high-value assets
A government discussion document /
Hon Peter Dunne
Minister of Revenue
First published in November 2009 by the Policy Advice Division of Inland Revenue, PO Box 2198,
Wellington 6140.
GST: Accounting for land and other high-value assets: A government discussion document.
ISBN 978-0-478-27177-5
CONTENTS
CHAPTER 1 Introduction 1
Overview 1
Purpose of this discussion document 2
Summary of proposals 3
Submissions 3
CHAPTER 2 Domestic reverse charge 5
Current problems 5
Objectives of the domestic reverse charge 6
Application of the domestic reverse charge 7
Exceptions 10
Alternative option: zero-rating 11
CHAPTER 3 Preventing timing mismatches – strengthening the application
of section 19D 13
CHAPTER 4 Timing of refunds 15
CHAPTER 5 Transactions involving nominations 17
Nominee transactions when the domestic reverse charge does not apply 17
The proposal 18
CHAPTER 6 Sales in satisfaction of debt under section 5(2) 19
The proposal 20
CHAPTER 7 Input tax and adjustments for change-in-use 21
The apportionment of input tax deductions on acquisition 23
Subsequent adjustments of input tax deductions 24
The sale of goods and services for which full deductions were not claimed 29
Second-hand goods input tax adjustments 31
CHAPTER 8 Accommodation 33
Is the exemption for supplies of accommodation necessary? 34
Definition of “dwelling” 34
APPENDIX Indicative GST legislation 38
CHAPTER 1
Introduction
Overview
1.1 New Zealand’s GST applies to the widest possible range of goods and services, with minimal exceptions. This reduces the extent to which GST alters consumption and production decisions in New Zealand, thereby creating economic efficiency and reducing compliance and administrative costs.
1.2 Because GST is designed to tax consumption rather than production, one of the basic principles of the tax is that businesses should not be subject to GST when producing goods and services.[1] This is achieved through the credit-invoice mechanism, which ensures that the economic incidence of the tax is removed on most business purchases. The mechanism also prevents the tax from “cascading” as goods and services are supplied between businesses that are registered for GST.
1.3 Transactions between businesses should, therefore, be GST-neutral unless exemptions apply (for example, the supply of financial services in some cases). The terms “GST-neutral” and “business-to-business neutrality”, for the purposes of this document reflect the fact that GST paid by a business can be claimed against the GST payable on taxable supplies. A business is “neutral” about the purchase of goods and services if the GST it pays does not become a permanent business cost. Business neutrality is also an appropriate concept to apply to the revenue received by the government in the sense that input tax should generally be matched with a corresponding payment of output tax.
1.4 The goal of business-to-business neutrality has not, however, always been achieved. This is of most concern to both businesses and the government in transactions involving the supply of significant assets, such as land. For businesses, an example would be a transaction not qualifying under the legislation for zero-rating as a “going concern” or an invoicing error that results in a purchaser’s expected input tax entitlement (sometimes referred to as a GST “refund” or GST “credit”) being denied. Because the assets are significant, they are infrequently traded and can create GST consequences that businesses may not have expected or planned for.
1.5 For the government, because Inland Revenue regularly refunds GST-registered persons for excess input tax deductions, a substantial risk to the tax base can be created through the actions of a small minority of taxpayers. The risk arises from this group entering into tax-aggressive structures that involve no corresponding GST payments to Inland Revenue. By taking advantage of the GST system in this manner these taxpayers redirect revenue that could be used by government for public benefit to their personal benefit.
1.6 In considering these concerns, this document focuses predominantly on transactions involving land. It also considers a number of other issues aimed at clarifying and providing greater consistency for these transactions.
Purpose of this discussion document
1.7 In June 2008, officials released an issues paper, Options for strengthening GST neutrality in business-to-business transactions, which suggested a number of options to help resolve GST neutrality concerns and improve the operation of GST in general. This discussion document draws upon the analysis in the issues paper and in the submissions that followed.
1.8 The officials’ paper discussed a number of options that the government will not be proceeding with. These include the proposals to widen Inland Revenue’s set-off powers, give Inland Revenue power to impose caveats on land, limit access to the invoice basis of accounting, extend the current treatment of associated persons for the purposes of second-hand goods deductions and place a cap on registering accommodation-based activities. While these options may have addressed the tax base risks, they have been rejected as being either too broadly targeted or because of their potential negative effect on normal business operations.
1.9 This discussion document proposes changes in the following areas:
· the application of domestic reverse charges;
· the application of section 19D of the GST Act;
· timeframes for releasing refunds;
· transactions involving nominations;
· sale of property in satisfaction of debt;
· input tax entitlements and adjustments for change-in-use; and
· supplies of accommodation.
1.10 Because of the detailed nature of some matters covered in this discussion document, the government is interested in opinions on how these proposals could be presented in legislation. The Appendix to this discussion document contains indicative legislation for the more significant changes proposed.
Summary of proposals
Domestic reverse charge
Introducing a domestic reverse charge to transactions involving land, “going concerns” and assets with a value of $50 million or more.
Strengthening the application of section 19D of the GST Act
Amending section 19D by applying it to the timing of input tax deductions rather than payments.
Timing of refunds
Amending the legislation to specify that the 15 working-day rule refers to the issue of the notice by Inland Revenue rather than receipt by the taxpayer.
Transactions involving nominations
Clarifying the effect of nominations on taxpayers’ entitlement to input tax deductions.
Sales in satisfaction of debt
Extending the rules governing sales in satisfaction of debt to transactions that are “in substance” sales in satisfaction of debt.
Input tax and adjustments for change-in-use
Replacing the existing change-in-use adjustment rules with an approach that apportions input tax deductions according to the relative use of the goods and services.
Accommodation
Amending the definitions of “dwelling” and “commercial dwelling” to clarify the boundaries of those definitions.
Submissions
1.11 The government invites submissions on the proposals in this discussion document and on the draft legislation provided in the Appendix. It is especially interested in opinions on how the proposals could be improved.
1.12 Submissions should include a brief summary of major points and recommendations. They should also indicate whether it would be acceptable for officials from Inland Revenue and the Treasury to contact you about your submission to discuss the points raised.
1.13 Submissions should be made by 18 December 2009 and be addressed to:
GST: Accounting for land and other high-value assets
C/- Deputy Commissioner, Policy
Policy Advice Division
Inland Revenue Department
PO Box 2198
Wellington 6140
1.14 Submissions may be the source of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. If you think any part of your submission should properly be withheld under the Act, you should indicate this clearly.
CHAPTER 2
Domestic reverse charge
Proposed change
This chapter discusses the proposed introduction of a domestic reverse charge which would apply to transactions involving land and other high-value assets.
2.1 The June 2008 officials’ paper canvassed options for better ensuring a GST-neutral result in connection with the supply between businesses of land and other high-value assets.
2.2 The options discussed included suspending the liability for GST on certain business-to-business supplies or, using a mechanism known as a domestic reverse charge (DRC), shifting the obligation to charge GST from the supplier to the recipient in certain circumstances.
2.3 Submissions on the officials’ paper indicated a level of support for a domestic reverse charge but were concerned about the likely complexity of the rules necessary to support its application. Some submissions suggested that zero-rating should be considered as an alternative option to the DRC, arguing that zero-rating is more consistent with the current GST framework. This chapter analyses these two options and proposes introducing a DRC which would apply to land, going concerns and transactions with a GST-exclusive value exceeding $50 million.
Current problems
2.4 The government is concerned that, in business-to-business transactions, GST neutrality for businesses and the government is not always occurring as it should. This is of particular concern in transactions involving land and high-value assets. For example:
· Businesses can and do incur costs if GST has to be accounted for before payment is received from the customer. This can occur, for example, where the transaction occurs towards the end of the vendor’s return period.
· Providing GST refunds can pose a risk to the government’s revenue base if the refund does not give rise to a payment of GST by the other party involved in the transaction. Of particular concern are phoenix-type fraud and deliberate accounting base mismatches.
· Zero-rating the supply of going concerns can lead to an expectation by the parties to the transaction that no further GST is payable on the transaction. This expectation can be unfounded if the facts do not support that the supply was a “going concern”.
· Because the rules that apply to the supply of a going concern are in effect not mandatory, it is possible for a financially stricken supplier to sell its business as a standard-rated supply. This creates a revenue loss for the government if the GST is unpaid by the supplier but an input tax deduction is claimed by the recipient.
2.5 In situations involving a risk to the tax base, use of the general anti-avoidance provision or, in the case of fraud, prosecution action, may be available. Using litigation to resolve matters of avoidance is, however, expensive in terms of taxpayer, Inland Revenue and the courts’ resources and the outcome may not necessarily be consistent with good policy. Even if the outcome of litigation provides useful interpretive guidance and a level of certainty, it is often not timely.
2.6 The government therefore considers that additional legislation is needed to address the concerns outlined.
Objectives of the domestic reverse charge
2.7 The government’s preferred option is the introduction of a DRC to apply to land and other high-value transactions between GST-registered persons. The main feature of the DRC would be to require the recipient of goods and services to self-assess GST on goods and services acquired from another registered person, and allow the recipient to deduct input tax if entitled to do so, in the same taxable period.
2.8 The specific objectives of the DRC would be to:
· Remove the cashflow concerns for the parties to an affected transaction for the period between which the tax is paid and the input tax deduction is allowed. (This is because the recipient would be able to offset the GST payable and the input tax deduction in the same taxable period.)
· Reduce the risk that the supplier faces an unexpected GST liability in the event that a transaction is incorrectly zero-rated, as could occur if a registered person sells a zero-rated going concern to an unregistered person that they believed was registered.
· Limit the involvement of the supplier if the contract is varied, cancelled or otherwise does not proceed.
· Reduce the revenue risk to the government arising from a genuine or structured business failure. (The recipient, having acquired the goods and services in all likelihood for an ongoing taxable activity, would be less likely than the supplier to exit the GST system.)
Application of the domestic reverse charge
2.9 The proposed DRC would apply to transactions between registered persons involving the supply of land, going concerns, and goods and services with a value of $50 million or more.
2.10 As outlined earlier, the recipient of a supply of goods and services, being a registered person, would be required to self-assess and return GST in the taxable period in which the supply was made. An input tax deduction would be available to the recipient in the same taxable period if the goods and services were acquired for the purpose of making taxable supplies.
2.11 The DRC would apply irrespective of whether either GST-registered person made predominantly exempt supplies. The change-in-use adjustment rules or the apportionment rules (in the form proposed in chapter 7) would need to be applied if the goods and services were used for a mixture of making taxable and non-taxable supplies. Supplies to unregistered persons would continue to be subject to normal GST rules.
2.12 The supplier would not be liable for GST normally charged on the goods and services in question. However, the supplier would still be treated as making a “taxable supply” of goods and services to preserve existing input tax entitlements. Transactions to which the DRC applies would need to be expressed as “exclusive of GST”.
2.13 It is envisaged that the agreement for sale and purchase of property would be the main document to support suppliers’ and recipients’ obligations under the DRC. The agreement will be required to contain the core details about the supplier and the recipient, including their respective GST registration numbers, their respective names and addresses, and details about the transaction, including its value (excluding GST).
2.14 Inland Revenue would not have recourse to the supplier in the event that the recipient does not account for GST, provided the supplier has complied with and retained the prescribed information as outlined above.