GST on Mortgagee Sales
Tax Alert - October 2017
By Andrew Babbage & Hana Straight
The issue of whether you can recover GST on costs associated with mortgagee sales has recently had another twist, this time in the taxpayer’s favour. Businesses that provide finance to other businesses and use the business-to-business GST zero rating of financial services provisions, can now recover the GST on costs associated with trying to recover any amounts owed, if those loans turn sour. While this has most relevance in the case of mortgagee sales, this taxpayer friendly change applies not just to sales of land but to all types of asset sales by a lender who has the power to enforce the debt, provided the original loan qualified for GST B2B zero rating treatment. Organisations that have previously had GST disallowed on mortgagee sale costs should re-examine the treatment they applied in the past and see if the GST can now be claimed under the newly published Inland Revenue position, both on a go-forward basis and also for historical costs.
It has been a long road to get to this result and we welcome Inland Revenue releasing this latest statement to clarify this issue, which is contained in the updated operational statement, Operational Statement 17/01. This now confirms that mortgagees who are subject to the B2B financial services rules can claim an input tax deduction for costs associated with mortgagee sales. Positively, the operational statement allows impacted taxpayers to approach the Commissioner to claim back previous input tax credits that were not previously claimed.
The genesis for this change arose when Deloitte took the unusual step of seeking a binding ruling from Inland Revenue that put forward a position contrary to Inland Revenue’s published interpretation statement which disallowed claims for GST on mortgagee costs. We took this approach on the basis that we considered ours to be the better interpretation and we recognised that binding rulings were required to be based solely on an assessment of the law, and not influenced by existing Inland Revenue policy.
Although private rulings are specific to a taxpayer, it is positive that Inland Revenue accepted the need to withdraw its existing interpretation statement and publish this update, once the contrary binding ruling was issued, given its relevance to other impacted businesses. The takeaway is that the binding ruling process can be a very useful tool to obtaining movement on technical issues, even if there are published Inland Revenue comments that disagree with the position being sought by the taxpayer.
For those interested in the technical details behind this GST issue, it is useful to look briefly at the underlying history, as there have been a number of earlier statements from Inland Revenue that initially sought to disallow the ability of anyone to claim back GST on mortgagee sales.
In 2004 Inland Revenue released an Operational Statement that considered whether a GST registered lender could recover GST on the costs associated with mortgagee sales. The Operational Statement concluded that a mortgagee was not entitled to claim input tax on costs associated with a mortgagee sale as the input tax was not incurred in the course or furtherance of a taxable activity. The rationale was that a mortgagee, by carrying on a lending activity, was making exempt supplies, being the provision of financial services. However, with a throwaway line, the statement signed off with the teaser that “This is subject to the newly enacted section 11A(1)(q)…”.
Section 11A(1)(q) is more commonly known as the “B2B” provision and allows a lender to treat certain financial supplies as zero-rated supplies, where the borrower is making more than 75% taxable supplies, rather than being an exempt supply. This B2B provision meant that a lender, who loaned funds to a GST registered business, e.g. to a property developer, could treat the loan as a zero-rated supply rather than as an exempt financial service.
At face value, the reference to section 11(1)(q) in the Operational Statement meant B2B lenders could recover GST incurred in collecting loans from borrowers in default. However in practice Inland Revenue sought to disallow GST claimed on costs associated with mortgagee sales, although there was no other explicit Inland Revenue published comment on the interplay of the B2B rules and mortgagee costs.
It was not until 2015 that Inland Revenue issued any further statement on this, concluding in Interpretation Statement 15/01 ‘GST and the costs associated with mortgagee sales’ that a mortgagee was not entitled to recover GST on mortgagee sales costs, even if they had made an election into the B2B regime.
Following Deloitte’s application, and an independent review by Crown Law, we were successful in obtaining the binding ruling for our client confirming the GST amounts could be claimed, resulting in Inland Revenue now updating its published position here.
For more information please contact your usual Deloitte advisor.
October 2017 Tax Alert contents
- Tax Alert - October 2017
- GST on Mortgagee Sales
- OECD adds complexity and uncertainty to intangible property pricing
- New Customs law to be implemented next year – how prepared is your business
- High Court provides guidance on shortfall penalties
- Country-by-Country Reporting: What is your risk profile?
- A snapshot of recent developments