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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:

A tax bill currently before Parliament will change how employers meet their PAYE reporting and payment obligations. The entire bill is here: 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!





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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?


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Commonsense prevails: well almost

Yesterday the Australian Tax Office issued a practice statement explaining when it would overlook an incorrect GST input claim made by a business.

You can read it here

On the face of it the practice statement reeks of commonsense.

The supplier wrongly applies GST to the transaction and so over pays their GST. The recipient over claims their GST but would have been entitled to the claim anyway if the transaction was subject to GST. The ATO doesn’t have to refund the over paid GST to the supplier so they turn a blind eye to the over claimed GST by the recipient and everyone’s left where they would have been if the mistake had never been made. In the document they call it “preserving the status quo”.

I really like the way the ATO is prepared to come out and say when they will use their “powers of general administration”. Their intention is admirable: to adopt a pragmatic approach to tax administration where being overly technical would result merely in extra administration and costs without any net effect on tax collected.

In New Zealand the IRD does in practice demonstrate the same sort of common sense approach to compliance, agreeing not to go to great lengths to unwind historic wrongs if there is no net tax at stake [although not always it must be said]. What we don’t see so much of though are published statements from the IRD saying when they will turn a blind eye to past wrongs in the interests of administrative expediency.

As sensible as the ATO position seems to be though I do have a slight quibble with it. I’m not sure it’s quite as straightforward as the document suggests.

The ATO’s statement is based on an assumption that the pricing of the transaction between the supplier and recipient explicitly took GST into account. In other words, it assumes the parties turned their minds to GST and adjusted the contract price to add GST. In my experience that isn’t always the case.

Often parties contract on the basis prices include GST (and any other taxes). The price is driven by market considerations and is the agreed price regardless of whether GST applies. So, if a supplier has incorrectly treated the transaction as being subject to GST, from a contractual perspective, it would not be right for the tax authority to insist the supplier refund a GST component to the recipient. Yet that is a strong driver of the ATO’s position.

The ATO assumes the mistake made by the supplier in over paying their GST must be corrected by a refund to the supplier being passed on by the supplier to their customer. Because of that, the ATO come to the conclusion it’s administratively acceptable simply to allow the customer to keep the refund claim they wrongly made and for the ATO not to refund the over paid GST to the supplier.

In my view, if the supplier has mistakenly reduced their margin by accounting for GST on a transaction which should not have been subject to GST and the parties clearly contracted on a GST inclusive basis without turning their minds to GST, then rather than “preserving the status quo”, the ATO’s approach could well leave the supplier out of pocket and the recipient with a windfall.



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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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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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A lot of refunds are changing hands at the moment. All sorts of arrangements are being cancelled because of mother nature and today we read Contact and Telecom have discovered billing errors which will require refunds being paid to customers.

A word of caution: if you are GST registered and paying or receiving a refund make sure you are on top of what you have to do for GST purposes. Whether you are entitled to a refund of GST previously accounted for or have to pay back GST already claimed you should make sure you understand the GST timing and documentation requirements.


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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.


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The important GST policy issues…

IRD Policy have just released their updated work programme for 2010 / 2011.

I understand they will consider submissions from anyone who feels there are other more pressing tax policy considerations.

Here’s what they have in the policy pipeline for GST:

– June 2011: a consultative paper will be issued on the zero rating of immigration services provided to non-residents.

– Sometime after June 2011 IRD will respond to a “questions we’ve been asked” on the value of consideration in a matrimonial/relationship property agreement.

– At a date yet to be determined IRD will respond to a “questions we’ve been asked” on whether a non-profit body needs to conduct a taxable activity and make supplies in the course of that activity to claim input tax credits.

I’m not sure why the GST treatment of immigration services is suddenly so complex that the best GST brains in the IRD need to be working on it but I guess someone must have concerns.

I’m also not sure why so much time needs to go into the relationship property and non-profit bodies issues mentioned.

There are perhaps other GST policy issues which could do with some attention. If you can think of any I suggest you get in touch with the IRD.

Perhaps they could include:

– the policy implications of removing GST from fresh fruit and vegetables (a Labour Party election policy). Surely it would help us all make a decision if we had some objective information from the experts?
– the extent to which non-profit bodies can treat payments received from customers to attend fundraising events such as concerts and dinners as “exempt” from GST. This is particularly pertinent at the moment given the large number of such events occurring around the country for Christchurch.
– how the rules for payment of GST to Customs on imports by registered businesses can be improved to remove the unnecessary bureaucracy and cost involved in paying Customs and then claiming back from the IRD.

Just three for starters.


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IRD leniency

The IRD is to be commended for quickly responding to the tragic events in Christchurch and reassuring residents there they will not be faced with penalties if they are unable to keep up with their tax obligations as a result of the earthquake.

This will be welcome by those who would otherwise have had to get their GST returns filed on 28 February or have to work on their tax returns for 31 March 2011.

You can see the Minister of Revenue’s statement here:

Statement by Hon. Peter Dunne