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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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IRD wants to hear from employers

IRD wants to know what employers think of their proposals for correcting and adjusting PAYE filings.

This recently released officials’ paper sets out the background and proposals: http://taxpolicy.ird.govt.nz/publications/2017-ip-paye-error-correction/overview

A tax bill currently before Parliament will change how employers meet their PAYE reporting and payment obligations. The entire bill is here: http://taxpolicy.ird.govt.nz/bills/51-249. Employers will be able to use their payroll software to file their PAYE information directly. The objective is to reduce paper based compliance and make it easier for those who have payroll systems that support digital filing.

The officials’ paper on correcting payroll reporting errors follows on from the changes intended in the bill and deals with how calculation, transposition and interpretation errors would be corrected and adjustments made. Depending on the nature of the error the correction may be to the original reporting period or an adjustment could be made in a later reporting period. The officials have set out a number of options under different scenarios.

Getting PAYE right all the time is extremely difficult. There are many complex variables and the officials at IRD recognise this in the approach they’ve taken. Overall the proposals appear balanced and pragmatic. However, not all options will appeal to all employers and it’s important you have your say if you are concerned about the impact on you.

The proposals include clarifying what happens when an employee is mistakenly overpaid and does not repay the employer. There is some uncertainty whether the overpayment is actually income of the employee that should be subject to PAYE. IRD intends to make it clear PAYE remains payable on overpayments of salary and wages when the employee has not refunded the overpayment. This could be a contentious. It some cases it could seem as though the tax collector is benefitting from an error by the employer and the employer is bearing an added cost of their mistake solely because the employee refuses to repay the overpayment (and may even have become uncontactable). There will be lots of scenarios to consider and I’d be surprised if there weren’t some strong submissions on this point.

If you want to make a submission you have until 15 September. Don’t be shy now!

 

Iain

 

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Vat audits- the whole story

EY’s digitally interactive report on managing indirect tax disputes is definitely worth a read.

http://www.ey.com/indirectcontroversy

The report has a host of useful information about modern indirect tax audits, common errors and how smart businesses are managing their indirect taxes to stay clear of nasty surprises.
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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Surprise in body corporate treatment?

A Product Ruling (BR Prd 14/08) published by IRD on 28 July is fascinating as much for what it doesn’t say as the conclusions reached.

Facts briefly:

– Unit title building in Christchurch.
– Mostly commercial property.
– Destroyed in earthquake.
– Body corporate insured building and paid the premiums (including GST). The Body Corporate was the named “insured” not the individual unit owners.
– Claim made. Settlement reached. Insurer paid out in full and final settlement.
– Rather than reinstate the building the Body Corporate resolved to distribute the settlement funds to all unit owners in proportion to their interests.
– The majority of unit owners are registered for GST but the Body Corporate is not.
– CERA purchased the unit owners’ interests at current market value (on an “as repaired” basis) less the amount of the insurance settlement distributed to each Owner.

Ruling:

The IRD have ruled –

1. GST registered owners do not have to account for GST on the receipt of their share of the insurance settlement distributed to them by the Body Corporate.
2. The distribution of the insurance settlement proceeds by the Body Corporate to each GST registered owner is not subject to GST.

This Ruling is fascinating. I don’t necessarily disagree with it but I am intrigued.

It’s a Product Ruling, which means it’s public. Surely it could have been a private ruling?

An entire paragraph is repeated. It’s very unusual for the IRD to have typos that big in rulings. They are generally checked and re-checked.

If the insurer gets to claim an input tax deduction for the settlement payment to the Body Corporate (which it seems to me could be the case) and if the GST registered Owners had used the funds to repair the building isn’t there a potential for a double claim of input tax deductions? They could claim input credits on the repair costs and yet according to the Ruling no one has an output tax liability on the receipt of the settlement. Now, I know that’s not what happened because the building wasn’t repairable. However, if that were not the case would the GST result have been any different?

Also, the Body Corporate paid the insurance premiums and wasn’t registered for GST. That seems odd. So, the GST registered Owners were not able to claim GST input tax deductions for the insurance premiums (because it seems the Ruling has concluded there was no agency relationship between the Body Corporate and the Owners). I wonder how many commercial unit title buildings in New Zealand arrange their insurance this way? I wonder if some Owners are in fact claiming GST input tax deductions whereas this Ruling seems to suggest they wouldn’t be entitled to. Seems like a pretty strange state of affairs.

I’ve got to be missing something here. Can someone help me out?

cheers

Iain

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Bodies corporate and GST

Brian Fallow’s opinion piece in today’s Herald on residential bodies corporate and GST is timely.

See here: http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=11231055

This issue baffles me. Why is it so complicated and why is it taking so long for the IRD to reach a settled position?

Maybe I’m missing something, but like Fallow, I think the legal analysis isn’t that complex. Bodies corporate are separate entities from the apartment owners and they provide services to the owners in return for levies. Even if those services are mandated by legislation it seems to me, there is a supply and it is for consideration.

You wouldn’t have to look far to find examples where the IRD has insisted on a company registering for GST because it was supplying goods and services to related shareholders. If no charge was made for the supplies the IRD is entitled to deem consideration to be provided at market value if the shareholder is not GST registered.

This issue isn’t without a downside for the bodies corporate and the apartment owners though. Leaving aside the issue of leaky home settlements (and I agree with Fallow on that), those deriving fees of more than the registration threshold are required to register for GST in my view and that could mean a net GST cost to the owners, especially if the body corporate employs staff.

Our GST system is applauded for being broad based and here we have the IRD arguing for a narrowing of the base. An unusual situation in my view.

Comments most welcome on this one.

Iain

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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.

http://www.ird.govt.nz/resources/6/6/661d18004c5fb8aea1cde57bdeadb8e8/our-compliance-focus-2012.pdf?CACHEID=661d18004c5fb8aea1cde57bdeadb8e8

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.

 

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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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.

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