Taxation (GST and Remedial Matters) Bill
Commentary on the Bill
Hon Peter Dunne
Minister of Revenue
First published inAugust2010by the Policy Advice Division of Inland Revenue, PO Box 2198,
Wellington 6140.
Taxation (GST and Remedial Matters) Bill; Commentary on the Bill.
ISBN 978-0-478-27185-0
CONTENTS
GST
Zero-rating transactions involving land
Transactions involving nominations
Supplies of accommodation
Input tax and change-in-use adjustments
GST reverse charge rules
Application of section 19D to non-profit bodies
Section DB 2 – reverse charge rules
Miscellaneous technical amendment: GST – filing dates for “special returns”
KiwiSaver remedials
Sharing of KiwiSaver member information
Refinements to scheme wind-up provisions
Other remedial matters
On premises fringe benefit tax exemption
Joint bank accounts
Cap on shortfall penalties
PIE credit impairment provisions
Technical amendments concerning the approved issuer levy
Applications for overseas donee status
Treatment of superannuation schemes administered by the National Provident Fund
Auckland Council restructuring
Tax treatment of emissions trading units
Rewrite Advisory Panel amendments
GST
Zero-rating transactions involving land
(Clauses 4, 6, 9, 10, 13(4), 17, 18, 19 and 20)
Summary of proposed amendments
The GST legislation is being amended to require GST-registered vendors to charge, subject to certain conditions, GST at the rate of 0% on any supply to a registered person involving land or in which land is a component. This measure is intended to prevent “phoenix” fraud schemes that involve Inland Revenue refunding GST to the purchaser with no corresponding payment being made by the vendor because the supplying company deliberately winds up before making payment.
Application date
The amendments will apply from 1 April 2011.
Key features
Application
The Goods and Services Tax Act 1985 (GST Act) will be amended by new section 11(1)(mb) which will require a GST-registered vendor to charge GST at the rate of 0% on any supply involving land or in which land is a component to a registered person who acquires the goods with the intention of using them for making taxable supplies.
The new rules will not apply when the supply is a supply of land intended to be used as a principal place of residence of the purchaser or their relative (section 11(1)(mb)(ii)). This exclusion will prevent registered persons such as sole traders from using their GST-registered status to zero-rate the purchase of their family home. In circumstances when a principal place of residence forms part of a larger supply of land, the supply of the residence will be deemed to be a separate supply from the supply of the other land (section 5(15)).
A new definition of “land” will be added to section 2(1) of the GST Act to include an estate or interest in land, a right that gives rise to an interest in land, or an option to acquire land or an interest in land. The definition will not apply to mortgages or supplies of accommodation in a dwelling.
The new zero-rating rules will apply to any supply that involves land, irrespective of whether land is a predominant component of the supply. This will affect most supplies of “going concerns”, which often involve transfers of land, and in turn reduce the need to determine whether a going concern is being supplied.
New section 5(22) also extends the application of the zero-rating rules to certain supplies of land to which section 5(2) applies. For example, if a mortgagee sells a mortgaged property, subject to the obligation to account for GST under section 5(2), the mortgagee will be required to zero-rate the supply if the mortgagor would be required to zero-rate the transaction were they selling the property themselves.
Vendor’s obligations
Since the new rules apply to transactions between two registered persons, new section 78F(2) requires the vendor to obtain the purchaser’s registration details.
The proposed zero-rating rules will not apply if the registered purchaser does not intend to use the goods for making taxable supplies or if the property is being purchased as the principal place of residence of the purchaser or their relative. Vendors will therefore be required to confirm with the purchaser their intentions in relation to the supply.
If, in the circumstances relating to the supply, the vendor is unable to obtain the details described above, the vendor must make sufficient inquiries into the purchaser’s registration status and otherwise obtain all the information required (new section 78F(3)).
Having obtained the necessary information about the purchaser’s registration status or the purchaser’s intentions regarding the use of the land, the vendor will not be liable for tax on the supply in a case of mistake or misrepresentation by the purchaser (new section 78F(4)).
If the vendor fails to fully comply with their information-gathering obligations in section 78F(2) and (3), the vendor may be liable to account for tax even if it is also the case that the purchaser has provided incorrect information to them (new section 78F(5)).
Although the vendor will not be required to account for any output tax for a zero-rated supply, they will need to disclose the zero-rated transaction on their GST return or an attachment to the GST return to be prescribed by Inland Revenue. This information will help Inland Revenue to identify the transaction and ensure that the purchaser complies with their apportionment obligations.
Purchaser’s obligations
New section 5(23) states that if an unregistered purchaser provides incorrect information to the vendor, the purchaser will be deemed to supply the goods and services to themselves and be liable to pay GST on the supply at the standard rate. For the purposes of this section, the unregistered purchaser will be required to register for GST (new section 51B(4)) and will not be able to claim a deduction in respect of the deemed supply (new section 20(4B)).
In circumstances when the purchaser fails to provide the correct information to the vendor, the purchaser may be liable to account for tax even if the vendor has failed to fully comply with their information-gathering requirements in section 78F(2) and (3) (new section 78F(5)).
This obligation on the purchaser to account for tax will only apply if the vendor has not accounted for the GST at the standard rate.
Under the rules for apportionment of input tax and change-in-use adjustments also proposed in this bill, any input tax deduction that can be claimed by a purchaser will be based on the GST paid by the purchaser and the intended taxable use of the goods and services. Since the amount of input tax in a zero-rated supply is zero, special rules will be required to ensure that any non-taxable use of acquired land is accounted for.
New section 20(3I) will require the purchaser to account for tax on the acquisition of a zero-rated asset when they do not intend to use the asset solely for the purpose of making taxable supplies – that is, the asset is also used privately or in making exempt supplies. This will be done by the purchaser having to calculate, on acquisition, the amount of GST that would have been paid by the vendor if the supply was subject to the standard rate of GST (the nominal GST component), and account to Inland Revenue for the proportion of the nominal GST component that relates to the non-taxable use of the acquired supply. The nominal GST component will also be used by the purchaser to make adjustments for any subsequent change in use.
Example of a zero-rated transaction
Nominations
Nominations are often used in transactions that involve transfers of land. For example, although a contract for a transfer of land may be between a vendor and a purchaser, the transaction may instead be settled and the title in land received by a third party nominated by the purchaser (the nominee).
The bill includes the introduction of new rules that would govern the GST treatment of transactions involving nominations. The purpose of the rules is to ensure that the GST treatment of a nominee transaction follows its economic substance. How the economic substance is determined depends on which party (the nominee or the purchaser) pays the consideration.
The new nomination rules will particularly affect land transactions when a contractual purchaser and a nominated person have a different GST registration status. For example, registered vendor A may agree to sell land to an unregistered purchaser B. Because of B’s unregistered status, A may have initially treated the transaction as subject to the standard GST rules. However, if purchaser B has nominated a registered person C to settle the transaction, the new nomination rules will treat the transaction as between A and C (new section 60B(5)). Therefore, the supply will need to be zero-rated by the vendor (and they will be able to claim back any output tax already paid in relation to the supply).
Conversely, registered vendor A may agree to sell land to a registered purchaser B. Because of B’s registered status, A may have initially treated the transaction as subject to the zero-rating rules. However, if B nominates an unregistered person C to settle the transaction, the new nomination rules will again treat the transaction as between A and C. As a result, A would be required to charge GST on the supply at the standard rate.
Background
In November 2009, the Government released the discussion document GST: Accounting for land and other high-value assets, which proposed a number of changes to the GST Act 1985 that would address certain GST base risks and improve the operation of the GST system more generally. The main risk to the tax base identified in the discussion document was “phoenix” fraud schemes that often occur between associated entities and involve Inland Revenue refunding GST to one party with no corresponding payment being made by the vendor because the vendor deliberately winds up the business before making payment.
Example of a phoenix fraud transaction
In considering this concern, the discussion document proposed a domestic reverse charge to transactions principally involving land, “going concerns” and assets with a value of $50 million or more. The zero-rating option was mentioned in the discussion document, but was not preferred. The preference for the domestic reverse charge largely resulted from concerns that zero-rating would not deal well with situations when an unregistered purchaser purports to be registered or when parties mistakenly zero-rate a transaction. However, most submitters expressed a preference for zero-rating as it would give rise to fewer compliance costs.
While both mechanisms would be effective, the domestic reverse-charge would introduce a new method of accounting for GST under which the obligations of parties to a transactions would significantly differ from those under the normal GST rules. Under the zero-rating mechanism, the accounting obligations of the parties would remain virtually unchanged. Accordingly, zero-rating the relevant transactions to the GST base risk is likely to be an easier mechanism for businesses to deal with.
Any remaining concerns regarding zero-rating are intended to be resolved by anti-avoidance provisions.
Submissions on the discussion document considered that for large-value non-land transactions, current Inland Revenue processes to allow an offset of the output and input tax between registered parties in order to avoid carrying costs and other risks are working effectively. The $50m threshold for zero-rating outlined in the discussion document was considered by most to be unnecessary and is not therefore included in this bill.
Transactions involving nominations
(Clauses 15 and 18)
Summary of proposed amendments
The GST legislation is to be amended to clarify that, in transactions involving nominations, when a contractual purchaser nominates another person to receive the goods or services from the contractual vendor,the GST treatment should be determined on the basis of the transaction’s economic substance. The amendment will ensure that the GST Act 1985 provides guidance regarding the GST treatment of transactions that involve more than two parties.
Application date
The amendment will apply from 1 April 2011.
Key features
New section 60B will be added to the GST Act 1985 to clarify the GST treatment of transactions involving nominations – that is, when a contractual purchaser nominates another person (a nominee) to receive the goods or services from the contractual vendor.
In these circumstances, the GST treatment will depend on which party provides payment for the supply of goods or services:
- In transactions when the contractual purchaser provides the full payment for the supply, there will be only one supply from the vendor to the purchaser. The purchaser will be the only party entitled to an input tax deduction (section 60B(2)).
- When a nominee settles the transaction by paying the full purchase price to the vendor, the proposed rules will treat the arrangement as involving one transaction – from the vendor to the nominee (section 60B(3)).
- When both a contractual purchaser and the nominee contribute to the payment for the supply, the proposed new rules will treat the transaction as involving a single supply between the vendor and the purchaser, with the purchaser being entitled to the input tax deduction (section 60B(4)). However, the purchaser and the nominee will be able to override this default rule by explicitly agreeing that the supply of the property be treated as a supply by the vendor to the nominee. No such agreement can, however, be made if the purchaser has already claimed input tax in relation to the supply.
- Notwithstanding the above, when a contractual purchaser and the nominee have a different registration status, the transaction will be always treated as involving a single supply between the vendor and the nominee, with the nominee being entitled to the input tax deduction, if any (new section 60B(5)).
- Under other changes proposed in the bill (clause 10), GST-registered vendors will be required to charge GST at the rate of 0% on any supply to a registered person involving land or in which land is a component. The proposed nomination rule for situations when a purchaser and the nominee have a different registration status may potentially affect whether such a transaction is zero-rated.
The proposed nomination rules will also affect the tax invoice requirements. In normal circumstances, a taxpayer must have a tax invoice to claim an input tax deduction. In transactions involving nominations, a nominee may not have the tax invoice as it may have been issued to the purchaser. In these circumstances, new section 24(7B) will require a nominee to maintain records that would allow information such as the name and address of the supply, the date of the payment for the supply, a description of the goods supplied, and the payment for the supply to be ascertained.
Background
GST is often described as a tax on transactions. Most transactions involve only two parties –a contractual vendor and a purchaser – and much of the GST Act operates on that assumption. The GST Act is not generally designed to cater for transactions involving nominees. Nominee transactions would ordinarily involve a purchaser nominating another person (a nominee) to receive the goods and/or settle the transaction.
In the absence of appropriate guidance, taxpayers have sometimes been uncertain about the GST treatment of nominee transactions, especially in relation to claiming input tax deductions.
The Government consulted on the proposed legislative clarification of the nomination rules as part of the 2009 discussion document,GST: Accounting for land and other high-value assets. Submitters on the discussion document generally supported the proposed approach to determine the GST treatment of transactions involving nominations on the basis of the transaction’s economic substance. The bill reflects this approach and gives taxpayers greater certainty when entering transactions involving nominees.
Supplies of accommodation
(Clause 4(3) and (4))
Summary of proposed amendment
The GST legislation is to be amended to clarify the boundaries of the definitions of “dwelling” and “commercial dwelling” as the current legislative framework does not give taxpayers enough certainty about when the supply of accommodation should be treated as a taxable or exempt supply.
Application date
The amendment will apply from 1 April 2011.
Key features
Under the current rules, accommodation provided by GST-registered persons in a “commercial dwelling” is taxable whereas accommodation provided in a “dwelling” is treated as an exempt supply.
The definitions of “dwelling” and “commercial dwelling” in section 2(1) of the GST Act 1985 are being amended to give suppliers more certainty on whether they supply accommodation in a “dwelling” or a “commercial dwelling”. This will be mainly achieved by narrowing the definition of “dwelling” and updating the list of accommodations that should be treated as “commercial dwelling”.
The definition of “dwelling”
When the GST Act 1985 was introduced, the exemption for accommodation in a “dwelling” was intended to apply to situations when there is a reasonable level of substitutability between renting and owning a home. Arguably, this goal is not currently being achieved because of the wide interpretation of the definition. To achieve the purpose behind exempting supplies of accommodation in “dwelling”, the definition will be amended to be construed more narrowly.
Under the current definition of “dwelling”, the application of GST is based on the functional nature of the premises in which the accommodation is provided, rather than on the intention of the supplier and the recipient for the use of the property. The definition of “dwelling” will therefore be amended to refer to the nature of the occupation of the accommodation by the recipient of the supply.
Under the proposed changes, for accommodation to be a “dwelling” it must be occupied by the recipient as their principal place of residence. Moreover, an important characteristic of home ownership is that the owner enjoys an exclusive possession of their property. For an accommodation to be a “dwelling”, the definition will also be amended to require that a tenant possesses an exclusive possession of their accommodation. Thus, for example, supplies of accommodation in a typical rental property by way of lease will continue be treated as exempt for GST purposes.