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Online trading – again

Once again the issue of internet purchases coming in to NZ GST free is hitting the news.

See here

In my view this needs to be addressed. The size of the problem will only increase. Having any kind of exemption like this distorts our GST system and favours some at the expense of others.

But in finding a solution we have to consider the treatment of services which are imported into NZ. More and more imports of physical goods like books/DVD’s are being replaced by electronic downloads.

There’s a huge difference between the treatment of importing a physical book and importing an electronic book.

The GST free threshold for private imports of physical books is up to $400. However, electronic books with a value up to $60,000 can be imported privately before any GST applies. The same applies to any physical product for which there is an electronic alternative.

In my view Governments with VAT/GST systems need to be addressing these border issues on a multilateral basis, in a similar way to how double taxation is dealt with by Double Tax Agreements between States.

That will be a lengthy process however and in the meantime hard practical solutions are required if a country is going to ensure foreign retailers compete fairly with domestic retailers for the same consumer dollar.

Yes there will be administration and collection costs but that could be the cost of having a system which is fair to all.


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The GST cost of eradicating cats

Gareth Morgan wants cats to be eradicated from New Zealand. NZ Herald 22 Jan

I haven’t seen any analysis of the tax impact of this policy so thought I’d run some quick numbers myself.

Apparently there are more than 1.4m cats in New Zealand (a world record per capita).

It is estimated each year New Zealanders spend 680m on cat food, vet services and other cat related items.

If cats are eradicated the GST revenue lost to the Government will be in the region of $88m each year. That’s more than twice the amount spent by the Department of Conservation each year on species conservation programmes.

Always got to consider the GST angle aye?


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NZ tax department reveals its compliance focus

Our new tax Commissioner has just released a document outlining her department’s key compliance programmes for 2012/13.

The 32 page document discusses many risks tax investigators have identified for special attention.

In the GST area the focus is very much on the hidden (“black” or “cash”) economy where some recent wins have already been chalked up by the Commissioner. They’re looking for the traders who take cash and keep it outside of their business records so that it is not declared in tax returns.

Property transactions continue to be a big GST focus, although, as they point out in the document, many concerns have largely been resolved by the new requirement to “zero rate” most land transactions between GST registered entities.

There’s a strong message for central and local government entities that they can expect close scrutiny of their GST systems and processes. The document points to the restructuring and reorganisation in government bodies throughout the country and concludes there are added risks for GST compliance where implementation is lacking.  

If taxpayers believe they may be one of those targeted by these programmes the suggestion from the Department is that they review their own systems now and make sure they are compliant. If there are errors it’s better to deal with these up front with the Department before they come knocking on the door.

With the back drop of continuing pressure on the Government’s tax take and a few recent wins in the courts there’s little doubt in my mind tax collectors have a mandate for ongoing focus in these areas.





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Good news for non resident businesses

Non resident businesses looking to establish supply chains into New Zealand have to go through hoops to register for GST here and recover the GST on their NZ expenses. Often it means they’re at a disadvantage when compared to businesses established in New Zealand.

Yesterday Revenue Minister Peter Dunne said the Government intended to implement a proposal in an August 2011 Discussion Document to relax the rules for non-residents GST registering in New Zealand. This isn’t about giving non-resident businesses something they couldn’t already get. It’s about making it easier for them with less administration. That’s good for the businesses and good for Government Administration.

It’s also good for New Zealanders who do business overseas. If this change goes ahead we will be more aligned with Australia and other countries around the world with VAT based systems. In some of those countries New Zealand exporters cannot recover VAT costs because our system does not reciprocate. This change means NZ businesses will find it easier to claim back refunds of VAT overseas.

Not a game changer but definitely an improvement.


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GST and non-profit bodies

Inland Revenue released their updated “Public rulings work programme” on 5 October. This is where they announce key policy areas they are working on at the moment. It means we can expect some sort of discussion document, legislative announcement or ruling on certain aspects of tax.

Once again there’s an item relating to non-profit bodies and GST. In the programme Inland Revenue have described it like this:

QWB00078 GST – non-profit bodies and section
Does a non-profit body need to conduct a taxable activity and make supplies in the course of that
taxable activity to claim input credits?

All GST registered non-profit bodies need to be alert to this. The question posed by Inland Revenue implies they are thinking about whether non-profit bodies should have less ability to claim GST on expenses.

Section 3A(4A) of the GST Act was enacted in 2002 as a concession for non-profit bodies. Broadly speaking it meant a GST credit could be claimed by a non-profit body on any expense as long as that expense was not incurred for the principal purpose of making exempt supplies (being supplies of residential accommodation or financial services).

This was quite generous because other GST registered businesses actually need to show a connection between the expense and their business outputs before they can claim a GST credit. This concession means non-profit bodies could claim GST on expenses which generally related to their non-commercial or charitable activities as long as they weren’t mainly connected to supplies of residential accommodation or financial services.

Section 3A(4A) was technically repealed from 1 April but its effect still exists in a new section 20(3K).

All non-profit entities need to consider how this might impact their budgets.

Inland Revenue have not given a timetable for release of any proposals or discussion document so it’s a waiting game at the moment. At some stage in the next 12 months it would appear we can expect some movement. Then there should be an opportunity for those affected to have their say.


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Late payment fees or penalties?

Yesterday’s tax bill proposes a new provision saying “a fee charged for the late payment of an account” is treated as subject to GST.

It will be back dated to 2003 to prevent the Government being inundated with refund claims.

My issue is with the drafting. It applies to “late payment fees” but according to the commentary does not apply to “penalty or default interest”. Yet there’s nothing in the proposal to help taxpayers determine the difference.

I’ve been thinking through some examples and frankly I don’t think it’s always obvious when something is a “fee” for late payment and when something might be a “penalty” for late payment. There are no relevant definitions in the legislation.

If the IRD is not careful this could backfire on them. On a literal interpretation of the new provision it seems to me there’s a more than reasonable argument it applies to IRD “late payment penalties” under the Tax Administration Act. These penalties are not “interest” because use of money interest is imposed under different sections in addition to late payment penalties. When they were introduced we were told late payment penalties recognised the extra administrative costs incurred by the department when taxpayers paid their tax accounts late. That description is amazingly similar to the language in the Official’s Commentary on the new bill which talks about a late payment fee representing the “cost of administering the late payment”.

If IRD late payment penalties are subject to GST then businesses who have incurred them over the last few years might be entitled to ask the IRD for a tax invoice once this legislation is enacted and claim an input tax credit for the GST component.

This is a classic sledgehammer to crack a nut and needs more thought.


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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.


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All Black Rugby World Cup jerseys

The furore over being able to buy the new AB jerseys overseas for less than they are sold locally once again calls into question how well our tax legislation is dealing with internet commerce.

The pricing of the jerseys overseas would seem to allow them to be imported into New Zealand GST and duty free (provided only one is imported at a time).

NZ retailers are again (understandably) questioning the tax exemption threshold for imported goods.

In my view the issue here is how well our tax system deals with e-commerce. There needs to be a technology based solution to ensure consumption taxes are being imposed where the consumption occurs. Domestic legislation can have some impact but ultimately countries need to deal with this issue multi-laterally.


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“Fresh fruit and vegetables”

So the Labour Party has confirmed their policy to remove GST on “fresh fruit and vegetables”.

This is new ground for NZ’s GST policy and it will be interesting to watch the debate unfold as producers strive to get their products within the concessionary rate.

For my part, if there were tangible evidence the policy will benefit low-income households with consequential health benefits for the country then I think I could live with the added complexity it will undoubtedly bring.

However, two things concern me most.

1. Overseas experience suggests the retail price impact of a reduction in VAT tends to be short-lived. The UK reduced their VAT rate in November 2008 and while there was an immediate reduction in consumer prices the following month a UK Government report found by February 2009 prices had returned to their pre November 2008 levels. So who really benefits from a GST rate reduction? Some evidence at least suggests it won’t be consumers.

2. If we go down this path the precedent will be set for future governments to use GST rates as a lever to influence consumer behaviour. The ice will have been broken and lobby groups with the most influence will more easily persuade politicians of the merits in lower or even higher rates for different products. There’ll always be a public interest component which politicians could find hard to resist having succumbed this once.


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Capital gains tax

I know it’s wishful thinking to expect real analysis in political debates but, honestly, whether it’s time to introduce a capital gains tax in New Zealand is an issue which deserves more than the usual ping pong game of political rhetoric.

The refrain of the most vocal advocates is how a CGT will discourage real estate investment and encourage investment in other sectors where capital is much needed. The refrain of the most vocal opponents seems to be “it won’t collect as much as its supporters say it will”.

New Zealand’s current tax system exempts most capital gains from tax. Capital gains from investments in shares, businesses, real estate, art work, gold, jewellery, and antiques generally are not taxed. To argue this state of affairs is responsible for a skew in favour of investment in real estate and away from the sharemarket, for example, hardly seems to stack up. In fact, there is a group of rules in our existing tax laws which are aimed solely at taxing some capital gains from real estate investment. No such rules exist for investments in shares, businesses, gold, art work or antiques. If anything, our current tax system discourages investment in real estate when compared to how it treats other capital investments.

The rumoured capital gains tax apparently is not intended to apply only to real estate. Sensibly it’s proposed to apply to gains from selling shares, businesses, art work, gold, jewellery and antiques (and any other appreciating asset). So quite how it’s going to suddenly change the behaviour of real estate investors is beyond me.

I think the focus on real estate is unhelpful when discussing whether we should have a capital gains tax here. Surely most people are more likely to be influenced in their investment decisions by their perception of likely return rather than tax? It seems to me the absence of a broad based capital gains tax hasn’t driven investment behaviour into a particular asset class any more than the presence of such a tax will.

This is not a real estate versus shares debate. When we decide whether we should have a capital gains tax we need to consider fairness, efficiency of the tax system, economic benefits and effectiveness.

The question of how much a capital gains tax will raise is certainly relevant to whether it is worth the administration costs
of implementation but to a great extent is a design issue when considering the effectiveness of the tax.