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Easy fix costs Rugby League Club

Keeping up with your tax obligations can sometimes seem a drag: forms to be filled in, changes to keep abreast of and an incessant focus on the detail.

Mistakes can be costly. A few dollars here and there might be overlooked but get it much more wrong and you can be facing penalties for not taking reasonable care.

The IRD doesn’t get penalised for mistakes however. As long as they get it right eventually, failure to comply with the law is of no consequence.

To quote the Court of Appeal:

Ms Deligiannis accepts that the Commissioner has acted incorrectly in accepting GST returns filed by Mr Cullen in the Society’s name for periods before May 2016. But the Commissioner cannot be estopped by her previous errors of law from performing her statutory obligations to apply the revenue statutes correctly

The case was CIRRM Cullen CA239/2017 [2017] NZCA 448 a decision of the Court of Appeal issued on 12 October 2017.

The IRD won the case and the taxpayer was refused a $15,000 refund even though IRD had originally accepted it was due and payable.

The case is a reminder how costly it can be for taxpayers when they don’t get right some pretty basic housekeeping and how the playing field favours the tax collector.

The Tamaki Rugby League Club set up as an incorporated society under the Incorporated Societies Act in 2006. Over the next ten years the Club was struck off the Incorporated Societies Register and later reinstated twice and placed in liquidation once.

The second time it was struck off was in 2012 and it wasn’t reinstated again until June 2016. So, between 2012 and June 2016 it was operated as an unregistered unincorporated body or organisation.

The Club registered for GST while it was a valid incorporated society. It filed GST returns, made payments, and claimed GST refunds even during periods when it was struck off the Register of Incorporated Societies. IRD accepted these returns, processed them and paid out refunds.

The court case came about after the Club filed a return on 10 June 2016 covering the GST period April/May 2016. During April and May 2016 and at the time the GST return was filed on 10 June the Club was not a properly registered incorporated society. It had been struck off the incorporated societies register.

IRD initially accepted the GST refund was due but was not sure to whom it should be paid because the Club was not a validly registered incorporated society and the return had been filed using the GST registration number for the incorporated society.

IRD issued a notice of assessment reducing the refund from $14,951 to $101. A representative of the Club, Mr Murray, filed a Notice of Proposed Adjustment challenging the assessment and the IRD did not issue a Notice of Response. Mr Cullen started a court case asking for a declaration that the GST return was valid.

The High Court had found in favour of the Club deciding that in essence there was an entity, albeit an unregistered one, which was carrying on the taxable activity of the Club and which was entitled to the refund.

The IRD appealed to the Court of Appeal.

The Court of Appeal decided the Club was registered for GST as an incorporated society and there was no separate GST registered entity that was not an incorporated society. It was irrelevant that there might have been another entity carrying on the taxable activity. The fact was, there was no separate GST registration of any such entity. The Court of Appeal also held Mr Murray had no standing to issue the court case on behalf of the Club as an incorporated society. The IRD’s appeal was allowed and the taxpayer lost.

This would not have ended up this way if the Club had maintained its registered status as an incorporated society and not been struck off. In fact, the Club was reinstated as an incorporated society just a few days after the GST return was filed. However, that did not fix the problem. The IRD still won because the letter of the law said the Club did not exist as an incorporated society at the time it filed the GST return and during the period to which the return related.

So the taxpayer wasn’t allowed a slip up. Even though in substance the Club was conducting its activity just as it had before it was struck off and the IRD had been accepting and processing the returns up until June 2016, the fact was, at that date, technically it was not properly registered as an incorporated society and according to the Court of Appeal could not file a GST return while struck off the Incorporated Societies Register.

I’m a bit surprised there isn’t discussion in the judgment about section 51B of the GST Act. Often the full legal submissions are not included so it’s difficult to know whether the Court was asked to consider this section.

Section 51B provides that a person is treated as a registered person for GST purposes if they are not otherwise registered but supply goods or services representing that GST is charged on those supplies. Under the GST Act a “person” includes an unincorporated body of persons.

If the Club had been collecting subscriptions from members and making other supplies and purporting to charge GST on those supplies while not a valid Society section 51B(1)(a) may have operated so that the Club was “treated” as a registered person for GST purposes. There would still be issues to debate over whether a return filed purportedly using another GST registered person’s GST number is sufficient to amount to a “GST return” on behalf of the Club under section 16 or 18 of the GST Act. It was a return of sorts, even if the GST number on it was not the GST number of the unincorporated Club and, of course, the IRD had been accepting them in the past. But, that doesn’t count unfortunately.

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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Governments using lotteries to collect tax

Tax collectors in the EU are looking more closely at the use of lotteries to tackle VAT evasion.

This paper, just published, discusses how existing lottery schemes work and reveals there could be upside for governments. It concludes more empirical evidence is needed to confirm the benefits of tax lotteries but they may be a useful weapon in the fight against VAT (GST) evasion. http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/tax_papers/taxation_paper_51.pdf

They might also be a useful tool for governments looking to reverse the revenue lost as a result of increased online shopping.

The challenges for governments from the growing digital economy have been widely discussed. The OECD is consulting on a possible multilateral solution, http://www.oecd.org/ctp/consumption/discussion-draft-oecd-international-vat-gst-guidelines.pdf. I wouldn’t be surprised if tax lotteries are considered as a tool to encourage compliance with laws requiring non-residents to register for VAT in countries where they are selling online products to consumers.

The paper on tax lotteries is the product of a recent workshop attended by 39 EU member states. They discussed lottery schemes already running in Malta, Slovakia, Portugal and Georgia. They also heard from experts in Greece looking at a scheme there.

Tax lotteries have been around for a while. Taiwan has used them since the 1950’s and there was some evidence they experienced up to 20% improved compliance as a result.

They’ve been used to encourage consumers to ask for receipts when buying goods and services. The receipts are then sent to a central agency (by post, text or email) or some other electronic system is used so the receipts become entries in a lottery. There are then regular draws and cash prizes. In Malta for example the draws take place each month and are done manually i.e. the receipts are sent to the central lottery agency and put into a large barrel from which the draws are made.

The idea is consumers are incentivized to ask for receipts and this discourages evasion by creating a paper trail which the tax authorities can use to monitor compliance.

Some data collected so far suggests these lotteries do have an initial impact on compliance with increased revenues for the government. However, it seems over time the benefits fade. The EU workshop found that the main difference occurred as a sharp increase in reported sales by very small retailers but little difference in the reported sales of large retailers. One study reported increased tax revenues of Euro 8m against administrative costs of Euro 1.6m.

There have been some interesting reactions, including the emergence of “professional players” in these lotteries, being people who devote a large amount of time to them and who have even been found to be submitting receipts into the lottery for expenses they did not themselves incur.

The EU is committing resources to better quantify the potential upside for states in running these sorts of lotteries.

Another overseas development for the NZ Inland Revenue Department to watch.

 

Cheers

 

Iain

 

 

 

 

 

 

 

 

 

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Australian Tax Office rules on Bitcoin

The ATO has just issued a ruling on the GST treatment of Bitcoin. Here: http://law.ato.gov.au/atolaw/view.htm?docid=%22GST%2FGSTR20143%2FNAT%2FATO%2F00001%22

In brief:

1. A transfer of bitcoin is a “supply” for GST purposes.
2. Bitcoin is not “money” under the GST legislation.
3. A supply of bitcoin is not a “financial supply”.
4. If bitcoin are supplied in exchange for goods or services the transfer will be treated as a barter.
5. A bitcoin is not a “voucher” for GST purposes.
6. A secondhand goods input credit is not available on the acquisition of bitcoin.

No real surprises there. This had been well signposted.

We await the NZ IRD view which I wouldn’t expect to be much different.

Iain

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Savings up + GST collections down = GST rate up?

Kiwi households are saving more than at any time since 1995 according to the latest national accounts.

http://www.beehive.govt.nz/release/household-savings-rate-positive-five-years

The flip side is with low inflation and lower consumption the Government’s GST take is down.

I’m not an economist but my understanding is even though households may be saving more, national savings overall aren’t necessarily any better off because of the push/pull effect of private savings and tax collections.

This was something the Savings Working Group considered in their report Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity: Final Report to the Minister of Finance published in February 2011.

As a countermeasure the Savings Working Group recommended an increase in the GST rate from 15% to 17.5% over other tax changes because GST is “less distorting than income tax on the saving decision”.

http://www.treasury.govt.nz/publications/reviews-consultation/savingsworkinggroup/finalreport/30.htm

The political challenge with increasing GST to 17.5% is that our rate is already amongst the highest in the world when it comes to basic food, education, healthcare and utilities. Outside of the benefit system there doesn’t seem to be a simple mechanism to compensate low-income households for an increase in GST and this must surely put real pressure on our single rate broad-based regime.

Iain

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IRD comments on short term Christchurch rentals

Inland Revenue’s latest Business Tax Update reminds us people renting out houses in Christchurch short-term have to pay income tax on the rent, less deductions. It’s a pity they don’t mention GST because that’s more interesting.

The update is here: http://www.ird.govt.nz/aboutir/newsletters/business-tax-update/2014/btu-issue-057-11-14.html#06

An extract of the relevant section is quoted at the bottom of this post.

So, in a nutshell, if you own a house in Christchurch and someone rents it of you for, say, one month, fully furnished while their own home is repaired you have to declare the income from that and pay any income tax due. Not exactly a bombshell is it? Sure, a few people might genuinely be stunned by the revelation they have to pay income tax on income they receive from renting out their house, even for a short term. But my guess is for most people the Update might as well be telling them how to extract nutrient from eggs by suction.

The really interesting, and more contentious, point is how GST applies.

Providing residential accommodation in “dwellings” is not subject to GST. However, providing accommodation in “commercial dwellings” is subject to GST (assuming the registration threshold is satisfied).

A “dwelling” is a place the person occupies as their “principal place of residence” and excludes any “commercial dwelling”.

A “principal place of residence” is a place the person occupies as their “main residence for the period to which the agreement for the supply of accommodation relates”.

A “commercial dwelling” includes hotels, motels, boarding houses, hostels, B&B’s and similar premises.

If you rent a house out to someone for, say one month, fully furnished, while they have their own place repaired, are you providing anything more than accommodation that is similar to hotel or motel accommodation, i.e. short term furnished accommodation? Is the tenant occupying your place as their “main residence” during the rental period or is it secondary temporary accommodation while their “main residence” is repaired?

I think there is some doubt over how the GST Act applies in these situations. Sure, most will not be within the annual $60,000 GST registration threshold. However, some of the house owners may be registered for GST in their own right for other purposes, or may even wish to register for GST in relation to the temporary rental activity. Whether they should or can is unclear.

I’d like to see clarity on less obvious issues like these when the IRD is publishing notices telling taxpayers of their obligations.

Cheers

Iain

Extract from Business Tax Update November 2014

Renting out your own home short term

There’s a demand for temporary rental properties in Canterbury because of thousands of families needing accommodation while they wait for earthquake repairs on their homes. Some homeowners are meeting this need by offering furnished homes for short-term rental.

If you rent out your own home, even for a short time, any income you receive is liable for income tax, so you must include it in your tax return.

However, you can claim a deduction for any expenses you incur while your property is rented out. But you can only claim that proportion of ongoing costs for the time your property is rented out. For example, if you rent your home out for three months, you can claim the rates, insurance, interest and any agent’s fees you incurred during that period.

Find out more on what expenses you can claim”

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GST and tips

Some discussion lately on tips and GST.

It’s become more common for eftpos devices to offer customers a tipping option when paying their bills. The GST implications of this are more complex than the old-fashioned method of slipping a bit of extra cash to the staff person directly.

Businesses use different methods for sharing out tips that have been paid with eftpos.

In my view some methods could result in GST being payable on the tip because it could be seen as an extra payment for the service received from the business or an agreed adjustment to the price, particularly where it is not paid directly by the customer to a staff member to reward them personally for extra effort.

Inland Revenue has made clear statements about the income tax treatment of tips. It might be timely to extend that guidance to cover other tax implications, such as GST given the technological developments in this area.

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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What’s the IRD working on?

IRD has published its Public Rulings work programme for 2014/15.

You can find the full document here:

http://www.ird.govt.nz/resources/7/7/77d3ecdd-6305-408a-8b88-541e509f487b/download-pr-work-programme-2014-2015.pdf

Given GST is by far the most interesting tax here are the key points from the programme:

Currently consulting on (consultation period closed)
Time of supply when no supply made. This ruling covers when, if at all, GST has to be accounted for if a supply does not proceed. It’s pretty esoteric stuff but does have some practical implications for land transactions especially.

Currently consulting on (consultation period still open)
GST treatment of payments made to state schools. This covers school “donations” and other payments to schools and discusses when GST applies. Mainly affects state schools and provides more clarity over the treatment of what is a bit of a minefield.

Items currently in progress (nothing publicly available yet)
Secondhand goods claims for fishing quota/coastal permits and certificates of compliance.
Late return fees for hired goods.
Lotteries, raffles, sweepstakes and prize competitions.
Retirement villages Interpretation Statement update.
Non-profit bodies and section 20(3K).
GST and relationship property agreements.

Watch out for something to be published on the above. Fishing companies, secondhand goods traders, hire businesses, charities, aged care providers and relationship property lawyers will be particularly interested in these.

Known issues but NOT currently being worked on
GST and parking fines.
Partnership capital contributions.
GST under the Project to Reduce Emissions programme.
Single versus multiple supplies.
Directors’ fees and fees for board members.
GST and bare trusts.
Legal services provided to non-residents relating to transactions involving NZ land (a political hot potato).

If these issues concern you then it looks like you’ll be waiting until after 2015 before seeing progress.

It’s a pretty comprehensive work programme, especially when all the other (less interesting) taxes are added in. The IRD will have had to fix priority areas based on internal and taxpayer feedback.

Some of these issues are pretty important and when finalised will go a long way to improving the integrity of the tax system for many taxpayers. It’s a pity some of the not insignificant extra resources given to the IRD in recent years to audit taxpayers could not be diverted to allow this work to be completed more quickly.

Cheers

Iain

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Visiting sports teams

The recent publicity about AFL players being pinged for income tax as “entertainers” when they played the Anzac Day matches here is interesting. See here:

http://www.3news.co.nz/Wellington-AFL-game-hit-with-tax/tabid/415/articleID/355731/Default.aspx

Like everything in life there’s a GST overtone to this.

The players would have spent money on food, accommodation, transport and other stuff when in New Zealand, all of which would have been subject to GST.

The interesting question is how these players would get on if they sought GST refunds for the costs they incurred here as non-resident “entertainers”. It seems possible under the new GST non-resident registration rules but there are some reasonably strict criteria.

Still, could be a case of the Government taking with one hand and paying back with another?

Iain