Keeping up to date with GST developments
Tax Alert - August 2020
- Agreement for Sale and Purchase of Real Estate
- Remote services registrations and voluntary disclosures
- Concurrent use adjustments
- Secondhand goods credits and associated persons
- Interpretation statement 20/05
By Jeanne du Buisson and Rachel Hale
While COVID-19 has led to significant developments within the income tax world, there are also many developments within GST that have been in motion prior to COVID-19, and that have significant impacts on various parties and transactions. Set out below are some areas to watch in the world of GST.
10th edition of the Auckland District Law Society Agreement for Sale and Purchase of Real Estate
In December 2019, with assistance from Deloitte as well as other experts within the industry, the Auckland District Law Society published its 10th edition of its standard form Agreement for Sale and Purchase of Real Estate (“the 10th Edition Agreement”). The 10th Edition Agreement contains a number of important changes, including some quite significant vendor protections for GST purposes.
One such vendor protection will prevent a vendor from losing out financially if changes to the transaction alter the GST treatment of the sale. For example, if a change to the purchaser’s (or nominee's) GST status would result in a sale being standard rated at 15% rather than zero-rated, under the 10th Edition Agreement if the purchase price has been expressed as inclusive of GST, the change to a standard-rated sale will also change the purchase price to being plus GST. Without this change, the net proceeds of the sale for the vendor are in effect reduced by the amount of GST payable.
Where a vendor is selling property using the 10th Edition Agreement it is important that the provisions within clause 14 of the 10th Edition Agreement are retained. In particular, clause 14.8 provides the most significant of the additional vendor protections and this should not be struck out from the agreement. Where a property is being sold using an older version of the ADLS standard agreement (such as the earlier 9th Edition) we would look to add as further terms of sale the same protections that are now in the 10th Edition Agreement.
Remote services registrations and voluntary disclosures
As of 1 October 2016, remote services (typically digital services such as software and apps) being supplied to New Zealand consumers has been a taxable supply for GST purposes (at 15%) even where the supplier of those services is outside New Zealand and a non-resident for GST purposes.
The implementation of these rules has been very successful to date with much greater compliance and GST revenue than initially forecast. Up until recently, Inland Revenue have been very pragmatic with those suppliers who may have not GST-registered and returned GST as soon as liable to do so. However, as the rules have now been in place for some time, Inland Revenue’s approach is beginning to transition from understanding and education, to implementing a preference for backdating registrations and requiring returns to be filed for historic periods (with consequential penalties and interest). Where there is a lack of certainty around a supplier's obligations under these rules, it is now more important than ever to address this as soon as possible particularly where supplies in historic periods may be significant.
Concurrent use adjustments
Concurrent use adjustments are commonly required for the property / development industry. We often see instances of developers renting residential property (rental of residential accommodation being exempt for GST purposes) while the property is on the market (with the eventual sale of that property being a taxable supply for GST purposes). In such situations, a concurrent use adjustment is required as the developer’s use of the property, while primarily taxable use, does have a small portion of exempt use. We also see this occurring at the beginning of such development projects, where properties are rented out for residential use while a developer progresses pre-development work such as obtaining resource consent. Again, such situations necessitate a concurrent use adjustment.
These adjustments have often been contentious particularly where the carrying out of an adjustment enables taxpayers such as developers to access input tax credits before a taxable project is fully commenced. However, at present this is permissible under the GST Act provided it can be clearly demonstrated that this is genuine concurrent use.
In February 2020, Inland Revenue released its much anticipated issues paper on GST (see our earlier Tax Alert article). One of the issues raised in the issues paper relates to concurrent use of land. While the issues paper makes it clear that Inland Revenue wishes to enter into dialogue around whether the current rules for concurrent use adjustments are appropriate and whether those rules achieve the desired policy outcome, from a technical perspective, the law in relation to concurrent use has not changed nor is there any proposed legislation around this. However, in recent months we have encountered some issues where concurrent use adjustments and related claims are receiving strong push back from Inland Revenue, despite situations seeming to fit with the existing approach as set out in the GST Act.
Secondhand goods credits and associated persons
The claiming of secondhand goods credits in relation to land purchased from a non GST-registered vendor is an issue that comes up frequently.
While there can be many issues that arise which may make the claiming of such credits more difficult, one of the key issues we are increasingly seeing involves transfers between associated parties.
Under the GST Act, there is a proviso in the secondhand goods credit rules which states that where property is acquired from an associated entity, the acquiring entity’s credit cannot be any more than the GST the associated entity originally paid when they bought it. If that associated entity originally acquired the property from a non-registered vendor (and thus paid no GST) the acquiring entity will be unable claim any secondhand goods credit due to the fact that the associated entity originally paid zero GST on acquisition.
We are seeing this become an increasingly significant issue as properties are transferred between entities within groups for various other commercial reasons. Accordingly, it is critical to involve your local GST specialist before any internal transfers take place as once that associated transfer occurs it will be too late to claim the secondhand goods credit.
Where property is acquired from a non-registered vendor with an expectation of receiving a secondhand goods credit, seek advice on this early on and ensure that the ability to claim these credits is not impacted by subsequent commercial decisions post-acquisition.
Interpretation statement 20/05 – Supplies of Residences and Other Real Property
Inland Revenue have recently released “IS 20/05 Supplies of Residences and Other Real Property”. The new interpretation statement is simply an update of the prior statement as the rules in this area of GST have not changed.
IS 20/05 is relevant where a private residence is sold as part of a wider supply of land (for example, a farmhouse being sold as part of a wider sale of the entire farming property).
IS 20/05 confirms that section 5(15) of the GST Act applies where a wider supply of land includes:
- A principal place of residence; or
- A property which was used as a residential rental property by the Vendor for the last 5 years.
When section 5(15) of the GST Act applies, the supply is deemed to be two separate supplies with one supply being the private residence itself and the wider supply of the remaining land being the second separate supply. Where this occurs, it is important that consideration for the entire sale be apportioned between the two deemed supplies due to the differing GST treatments (the private residence would typically be treated as exempt) where the supply of the wider land may be a taxable supply (at either 0% or 15% depending on the characteristics of the purchaser).
The apportionment of the consideration between the two deemed supplies should be done on a fair and reasonable basis. It is also recommended to include the apportionment in the agreement between the parties as well as on the tax invoice / settlement statement issued by the vendor.
It is important to get this apportionment right before the parties finalise and sign the agreement.
As we have illustrated above, there have been a number of developments in the area of GST, and despite its reputation as a “simple” tax, GST can be quite complex. Getting GST experts involved early on in transactions is a good way to ensure there are no nasty GST surprises awaiting you.
August 2020 Tax Alert contents
- Keeping up to date with GST developments