Proposals to exclude services provided to non-residents in connection with land from being GST zero-rated are causing uncertainty
Tax Alert - February 2017
By Andrea Scatchard
Any mention of GST in the press in recent months has most likely been concerned with the so called Netflix tax, the imposition of a GST obligation on certain non-resident suppliers of remote and primarily digital services. While the theory behind these changes may be fascinating to tax professionals and academics, the changes themselves have little practical relevance to most businesses in New Zealand. Indeed it is really only at a personal level that individuals have been generally affected, when their Netflix, Spotify or other similar bill has increased in price.
What is less well known to the general public is that in conjunction with these changes there are proposals to reduce the ability to zero-rate services relating to land, where these services are provided to non-resident customers by New Zealand suppliers.
While services supplied to non-residents who do not physically receive those services in New Zealand are often zero-rated, the current GST legislation excludes from zero-rating services which are “directly in connection with” land in New Zealand. As a general rule, services must physically change the land in question in order to be considered directly in connection with that land. This is a well-established and understood test which has been the subject of judicial decision, giving rise to a line between zero-rated and standard rated transactions which is generally clearly understood by taxpayers.
The Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Bill proposes to further exclude from zero-rating services which are in connection with land, or an improvement to land, located in New Zealand, where those services are intended to enable or assist a change in the physical condition, ownership or legal status of the land or improvement.
If we put aside the question of whether this is conceptually an appropriate extension of GST in New Zealand, and accept that the change will happen, the immediate concern is how should taxpayers interpret the phrase “intended to enable or assist a change in the physical condition, ownership or legal status of the land or improvement”? No guidance is given in the legislation.
The Commentary on the Bill and the Regulatory Impact Statement both refer to services provided by solicitors, real estate agents and architects as the types of services which are intended to be covered by the proposals. These types of services are explained as being “services that form an integral part of a process of physically changing the land, but do not do so themselves”, and there is logic in the argument that these services enable or assist a change in ownership of the land in question.
However there is a much broader range of services that could potentially be affected by the changes. Consider the ancillary services that a land buyer or seller may require as part of a land transaction – advertising services, valuation reports, council LIM reports and property inspection services to name just a few. There is no clarity at all about whether these types of services will be affected by the changes. Inland Revenue officials have indicated that a Tax Information Bulletin will provide clarification through a detailed analysis of the changes, but this will necessarily only be issued after enactment of the Bill.
The Bill is currently awaiting its second reading, and with Parliament not sitting again until 7 February it is expected to be well into March before the Bill receives Royal assent. The changes are intended to take effect from 1 April 2017, which leaves little time for the Inland Revenue guidance to be issued, for taxpayers to digest its contents and determine whether their specific supplies are affected, to seek professional advice if necessary and make any system or procedural changes that may be required, all before 1 April 2017. The process is unnecessarily rushed, and in the absence of early clear guidance on the application of the rules, taxpayers risk adopting a GST treatment which may turn out to be incorrect, with the associated penalty and interest risk if it turns out they got that treatment wrong.
If your business needs guidance through these changes, please contact one of our indirect tax specialists.
February 2017 Tax Alert contents