GST reforms: GST is moving into the digital age and other remedials proposed
Tax Alert - October 2021
By Allan Bullot & Dave Morris
Any business person who has grumbled about the pernickety requirements of GST invoicing will perk up their ears at the news that, in future, there will be more flexibility around tax invoice requirements. Flexibility in record keeping is one of a raft of proposed changes to GST in the new Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill (the Bill). As indicated in the title the Bill has a focus on GST with many of the changes following on from the GST issues paper released in 2020.
While there are a number of good intentions in the proposed changes, there will need to be some substantial changes before the Bill is in a form that will give effect to these good intentions in the real world. Some of the application dates for these proposals are impractical or lack certainty as to how they apply to transactions in the past. We urge people to consider the changes and the impact they will have on their businesses and make submissions.
We have commented on some of the more significant changes below.
Move into the digital age and away from paper-based record keeping systems – bye bye to GST Tax Invoices?
There have not been significant changes to legislation for invoicing and documentation since GST was introduced in 1985, in contrast to the vast improvements to technology and business systems. In the Bill, Inland Revenue seeks to remove requirements for documentation rules that were originally based on paper based records, allowing for more flexibility in the way that the required GST information is shared between suppliers and their customers.
The proposed changes will not mean that business will have to stop using their existing systems, as the information required in the proposals often does not change significantly, rather the proposals are intended to provide business with more flexibility in an increasing digital world.
The required information to be held in finance systems will (at this stage) be known as supply information and taxable supply information, so no more GST Tax Invoices. In order to claim GST input tax credits you will need to hold the applicable taxable supply information, similar to the current tax invoice requirements.
The threshold for GST supply information under $50 will increase to $200 and there will no longer be the simplified invoice requirements for sales between $50 - $1,000. However, there is not yet any specific confirmation on the ability for purchasers to make claims of GST for purchases under $200 without detailed supporting GST information. This is an area that will require some further work, as is the one-size fits all approach for all supplies over $200 – there are many instances where there is no current process for the supplier to record the name and address of the recipient.
The current overly technical credit or debit note rules will be simplified and when correcting supply information, the only test will be that the original information was incorrect.
It will no longer be necessary to issue credit or debit notes or print “copy only” on duplicate invoices, but currently there is a requirement in the Bill to keep a record of requests for replacement information from customers. This register is one element that will need to be removed if the legislation is to be workable in a practical digital environment.
One significant improvement in the Bill is that businesses wanting to issue buyer-created tax invoices would no longer need prior approval from Inland Revenue. There would still need to be an agreement that only the recipient would create taxable supply information.
In some situations, it can make sense for a shared tax invoice to be issued for a number of supplies by different businesses supplying the same customer. This is one area where the intention of the proposed changes is positive, but the details currently have issues. Significantly, the proposed requirement for joint and several liability is not something that is likely to work well in practice. We suggest that there are other ways that the desired intention could be obtained.
There are also changes to the current offence of issuing multiple tax invoices, with the Bill proposing to create a strict liability offence for the recipient to claim multiple input tax deductions for the same supply.
It is important to note that these changes to taxable periods after the date of enactment (expected to be March 2022) and that current legislation will apply up until then. We strongly recommend that businesses familiarise themselves with the proposals.
Change to GST groups – technical clarification, and better M&A treatment for departing members
The GST grouping rules are designed to prevent distortions arising from intra-group supplies and reduce compliance costs for companies who are part of the same group. Under the proposed changes there will be more legislative certainty for the treatment of GST groups.
In particular, the legislation will be explicitly clear that: the GST group would effectively be a single registered person for the purposes of carrying on their activities and for supplies to third parties; there would be no requirement for members to return intra-group supplies; each member will have joint and several liability; and a nominated member company’s IRD number could be used for every member’s invoicing. Group members can join either at the start of the GST period or when the company is registered. This means that part period returns from members who are yet to join a group are no longer required.
There have been no changes to the eligibility requirements to form a GST group.
It is proposed that when a company leaves the GST group, Inland Revenue could allow the joint and several liability obligation to be suspended for the departing company. This is a great improvement and will simplify many business sales; it effectively adopts the same position that can be taken for income tax purposes when a company exits a consolidated tax group. Some changes will be needed to the detail of this proposed rule, but it is a great first step.
Property development remedials
Second-hand input tax credits and associated persons – a positive change
Often when starting a property development project a person may initially purchase a commercial property in their own name and then subsequently sell the property to their associated company once it has been registered. Currently the GST legislation prevents people being able to claim any input tax credit on the purchase, due to the way the associated persons rules work if the original non-associated vendor was not GST registered.
Under the new Bill, GST input tax would be able to be claimed by an associated party capped at the GST tax fraction of the most recent sale from a non-associated party before the second-hand goods was purchased by associated party.
This is a positive development as anti-avoidance associated persons legislation has arguably been “working” too well in many situations and people have missed out on receiving significant GST refunds which should have been available from a GST policy perspective.
GST sundry remedials
Often international companies will subcontract an NZ courier for the domestic leg of the transport of goods which is part of a larger international transportation arrangement. At a technical level this has often led to the incorrect zero-rating of the domestic leg of the transportation being a common occurrence by the NZ-based courier.
To fix this problem the Bill would allow the domestic leg of the transport of goods that are being exported or imported to be zero-rated, bringing the treatment in-line with what is already often occurring at a practical level and preventing commercial bias towards international couriers. It is good to see that this technical deficiency in the GST Act is being corrected.
Non-residents ability to claim import GST
While non-resident businesses who don’t make GST taxable supplies in New Zealand are, under certain conditions, able to claim GST inputs for costs in New Zealand via a special non-resident registration process, currently this does not allow import GST to be reclaimed.
The changes in the Bill would allow import GST inputs to be claimed by non-residents provided that the imported goods are sold to a GST registered business in New Zealand. These changes are welcomed and will potentially allow for some streamlining of certain import and distribution processes into New Zealand in the future.
Export of goods FOB - can zero rate supplies to both residents and non-residents now
When goods are provided to a non-resident buyer “free on board” and physically passed to a buyer at the New Zealand port for export they can still be deemed to be supplied in New Zealand for GST purposes. However, the goods can currently be zero-rated as long as they meet certain criteria, which includes a requirement that the customer be a non-resident.
Under the proposed changes the zero rating for goods provided “free on board” would be extended to both resident and non-resident customers. This change will give some greater certainty to many businesses that are involved in primary industries. For example, a supplier who delivers logs to the ship of a New Zealand resident recipient who then physically exports the logs outside of New Zealand would be able to zero-rate the supply of logs, provided the supplier enters the goods for export.
Zero rated going concerns – change of use
Currently at a strict technical level there may be no requirements for a recipient of a zero-rated supply of a going-concern to adjust for private or exempt use of the supply. This contrasts with zero-rated land sales where an adjustment is clearly required for the portion of private or exempt use.
To align the going concern rules with the land use rules, from the date of enactment purchasers of a going concern would also be required to determine if they will use the supply for a non-taxable use and return GST on the apportioned amount.
Apportionment agreements for all
Currently a rule technically prevents most businesses with a turnover of less than $24million from agreeing a customised GST apportionment method with Inland Revenue. The Bill proposes that any registered person will be able to agree an apportionment method with Inland Revenue. While in practise the restriction has often not really been applied by Inland Revenue, the change indicates that they are willing to be approached on more apportionment issues and is a great step forward. It is good to see Inland Revenue encouraging taxpayers to engage with them on a prospective basis.
Overall, many of these GST changes will be welcomed by many at a conceptual level, but there is a need for a reasonable number of amendments to still be made to ensure that the GST changes give effect to the good intentions behind the proposals. Given many of the changes apply from the date of enactment of the Bill, it will be crucial that the Finance and Expenditure Committee receive submissions and make a number of practical changes to these proposals to ensure they work.
Please get in touch with your usual Deloitte advisor if you would like to discuss how these reforms will affect your business.
October 2021 Tax Alert contents
- Something for everyone in the new tax bill
- GST reforms: GST is moving into the digital age and other remedials proposed
- Property tax details revealed
- Tax rules are catching up with cryptoassets
- New FBT rate option announced – but how helpful is it?
- COVID-19 Updates – October 2021
- Tax Governance: Inland Revenue’s latest compliance campaign
- Economic income and tax on a collision course? Inland Revenue’s effective tax rate project is about to start
- IBOR reform - time to check the tax impact
- Snapshot of recent developments