GST Interpretation Statement released
IR has recently released an interpretation statement (IS 18/07) titled “Goods and services tax – zero-rating of services related to land”.
Where services are provided by a GST registered person, to a non-resident who is outside NZ at the time the services are supplied, the services can usually be zero-rated (charged with GST at the rate of 0%) by the supplier.
Up until 1st April 2017 however, zero-rating in these circumstances was not permitted, where the services were supplied directly in connection with land or personal property situated in NZ. In this regard, the main issue of contention that often arose between Inland Revenue and the taxpayer, was whether the services were “directly in connection with” the subject item, and many of you will remember the Wilson & Horton case that travelled as far as the Court of Appeal, which ultimately determined that the test was a fairly narrow one.
The Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Bill amended the GST legislation, to reflect Parliaments view that in applying the destination principle upon which NZ’s GST system is based, other services provided to non-residents in respect of NZ land, should also be standard rated. Consequently, from 1st April 2017, services supplied in connection with land and intended to enable or assist a change in the physical condition, or ownership or other legal status, no longer qualified for zero-rating.
The purpose of IS 18/07 is stated by IR to discuss the zero-rating provisions both pre and post the law change, and it does this in some detail, first exploring who is considered to be a non-resident to which the provisions may have application, including exactly when the recipient may be seen to be outside NZ at the time the services are performed, through to revisiting somewhat the “directly in connection” commentary which was released not long post the Wilson & Horton decision (naturally updated of course) and finally analysing the new concept of “services supplied in connection with land and intended to enable or assist a change in the physical condition, or ownership or other legal status.”
Some take-outs from IS 18/07:
- Do not just assume someone is non-resident because they have never been to NZ. The residency test for GST purposes is in fact wider than that used for income tax purposes, and can include a person who carries on, in NZ, any taxable activity or any other activity, while having any fixed or permanent place in NZ relating to that taxable activity or other activity. IR’s view in this regard, by way of an actual example, is that a fixed or permanent place in NZ can include a rental investment property because it ticks all the necessary boxes.
- The intended purpose of the services should be considered from the recipients perspective, therefore a subjective test, although one to be tested against objective evidence. It is suggested therefore that suppliers may wish to retain evidence to support the basis of their understanding of the recipient’s subjective intention where the supplier has chosen to zero-rate the supply, at least in cases where it is not clear from the documentary evidence, what the services were intended to do.
- It may be that the recipient could be seen to have multiple intentions, and where this is the case (assuming there is just a single supply involved), the supplier should use the dominant element to guide how they treat the supply. If there is any doubt, IS 17/08 suggests the supplier should always standard rate the supply in the first instance, and make a subsequent adjustment should it transpire that treatment was incorrect.
Director’s duties not breached
A recent Court of Appeal decision has confirmed that the simple fact of a director not paying the company’s GST obligations over a substantial period of time, in itself would not lead to a finding that the director had breached their director’s duties, where the company was eventually liquidated.
The liquidators had alleged that the director had traded while insolvent, had acted without due care and skill, and had failed to keep proper accounting records, and consequently he must have been in breach of his directors duties.
However the appeal was dismissed on the basis, that without further evidence (which had not been provided to the Court), a general proposition that a failure by a director to account for GST over a substantial period where the company was subsequently liquidated, was on its own sufficient to establish a breach of duties, could not be accepted. In the words of the Court, it was an “unattractive” proposition that continued trading while not paying GST should lead to a liability for a breach of director’s duties.
Determination exempting Plunket honoraria
Income tax legislation permits IR to determine an amount or proportion of any schedular payment that is considered to be exempt income, on the basis the amount is deemed to be expenditure incurred that is exempt from income tax.
In this respect, IR has released a recent determination that applies to honoraria paid to volunteers of the Royal NZ Plunket Trust. In accordance with the determination, which is to apply from 1st January 2018 to 31st March 2019, where honoraria is paid to a volunteer to reimburse that person for any expenditure they had incurred in carrying out Plunket related activities, up to $800 per tax year will be treated as expenditure incurred in the production of that payment, thereby resulting in only amounts in excess of that threshold being subject to withholding tax.
Should the volunteer receive reimbursements in addition to honoraria for expenditure they have incurred, then those amounts will also count towards the $800 threshold.
Modernising Tax Bill reported back
The Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill has been reported back to Parliament by the FEC. You may recall the Bill was introduced in June last year, and is focussed on making tax simpler and easier for individuals, predominantly via the simplification of various rules and processes.
Additionally proposed in the original Bill, are new rules:
- introducing a “short process ruling” allowing small businesses to apply for binding rulings from IR;
- allowing people over 65 years to join KiwiSaver (no compulsory employer contributions however); and,
- new KiwiSaver employee contribution rates of 6% and 10%.
Since the Bill was introduced, a number of SOP’s have been added, including one to amend the rules in respect of non-profit bodies who are selling goods or services for which they have received GST input tax deductions for. Present legislation in this regard, potentially provides a loophole for the non-profit body to avoid paying GST on an asset sale, the asset for which the non-profit has been able to claim a GST input tax deduction previously.
One change to the Bill, which you could argue is quite reassuring, is the removal of an intended provision which would have permitted the Commissioner of IR to make minor legislative changes without having to go through the parliamentary process. The FEC was nervous about the prospect for Parliament’s law-making authority to lose some of its respect as a result of this amendment, and consequently the Committee has recommended that further consultation should be undertaken with the Legislation Design and Advisory Committee, post which the law change proposal could again be submitted to the Committee for consideration.
