GST issues paper proposes some much needed R&M to the GST Act
Tax Alert - March 2020
By Allan Bullot & Robyn Walker
New Zealand’s GST system is often referred to as one of the world’s best value added taxes. GST currently collects approximately $28 billion per annum (or approximately 32% of tax revenue) with relative ease. However, like other tax revenue regimes, the Goods and Services Tax Act 1985 (GST Act) requires regular repairs and maintenance in order to maintain the certainty, efficiency and fairness of the GST system.
On 24 February 2020, Inland Revenue released an officials’ issues paper, “GST policy issues” (the issues paper), seeking feedback on a wide range of GST-related policy issues to ensure that the GST rules remain current for modern business practices and technology while remaining fair.
A high-level summary of the issues and corresponding proposals are outlined below. Many will be of general interest to all taxpayers, however, there are a number that are industry specific.
Officials are seeking feedback on the issues set out in the paper. Submissions
close 9 April 2020. Please reach out to your local GST advisor if you wish to discuss the issues or make a submission.
A number of the proposals are taxpayer positive, and therefore should be publically supported through submissions if taxpayers want the proposal to proceed; particularly if there is a potential fiscal cost to the proposals. While not stated in the issues paper, the supporting documents released with the issues paper allude to the need to consider the fiscal position once some of the policy
proposals have been narrowed down to preferred options; indicating that not all proposals may go forward if they are not specifically supported by the business community.
The issues paper also presents the opportunity to submit on GST issues outside of those directly covered in the issues paper and to highlight any other niggles that may exist between common business practice and the black letter law.
Summary of issues discussed:
Tax Invoice requirements
The issues paperproposes some changes to GST invoicing requirements to align with changes in business practices and technology. This positive proposal suggests removing some of the invoicing requirements or making the requirements more flexible. For example, modernising legislation to deal with e-invoicing, removing the need for Inland Revenue approval for buyer created tax invoices, more flexibility around shared invoices and relaxing penalties around issuing duplicate invoices. We recommend that businesses use the issues paper as an opportunity to highlight other opportunities to simplify or improve the rules for tax invoices, credit notes and debit notes – accounts payable and receivable staff are likely to have a long wish list of possible invoicing improvements.
Cryptocurrencies (crypto-assets) are not treated as currency and therefore have an unfavourable GST treatment compared to money or other investment products, with GST charged at 15% on the supply of the crypto-asset
(theoretically at least: we question whether this treatment is applied in
practice). There is also a potential “double taxation” problem when income tax
is later applied to the sale of cryptocurrency. The proposal suggests excluding
cryptocurrencies from GST and the financial arrangement rules. An advantage of this approach is that it should provide a neutral tax treatment for those crypto-assets which are close substitutes for existing financial products such as currency or shares. Income tax will still apply to any profits made when
cryptocurrencies are sold or traded.
Apportionment and adjustment
The existing apportionment and adjustment rules are complex and difficult to apply in practice. In some situations, they can result in under- or over-taxation. The issues paper suggests a number of different amendments to specific apportionment and adjustment rules. In addition, feedback is sought on further ways in which the rules could be simplified and improved.
Domestic legs of the international transport of goods
Courier business practices will often sub-contract part of the journey for an
international delivery to other providers.
Currently the GST zero-rating rules for international transport do not accommodate these sub-contracting practices, instead GST technically needs to be charged on transport within New Zealand when the goods are being moved within New Zealand by a subcontracted courier. This is seen as being against the underlying policy of GST not applying as a cost to international transportation. The issues paper proposes fixing the technical issues by zero-rating domestic transport services that are supplied to a non-resident transport supplier that is providing international transport mof goods to or from New Zealand.
Business conferences and staff training
Currently it is possible for a non-resident business to register for GST and claim back GST incurred in New Zealand on business conferences and training. However, it is impractical for non-resident businesses to do this for what may be a one-off expense; the compliance costs may often exceed the GST in question. To reduce compliance costs the issues paper proposes allowing for services such as conferences, conventions and staff training services supplied to non-resident businesses to be zero-rated. Zero-rating would not apply to education and training provided to individuals or “incentive tours” which reward employees with tourism experiences. This could make New Zealand a more desirable hosting location for large international conferences, conventions and training, and would also put the New Zealand regime on par with other destinations such as Australia and Singapore.
One long running issue that might be solved by the issues paper is the GST treatment of different types of management services supplied to managed funds. The rules are complex and are applied inconsistently within the industry. Some managers apply 15% GST to all their services,while others apply 15% GST to only 10% of service fees. This distorts competition by favouring certain types of managed funds based on how the supplier has chosen to interpret the GST rules. The proposal suggests developing new rules for fund manager and
investment manager services. Several alternative options, which would have
different fiscal consequences, are discussed:
1. Taxable (15% GST).
2. Exempt financial services.
3. Deem a percentage to be exempt (and the remainder taxable).
4. Zero-rating or a reduced input tax credit mechanism.
Insurance pay-outs to third parties
The rules around insurance pay-outs to third parties are complex. An issue arises where a GST-registered third party receives an insurance pay-out without knowing its source, and accordingly treats the payment as compensation with no GST charged. The proposal discusses three alternative options:
1. Making the insurer responsible for the GST obligations on behalf of the claimant (this would require the insurer knowing the GST status of the claimant and any associated third parties).
2. Requiring disclosure to the third party that the payment is covered by insurance and therefore GST may be required to be returned on the settlement amount.
3. No law change but Inland Revenue would provide education and guidance to advisors and taxpayers about the need to consider GST implications when negotiating insurance pay-outs.
This proposed law change complements a Commissioner’s Statement issued on this topic in February 2020.
Compulsory zero-rating of land
It has been identified that there are some situations where the current compulsory zero-rating of land rules appear to produce inconsistent outcomes. The proposals include:
- Clarifying that section 5(23) applies to place the output tax liability on the purchaser, in cases where a vendor incorrectly zero-rates land.
- Clarifying that Section 5(23) applies to standard-rate the supply of land on the date that the original supply was incorrectly zero-rated.
- Adjusting the second-hand goods input
credit, in cases where land should have been zero-rated in the taxable period in which it became apparent that the amount of input tax deducted was incorrect.
- Clarifying that section 20(3J), applies from the time of supply of the land.
Technical and remedial issues
Other technical or remedial changes are required to various rules in the GST Act to ensure these rules work as intended. The proposals include changes to:
- GST grouping rules.
- Claiming input credits on goods not physically received yet at the time a GST return is filed.
- received yet at the time a GST return is filed.
- Second-hand goods input credits on supplies between associated persons.
- Provide more flexibility for the Commissioner to approve the end date of a taxable period.
- Ensure that members of non-statutory boards do not have a taxable activity.
- Introducing a right to challenge the Commissioner’s
decision to reopen time-barred GST returns.
We encourage anyone who has an interest in any of the above topics to consider making a submission on to the issues paper. Having your voice heard ensures that Officials get a better understanding of the importance of a particular issue. Businesses shouldn’t take for granted that all of the proposals will proceed regardless of whether submissions are made.
Please reach out to your local GST advisor if you wish to understand more about how any of the proposals may impact you. We can also provide more information about the process of making submissions.
When is a gift unconditional?
Separate from the issues paper, at the end of February the Inland Revenue also released a draft interpretation statement “Goods and Services Tax – Unconditional Gifts” (“the draft statement”). This draft statement refreshes the guidance last provided by Inland Revenue in 1991 about when a GST registered non-profit body is required to return output tax on gifts received (i.e. donations).
The key issue is whether a donor is receiving an “identifiable direct valuable benefit” of more than nominal value in return for the gift. If a gift is made with an expectation of a benefit, then this will not be an “unconditional gift”, and the non-profit body will be required to return output tax. There will be a spectrum of benefits being provided by non-profit bodies to donors, and this is not necessarily a straight forward matter to resolve. Non-profit bodies should use this draft statement as a reason to take a fresh look at fundraising activities to ensure GST is being properly considered. Submissions on the draft statement close on 10 April 2020.
March 2020 Tax alert contents
- GST issues paper proposes some much needed R&M to the GST Act
- Another year over, and a new year just begins
- How healthy is your tax compliance for your rental property?
- OECD guidance on financial transactions finalised
- Update on OECD Base Erosion and Profit Shifting measures
- Snapshots of recent developments
- Deloitte Tax Calendar - Last Call