to be on top of this.

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Inland Revenue interim operational position for GST and Bodies Corporate - 23 June 2014

Inland Revenue interim operational position for GST and Bodies Corporate – 23 June 2014

The Government recently announed its intention to introduce legislation exempting bodies corporate from GST, back dated to 6 June 2014.

There’s a slight problem in that this legislation can’t be enacted until after the election.

So, bodies corporate are told the law will be changed effective from 6 June but don’t know for sure whether that will actually happen. The election could produce quite a different Parliament. It could be foolish to presume the new Parliament will adopt the current Minister’s position on this.

In the meantime Inland Revenue has issued an interim operational position to help bodies coporate navigate through this period of uncertainty.

Inland Revenue generally must apply the current law which, in its view, allows bodies corporate to register for GST. However, in this instance the Department has stated it will not require an unregistered body corporate to register for GST, even if it receives levies of more than $60,000 per annum (the mandatory registration threshold).

It’s arguable whether Inland Revenue is able to ignore the compulsory GST registration requirements in this way, but, as I’ve said before, its position can be commended for being sound tax administration during this interim period. 

The interim position statement covers a wide range of possible scenarios.

The greatest implications arise for bodies corporate currently registered for GST which, once the proposed legislation is passed, will no longer be entitled to be registered with effect from 6 June 2014. As the statement explains, they will have their GST returns amended and their registration cancelled as at 6 June 2014. This could result in a liability to Inland Revenue or refunds being due from Inland Revenue to a body corporate.

Unwinding GST returns and payments lodged by a body corporate from 6 June 2014 until whenever the proposed amendment is passed (if at all) could be messy. There’ll be potential use of money interest issues and it’s likely tax advisors will have to be called in to help given the complexities.

The greatest risk arises for a body corporate claiming input tax deductions exceeding its output tax liabilities during the interim period. It could be faced with paying back tax to Inland Revenue and having to make submissions asking for use of money interest to be waived (which hopefully would occur but there are no guarantees).

Depending on cash flow requirements and other factors we could see some bodies corporate delaying input tax claims during this interim period so their GST returns are net nil or result in just a little net tax to pay. GST input tax deductions are able to be claimed in later GST periods for up to 2 years. That allows a body corporate to wait and see whether the current Government’s proposed amendment is ultimately passed by Parliament after the election before submitting large refund claims. If the legislation is passed it will be less messy to unwind the GST returns already lodged.  If it isn’t, they can include the input tax claims in a later GST return.

This really has become quite a complicated area for what always seemed to me to be a pretty straightforward issue. It would be much better if the current law stood and bodies corporate were within the GST system just like everyone else. Someone needs to get the horse back in the paddock.

cheers

Iain

 

 

 

 

 

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Bahamas VAT

The Bahamas will have a new VAT from 1 January 2015: 7.5% (0% for exports) on a broad range of goods and services, few exemptions, small business concessions, “inclusive” pricing and an extensive public education programme.

Confirmed by the PM and Minister for Finance, The Rt Hon Perry G. Christie on 28 May in his Budget Communication to the House of Assembly.

More details to come when new VAT Bill is available.

Iain

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NZ GST legislation inadequate

The NZ GST Act inadequately deals with online supplies of services and should be fixed immediately.

I’m referring to how the Act treats those selling products online such as e-books, movies, professional advice, teaching materials, photographs and lots of other digital information.

For businesses selling directly to private consumers the issues are more significant.

In certain situations the legislation requires the supplier to determine where their sales are “physically performed”. This affects how GST applies to them.

The concept of “physical performance” does not sit well with how these products are delivered. Is it the place where the supplier is located, where a server in the delivery chain is located, where the consumer is when they download the relevant product, where the consumer resides or some other place? Is there any “physical performance” at all?

I know these issues are being looked at and no doubt we’ll see some reform at some stage.

However, businesses are having to work out how the law applies to them now and it’s just not clear at all.

Iain

 

 

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Grant versus fee!

The Woking Museum and Arts and Crafts Centre is a charity set up to “advance the education of the public in local national and international history and arts and crafts”. In 2003 it entered into an agreement with the Woking Borough Council [In the UK] to “provide arts museum and cultural services and a public information service within the Borough of Woking”. The Council agreed to make annual payments to the Centre in return.

The UK Customs and Excise decided the payments made by the Council should not be subject to VAT. They argued the Centre was not a business and the payments were grants rather than “consideration” for supplies of services.

On 10 February 2014 the First Tier Tribunal hearing the case between the Council and the Centre decided the payments are subject to VAT for a number of reasons. Key to the Tribunal’s decision were the following conclusions:

1. The agreement entered into by the parties was a contract for the provision of services by the Centre to the Council and not a grant because there are mutual obligations characteristic of a contract.

2. The services delivered by the Centre provided a direct benefit to the Council in that artefacts of the Council were preserved in the museum by the Centre under an obligation to make space available for them.

3. The arrangements were commercial in nature and the fact the Centre is a charity does not render the relationship un-economic. The purpose and results of an activity are immaterial in determining whether that activity is “economic”.

This sort of analysis is as relevant in NZ as it was to this decision.

There are many organisations providing public benefit services under contracts with local authorities and government bodies. It is not always clear whether those arrangements are subject to GST and in fact we’ve had case law of our own on these sorts of issues.

The crux is how the payment should be treated. Is it a grant or a payment for services? In the end the arrangements and circumstances of each case will determine the outcome but the analysis above should provide some insights into what factors are important.

cheers

Iain

 

 

 

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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

iain