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GST derails another property sale

Recently from the Court of Appeal, another example of how GST can derail what should have been a simple property sale.

Y & P NZ Ltd v Yang Wang & Chen Zhang [2017] NZCA 280 is a decision from the Court of Appeal about whether caveats registered by the purchasers to protect their interests should remain in place.

They had registered the caveats after the vendor refused to settle because of a dispute over GST.

Here’s what happened:

2 May 2016 – Sale agreements for four properties entered into on a “plus GST, if any” basis. The vendor was registered for GST in relation to the sale. The purchasers stated in the agreements they would not be registered for GST at settlement and did not intend to use the properties to make taxable supplies. Settlement was supposed to be 28 July 2016. That’s enough basis for the vendor to add 15% GST to the settlement price.

25 July 2016 – Vendor sends settlement statements to purchasers requiring settlement with 15% GST added.

27 July 2016 – Purchasers verbally advise the vendor their circumstances have changed, they are registered for GST and will use the properties to make taxable supplies. They ask for amended settlement statements showing GST at 0% and provide the vendor with their GST number. The vendor issues the requested amended settlement statements.

28 July 2016 – Settlement day! Or so it was supposed to be. Instead, the vendor insists that settlement take place on the basis of the original settlement statements with 15% GST added because that was what was required under the 2 May 2016 agreements.

What then followed was a series of lawyers letters, a case lodged by the purchasers requiring specific performance of the contract and the registration by the purchasers of caveats against the titles.

This should have been a simple sale but instead we have a dispute over GST holding up the transaction and ending up in court.

Why did it come to that?

The legal arguments in this case were about whether the purchasers’ caveats should remain in place, presumably while the substantive case for specific performance was unresolved. All we really know from the Court’s judgment is that the parties were arguing over whether the purchaser had provided the required written notification of its GST position to the vendor within the required time.

What intrigues me is, if the vendor really wanted to sell their properties they could have settled on the basis of 0% GST, as requested by the purchasers, without the likelihood of any additional cost to themselves. In fact, the vendor might well have saved themselves the costs involved in dealing with the dispute. Yet for some reason they refused to settle.

Let’s say they had accepted the purchasers’ verbal assurances and settled at 0% GST and it turned out the assurances were wrong and GST of 15% should have been paid. What would have happened? Under the GST legislation, in that event, the onus of paying the GST would have shifted to the purchasers who would have had to pay it directly to Inland Revenue. It’s unlikely, in my view, that Inland Revenue would have required the GST to be paid by the vendor, although it can’t be ruled out.

In any event, the vendor had the chance to minimise their risk by asking the purchaser for an amended statement in writing that they met the requirements for 0% GST to apply. That could have been done on settlement day.

Maybe there’s a lot more to this case than this reasonably short judgment from the Court of Appeal suggests. It’s hard to fathom what really was to stop the transaction settling and why it ended up in a protracted legal dispute. Settlement was supposed to be 28/7/16, this interim hearing took place on 11/5/17 and the Court’s decision is dated 3/7/17 – and it’s still not over.

Here we had, presumably, a willing vendor and willing purchasers and yet they couldn’t get the deal done because of a disagreement over whether a written notice had been given on time.

The fact is, whether 15% or 0% GST applies to a land transaction is determined by the GST Act, not by the parties to the contract and not by whatever statements the purchaser might put in the contract about their GST position. While a vendor is entitled to rely on GST statements made in the contract by the purchaser they do not have to. In my view the vendor had options to achieve settlement without exposing themselves to unacceptable GST risks if their focus were on how they could complete the transaction rather than on why it should not be completed.

Willing parties to a contract should be able to get their deals done safely without having them derailed by GST and without protracted litigation.

 

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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Good news for Australian tiramisu lovers

The Australian Tax Office publishes a detailed food list which, over 88 pages, gives their opinion on the GST status of everything from abalone to zabaglione.

Tiramisu was on the list as subject to GST. However, on 27 August the Tax Office removed tiramisu from the list.

This means from now on not all tiramisu products are subject to GST in Australia. Some are “GST free”.

This is fantastic news for tiramisu lovers and no doubt there’ll now be something resembling a gold rush on GST free tiramisu products!

Sometimes I wish we had GST exemptions for food in New Zealand, even if just to give IRD workers the chance to think about fascinating questions such as whether tiramisu is subject to GST.

Our GST system seems so mundane by comparison, but, honestly, would we really want it any other way?

Iain

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NZ businesses are getting it wrong

I’m seeing increasing evidence of misunderstanding over how the zero rating rules apply.

From 1 April 2014 non-resident businesses can register for GST in NZ under a new system which allows them to claim GST refunds on business related costs. Historically a business had to supply goods or services in NZ before it could register and claim back GST on its costs here. That is no longer the case.

I’ve been working with a number of overseas businesses wanting to take advantage of the new system.

What’s starting to emerge is surprising. A number of these overseas businesses are looking to reclaim GST they should never have been charged in the first place.

The most common mistake I’ve seen is made by NZ service providers contracting with an overseas business. They’ve charged 15% GST when the transaction should have been zero rated.

To be fair, the zero rating rules are not the easiest in the legislation to follow. There’s quite a lot of case law on them which speaks to some of the complexities.

There seems to be a common misunderstanding that because services are performed in New Zealand (i.e. the work is done here) GST has to apply at 15%. That’s not necessarily the case. Only some services performed here and supplied contractually to a non-resident business are taxed at 15%.

If you’re providing services to overseas businesses I suggest you check how you are dealing with GST. If you’re incorrectly charging it at 15% you may find Inland Revenue comes knocking when your customer tries to register under the new system and claim back GST that should not have been charged.

Cheers

Iain

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Global VAT alignment edges closer

At the Global Forum on VAT in Tokyo last week 86 countries signed up to the first agreed framework for applying VAT to internationally traded services and intangibles. The new guidelines set out core VAT principles to be applied when taxing services and intangibles, will ensure more consistency between countries, will reduce double taxation and will protect the neutrality of business to business (“B2B”) transactions.

While an important step in the right direction, the more vexing question of how to tax internationally traded business to consumer (“B2C”)services and intangibles has been left for another time.

The Global Forum on VAT occurs under the umbrella of the OECD and provides a platform for global discussions on VAT. The first session took place in November 2012. Last week was the second occasion academics, tax administrators. business representatives and others were invited to discuss VAT policy trends and developments.

The main output from this latest session was a set of new OECD Guidelines on applying VAT across borders.

The Guidelines can be downloaded from the the OECD website – here: http://www.oecd.org/ctp/consumption/international-vat-gst-guidelines.htm

The focus of the Guidelines is B2B transactions. They discuss place of supply rules, the well known “destination principle” (B2B services should be taxed in the country where the customer is located) and mechanisms available to countries to allow non established foreign businesses to recover VAT incurred there.

None of this is startling news for New Zealand. We’re already ahead of this stuff thanks to our super charged GST system. Just this month we’ve seen a new streamlined registration and GST recovery system come into place for overseas businesses incurring GST here.

The really challenging question for New Zealand, and every other country with a VAT, is how do you tax B2C services and intangibles traded across borders? Unlike goods there’s no border control in place to capture internationally traded services and there’s no existing registration system to collect the tax from the customer/consumer.

This really is the more urgent question in my view. Countries are attempting to deal with the issue on their own (eg South Africa and the EU) but global cooperation and alignment are critical. Some States in the USA have implemented mechanisms to apply state taxes to inter-state B2C online sales (such as e-books) and the latest evidence suggests these measures are improving the sales of local bricks and mortar retailers at the expense of online retailers such as Amazon.

Last week’s Forum in Tokyo urged the OECD to finalise work on the VAT treatment of B2C services in time for the next Global Forum on VAT in November 2015. That seems like a long time to wait, but as we all know, achieving global consensus on anything is a slow process.

Cheers

Iain

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“Australia should follow NZ GST”?

NZ’s GST is certainly the most efficient form of VAT in the world.

The “VAT Revenue Ratio” is used by the OECD as a measure of VAT efficiency. The average in the OECD is about 50%.

The least efficient is Turkey’s VAT at about 30%. NZ ranks top at a little more than 95%, followed closely by Luxembourg.

Australia’s VAT Revenue Ratio is around 45%.

The Australian Treasury Secretary thinks they can learn from NZ’s GST and argues for a further shift in Australia from income taxes to GST. See: http://www.stuff.co.nz/business/world/9900014/Aussies-should-follow-our-GST-lead

If efficiency is the goal then the evidence seems compellingly in favour of the Secretary’s argument.

However, political realities seem to pull most countries in the opposite direction.

Yes VAT is spreading around the world as the tax of choice for governments but, increasingly those governments are voting for multiple rates, exemptions and zero rating when designing their version of VAT.

When the GFC hit we saw governments making greater use of reduced rates to stimulate activitiy. There is now a growing trend to use penal VAT rates as policy tools to discourage certain “undesirable” consumption (e.g for environmental reasons). Policies like these make a VAT system less efficient but they also make it more politically acceptable and relevant.

Perhaps the questions are: how long can NZ resist these political pressures and is it more likely we will follow the Aussie lead?

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