GST change for non-profit organisations: Inland Revenue’s proposals released
Tax Alert - September 2018
By Allan Bullot & Amy Kimber
Significant changes to the GST treatment of assets held by non-profit organisations are imminent. If you are a non-profit body that has substantial assets, you should be considering the potential impact of these changes as soon as possible, if there is any chance of future sale or disposal of your assets.
While many non-profit bodies hold assets without any intention of future disposal, equally many non-profit bodies hold assets with the intention of retaining them for some length of time and then needing to dispose of them. The rule changes will impact any non-profit bodies that could dispose of assets that have not been used in their GST activities (i.e. not used for the purpose of earning income that is subject to GST), such as those assets used in their general charitable activities. We explore how this concept could work in practice in the example below.
What changes are being proposed?
Earlier in the year, we reported on Inland Revenue and Treasury’s initial proposal to change the GST rules for non-profit bodies in this area (see our June 2018 article). The key change will be to ensure that where a non-profit body has claimed GST credits on the purchase or operation of an asset, the future sale or other disposal of that asset will be subject to GST, even where that asset has not be used to make GST-taxable supplies (e.g. a building used for general charitable administration, as opposed to a building used to earn commercial rental income).
On 4 September 2018, the Government moved one step closer to effecting this change, by releasing a Supplementary Order Paper that proposes to amend to the GST Act. The proposed amendments to the GST Act are largely in line with expectations from Inland Revenue’s initial Issues Paper. Here are the key things you need to know:
- The rules are expected to be given effect from 15 May 2018 (i.e. retrospectively to the release date of Inland Revenue’s Issues Paper). This means it is essential to start considering how these rules could affect your organisation.
- Where a GST credit has been claimed on an asset’s purchase, or GST credits on the asset’s operating expenditure have been claimed, you will need to return 15% GST on the future disposal of that asset. Relevant disposal events will include sales, transfers, insurance settlements, and a deemed supply of the asset if it’s still held when deregistering for GST.
- There will be a limited 3-year period in which you can opt to repay GST credits previously claimed on an asset within the past 7 years, rather than accounting for 15% GST on the asset’s future sale/disposal. This is an important and worthwhile consideration for appreciating assets, to minimise the total GST cost over the asset’s lifetime.
- To elect to repay previously claimed GST credits within the 3-year transitionary period, a formal election will need to be made to Inland Revenue and certain information will need to be provided. We anticipate Inland Revenue will release guidance on how this election process will operate and what details should be supplied, in the near future.
- There is an anti-avoidance provision that would limit a non-profit body’s GST credit on purchasing a second-hand asset, where the non-profit body is associated with the original owner or is acquiring the asset from another non-profit body. This would essentially limit the GST claim on acquisition to the original owner’s GST liability on the sale of the asset.
Recalling our example from the June 2018 Tax Alert article, let’s examine what the implications of these changes could be for a charity that runs a food hall to feed the poor. The charity owns a dining hall that it uses for its charitable activities, along with a small office building that it regularly rents out to commercial firms. The charity returns GST on its commercial rental income for the office building. The charity claimed GST credits on the construction of both buildings in 2014, and operational costs on both buildings since then. The total GST credits claimed on the dining hall building are $50,000.
In 2019, the charity decides to sell the dining hall building, as it will no longer be required following a relocation to a larger complex that can house both the office and food hall facilities. The charity expects to fetch a $750,000 sale price from the dining hall building, as real estate prices have been steadily increasing in the area.
Under the proposed amendments to the GST Act, the sale of the dining hall would be subject to GST (potentially either at 0% or 15%, depending on the circumstances). If subject to GST at 15%, the charity could be required to return as much as $112,500 of GST to Inland Revenue on the building’s sale. This is because the charity has previously claimed GST credits on the construction and operation of the hall.
The charity could instead elect to repay the $50,000 of GST credits claimed on the construction and operation of the hall. This would clearly be advantageous as the total repayment amount would be less than the potential $112,500 GST liability on the sale of the hall. If it made this election (prior to the 1 April 2021 deadline) and Inland Revenue accepts it, it would repay the $50,000 of total GST credits previously claimed and would not need to recognise any GST on the dining hall’s sale.
Where to from here?
With the proposed retrospective effective date of 15 May 2018, it is important to start considering the proposals for any new asset purchases and whether the transitionary rules should be applied for any assets held that have appreciated in value and may potentially be sold in future. Please do not hesitate to get in touch with us if you have any questions on the potential implications for your organisation.
September 2018 Tax Alert contents
- Tax Alert - September 2018
- IRD guidance on withholding tax for non-resident directors fees
- GST change for non-profit organisations: Inland Revenue’s proposals released
- Transfer pricing: developments in debt pricing
- BEPS guidance released to provide clarity
- Automatic refunds and new tax return rules for individuals
- Recent developments