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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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GST refund claims: keep it real.

You can’t claim GST back on an expense unless you actually receive whatever it is you are paying for.

That’s the message from the Australian Federal Court in a decision released on 1 November [Professional Admin Service Centres Pty Ltd v FC of T].

In that case the taxpayer agreed to contribute towards a man’s legal costs in return for sharing in any compensation he was awarded if successful. The taxpayer tried to claim the GST back on its payments.

The Court agreed with the Tax Office and refused to allow the GST claim because the taxpayer had no contract with the lawyers and did not actually receive the legal services itself.

The taxpayer had also tried to claim GST back on management fees it was “charged” by a related entity. The Court refused this claim as well because the evidence pointed to the fees being a “sham”. No actual services were provided to the taxpayer and no payment was made by it.

A New Zealand court would probably arrive at the same conclusion.

GST depends a lot on the contractual arrangements entered into by the parties. If goods or services are not actually acquired by the person making the payment it’s unlikely they can claim the GST back on the expense (except in some specific “agency” arrangements).

Much care is required around cost sharing arrangements and charges for “management services”. Make sure the contractual terms are consistent with being able to claim back GST and also make sure what you’re paying for is real!

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

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4 1/2 years in prision for $2.1m GST fraud

An Auckland property developer has been jailed for 4 1/2 years for tax evasion after he claimed GST refunds on property acquisitions over 3 years and then failed to account for GST or income tax on the sales.

It was deliberate evasion according to the court.

Inland Revenue has been strategically focussing on the real estate sector and property developers in particular for some years now. It’s been a successful strategy and this sort of case shows that a few people just simply refuse to own up to their tax obligations.

IRD will be well pleased with this outcome I suspect, and rightly so.

Iain

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Penny and Hooper decision carries GST lessons.

The Supreme Court ruled yesterday that orthopaedic surgeons Ian Penny and Gary Hooper avoided tax when they diverted income from their practices to lower tax rate entities such as companies and trusts. A significant issue was the below market salaries they paid themselves.

While it is an income tax case the Penny and Hooper decision is a reminder generally that those operating businesses through closely held entities need to pay careful attention to their tax obligations, including GST.

The Supreme Court found against the taxpayers even though the income tax legislation does not expressly state shareholders must be paid market salaries by the companies they control.

The GST legislation on the other hand does have express provisions requiring market prices to be paid when goods and services are exchanged between related parties. These provisions impact all closely held companies and trading trusts which carry on a GST taxable activity.

A GST registered company or trust which makes any of its property available to shareholders or beneficiaries is probably required to pay GST to Inland Revenue based on the market value of that property.

Similarly, a person providing services to a related Trust or Company may find they have a requirement under the GST legislation to register for GST and charge GST on the market value of the services they provide. Where the Trust or Company does not conduct a GST taxable activity [perhaps they are a residential landlord] this is a permanent GST impost.

It might be stretching the precedential value of the Supreme Court’s decision to claim it sets out principles which apply to GST. Nevertheless, it at least serves as a warning to all closely held trading entities that you need to be just as vigilant in your dealings with related parties under the GST law [and potentially more so] as you do for income tax purposes.

Iain

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How complicated can you get?

The Australian legislature has just passed some new regulations confirming parking charges, road tolls, facility hire charges, tip fees and fees for access to information are subject to GST.

One thing we should be thankful for as taxpayers is that we live in a country where our GST legislation was sufficiently well drafted in the first place that there’s no need for extra specific legislation like this.

Iain

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Warning for small operators

A recent Australian court case serves as a warning for very small businesses. The NZ rules are similar.

The taxpayer bought a former fauna park intending to convert it to educational and accommodation use. However the taxpayer didn’t get around to kick starting their new business. They incurred expenses of owning the property and claim GST on those expenses on the basis they were for its business. The only income they had was described by the court as “miniscule” (about 6k) and related to hiring the facility out for a birthday party.

The court decided the level of commercial activity was insufficient to conclude the taxpayer’s expenses related to a business. They were therefore denied the GST credits they claimed on their ongoing costs of the property.

New Zealand has rules requiring sufficient activity to be carried on before GST credits can be claimed on expenses. There are specific rules excluding activities which are really “hobbies”.

Anyone holding significant real estate interests who generates very little income from their property needs to be very careful if they are claiming GST on their holding costs.

Iain

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‘Look everyone…… no hands!’

Ever heard anyone yell that out moments before their bike hits a bump in the road, gets a serious case of speed wobbles and finally careers into a solid object?

A recent case from the Taxation Review Authority reminded me how a seemingly innocent transaction can end up with speed wobbles.

The transaction

Sale of trucking business for $75,000 (“including GST (if any)”).
Parties thought they were buying and selling a “going concern” (truck business with 1 truck and 1 customer).

Reminder – the sale of a business as a “going concern” by one GST registered person to another GST registered person can be “zero rated” provided certain requirements are satisfied. Therefore, no GST.

What went wobbly?

1. It wasn’t really a “business” but just a truck and some other assets. No customer contracts were transferred for example. So it couldn’t be a “going concern”. This meant 1/9th of the purchase price was GST. The vendor is $8,333 worse of and the purchaser could be $8,333 better of because the court said they could claim the GST back from IRD.

Comment: I bet the vendor wishes they’d had a “plus GST (if any) contract. Now they have to try to rely on a special section in the GST legislation which allows vendors to add the GST amount to the contract price in some situations where a transaction has incorrectly been treated as a going concern. It could be a lot of expense just for $8,333.

Also, Inland Revenue now have to devote resources to trying to recover the GST amount from the vendor.

2. Two “tax invoices” existed for the transaction: one said “GST amount $NIL – zero rated”. The other said “GST amount including or zero rated”.

Comment: It is an offence if a person “knowingly issues 2 tax invoices” in respect of the same supply. It’s unclear from the case whether the Inland Revenue is pursuing this aspect. Equally unclear is whether they consider one or both of the tax invoices to be invalid. If both were invalid the purchaser would not be entitled to claim the $8.333 GST from Inland Revenue. Another issue yet to be sorted out I suppose.

3. The evidence was that the purchaser actually drafted the tax invoices.

Comment: the GST law says a tax invoice must be “issued” by the supplier unless the Commissioner of Inland Revenue has specifically authorised the purchaser to issue a “buyer created tax invoice”. This isn’t discussed at all in the case but if the supplier didn’t “issue” the tax invoice and if the purchaser did not get the Commissioner’s permission to do so then the purchaser is not entitled to claim the GST back from Inland Revenue. Interestingly though, the TRA said they were.

Overall, given the parties’ very clear written agreement said they thought the transaction was “zero rated” this seems to be something of a windfall for the purchaser unless the vendor is able to get the extra GST out of them. The purchaser could be said to have taken advantage of a technical mistake by the vendor when they claimed the GST back from Inland Revenue even though they signed a contract agreeing there was no GST in the purchase price.

Pretty wobbly all round really.

Iain

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Another reason to do business in New Zealand

I was catching up on some reading of global tax developments and one in particular served as a reminder that in some respects our tax system is quite benign compared to other countries.

The UK have VAT rules which restrict what gifts and samples a business can provide in the UK without paying VAT.

The scenario is, a business buys or makes stock for sale and will have claimed VAT back on expenses relating to that stock. Sometimes businesses give stock away. They may be gifts to employees or loyal customers or perhaps samples provided as enticements to potential customers.

Under the UK restrictions only gifts up to a certain value and only one sample per person can be provided without the business incurring a VAT liability. If they exceed those limits the business has to pay VAT on the value of the gift even though they have not received any money for it.

Recently the European Court of Justice decided the UK is allowed to limit the value of business gifts that can be made VAT free but is not entitled to restrict when samples may be given away VAT free.

This court decision means the UK Government now has to change its VAT legislation and faces having to pay refunds to some businesses which may have complied in the past with the rules on samples.

In New Zealand we just don’t see these sorts of issues. For a start it’s not likely a court could decide our GST legislation is wrong and must be amended. Also, the framers of our GST system chose not to put in unnecessarily complex rules on businesses providing gifts and samples. The costs of policing these sorts of exceptions often outweigh the actual tax lost by not have the rules in the first place.

Here’s to a simple GST system!

Iain

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What not to do when dealing with the tax department

A recent case is littered with examples of how not to handle your tax affairs. Case 2 2011 NZTRA 11

The taxpayer wanted to challenge assessments issued by the IRD. The court said she couldn’t because of the way she managed her tax affairs. She didn’t even get a chance to try to prove the IRD wrong.

The decision highlights these lessons:-

1. File your tax returns and pay tax on time.
2. If you rely on accountants or lawyers to handle your tax affairs make sure they do what is required because ultimately it’s your responsibility and it is you who will be penalised if you don’t meet timeframes.
3. Don’t allow someone else (even your partner) to conduct business activities using your name.
4. Make sure you understand the tax implications of what you do.
5. If you receive correspondence from the IRD read it and understand what you are required to do.
6. If the IRD give you time limits to do things comply with those time limits or, if you can’t, communicate with the IRD before the time limit expires to arrange an extension of time.
7. If you have to send formal documents to the IRD take whatever steps you can to ensure you can prove when and by whom those documents were received on behalf of the IRD.
8. Do not ignore dispute notices, notices of assessment or demands for payment sent to you by the IRD.
9. Don’t wait 1 1/2 years before you get around to trying to challenge an assessment made by the IRD if you don’t agree with that assessment.

The harsh reality of this case is we don’t know whether the amount of tax this taxpayer was held liable to pay is correct. Quite simply, because she didn’t comply with time limits for disputing assessments she lost the opportunity to challenge those assessments. Potentially a very expensive price to pay for inaction.

This is a brand new decision so of course we don’t know yet whether the taxpayer will appeal.

Iain