A major GST change in the wind for non-profit organisations
Tax Alert - June 2018
By Allan Bullot & Amy Kimber
On 15 May 2018, Inland Revenue and Treasury released an issues paper, announcing what could become one of the most significant tax proposals for non-profit bodies in recent years and which will require all non-profit bodies with significant fixed assets to examine their situation closely now to avoid potential significant GST costs in the future. There will be a limited 1 year period from the introduction of the legislation for non-profit bodies to take action to limit the impact of the new rule.
The issues paper considers the GST treatment of asset disposals by non-profit bodies. Previously there has been some tension on whether GST is payable when selling or disposing of an asset that hasn’t been used to make GST-taxable supplies of goods or services. For example, assets that are used in a charity’s general operational activities that did not generate any income.
The issues paper looks to bring in legislation that will change the GST Act and mean virtually all sales / disposals of assets by a non-profit body will be liable for GST if it has previously claimed GST credits on the purchase or operation of the asset. Disposal events would include not just traditional asset sales, but also insurance settlement events (e.g. for a natural disaster resulting in the loss of an asset) and the deemed disposal of assets that occurs when deregistering from GST.
The real clincher is that non-profit bodies will need to start thinking about these rules now, as the proposed start date for the new rules is 15 May 2018, i.e. it will have partial retrospective effect.
What are the proposals?
There are concessionary rules that allow non-profit bodies to claim GST credits on all costs for making GST-taxable supplies and all costs involved in general charitable/not-for-profit activities even if those costs don’t relate to making GST taxable supplies. GST credits are denied for costs involved in GST exempt activities such as: the sale of donated goods or services, the provision of residential accommodation or financial services/investments. By contrast, a non-profit body need only return GST on its taxable supplies, which are typically quite minimal. This usually results in most non-profit bodies being in regular GST refund positions. This will remain the same, but the implications of applying these rules would change under Inland Revenue’s new proposals.
Take, for example, 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 a few years’ time, the charity decides to sell the dining hall building as part of a relocation process.
Previously, provided certain conditions were satisfied, the sale of the food hall would not be subject to GST. This is because the food hall was never used to make GST-taxable supplies and was only used in the charity’s philanthropic activities. However, under the new proposals (if they are accepted into law) the sale of the dining hall would be subject to GST. This is because the charity has previously claimed GST credits on the construction and operation of the hall. The charity may need to account for either 15% GST or 0% GST on the building’s sale price, depending on the specific circumstances of the sale.
What happens from here?
The issues paper is at discussion stage. Inland Revenue has invited submissions on the current proposals, with submissions open until 15 June 2018. While a legislative change could be some while away, if a law change is made it is expected to be given retrospective effect from 15 May 2018 onwards. With this in mind, it’s be important to start considering the proposals for any new asset purchases.
However, there may be a saving grace for non-profit bodies, albeit a temporary one and one that comes with a cost. Inland Revenue has recognised that some non-profit bodies may have unexpected GST costs where they have already claimed GST credits on their assets without anticipating a GST liability on their future disposal. To combat this, Inland Revenue have suggested a 12-month window during which non-profit bodies can elect to pay back the GST credits previously claimed on an asset. These returned GST credits would take the place of a GST liability on the future sale/disposal of the asset. This may be worthwhile for assets that could be sold or disposed of in future and that are likely to appreciate in value.
We’re interested to hear from you if you’d like to make a submission to Inland Revenue on the issues paper, and we’re happy to discuss any questions you may have on what these proposals may mean for you.