If you’re thinking about starting a new business be careful how much you spend on “preparatory and exploratory” work.
An Australian tax court has just concluded that a couple could not claim back GST on “preparatory and exploratory” expenditure because their business had not yet come into existence.
The couple had bought a rural property they wanted to use for an eco-tourism business. They spent money preparing a business plan, registered a business name, consulted an accountant and lodged a development application with the local council.
However, because they had not yet produced any income from the property the court said their business had not started and they couldn’t claim back the GST.
Could a similar result occur in New Zealand? Yes it could. A person cannot be registered for GST in New Zealand unless they carry on a taxable activity. This is a question of fact and courts will look at the intention of the taxpayer to supply goods and services for money.
Where there is a considerable time difference between incurring preparatory and exploratory expenses and actually earning revenue there is a risk the IRD could refuse GST registration and GST claims for those expenses.
In the Australian case the couple bought the land in 2003 and by 2012 had still not actually derived any income. That’s probably at the extreme end of the scale. Nevertheless there is a real risk for people starting businesses dependent on Resource Management Act approvals because it can be years before they are even allowed to start work developing their property.
Be careful out there.