It’s a busy time of year for the New Zealand Inland Revenue. Last week they released yet another Issues Paper (this time GST – Current issues). At 46 pages it’s packing a punch. Too many issues to go into here, but our pick of the bunch are:
- Input tax deductions for capital raising, up to the percentage of their taxable supplies – a practical and welcome rule change that saves a lot of angst (and money)
- GST grouping for limited partnerships – a new rule that removes confusion for limited partnerships that should never have existed in the first place
- GST special rate for mixed supplies for retirement villages and similar – a business will be able to calculate a fair and reasonable rate for the split between taxable and exempt supplies, another welcome change.
A triptych of views on the world of GST in New Zealand.
Want to read more, see below:
1. Capital raising – raising the GST claim bar
The proposal is to allow businesses that incur GST included costs in capital raising (such as accounting, legal, advertising etc) a GST deduction for those costs. Not a lot of people know that capital raising is a “financial arrangement” and as such is an exempt activity (i.e. you cannot claim GST on these costs, unless you have elected to treat your financial arrangements as not exempt in a Business to Business transaction).
The proposal is intended to take effect from 1 April 2017, and would allow businesses to take a percentage of their GST costs in capital raising as an input deduction. By way of example, if your business provided 100% taxable supplies, then you would get a deduction of 100% of the GST (currently nil). But if your business only did 70% taxable supplies then you would only get 70% of the GST (and 70% is better than nil).
This proposal works for us for a number of reasons. On a practical level many businesses in New Zealand have no idea that they are required to apportion their GST claims in direct relationship to their taxable / exempt supplies. And that is because most businesses don’t recognise they have exempt supplies in the first place (i.e. they don’t identify financial services as exempt supplies in their GST returns). Typically, a holding company may only have exempt supplies in the form of interest and dividends, or have a mixture with management fees being the only income that is a GST taxable supply. Yet often it is the holding company that drives the capital raising (although the Issues Paper notes that the cost is generally incurred by the target subsidiary).
The question from the Issues Paper to consider is: if the capital raising was for the taxable supplies part of your business (or exempt part) only, should you get 100% deduction (or no deduction), or should it be apportioned across all your supplies?
It is proposed that taxpayers that principally make supplies of financial services will be excluded from this rule as they are able to apportion under current legislation.
Our words of wisdom are this: 1 April 2017 is a long way away. Why wait?
Our second words of wisdom are this: How many GST registered business are doing it right now?
2. Limited partnerships – to group and be as one
The proposed change is really more of a fix-it-up kind of change. The current group GST rules are this:
- Groups of “companies” can register as a “group” for GST purposes.
- Groups of other taxpayers can register as a “group” under a control test, with consent from the Inland Revenue.
Pointy headed persons have pointed out that while “limited partnerships” are technically companies (as provided for in the Limited Partnerships Act 2008 and the GST Act) but for GST grouping purposes they collectively cannot be a “group of companies” (referenced back to the Income Tax Act definition). But only non-companies can group under the alternative. Hence limited partnerships cannot register as a GST group under either rule.
Given that there is no logic to this, the Issues Paper proposes to allow limited partnerships to be treated like other taxpayers under a control test with consent of the Inland Revenue! Well done.
3. Exempt and taxable mixed supplies for retirement villages
As you no doubt are aware, a retirement village (and similar businesses) provide two types of supplies. The first is domestic accommodation for their residents (and often the wider use of communal facilities). Domestic accommodation is exempt from GST. The second service can be a mixture of supplies such as: cleaning, nursing, community activities, meals, gardening etc. All of which are subject to GST. The level or mixture of services, exempt and taxable, vary between residents and during different times in their life in a village. There are then further complications on whether a person receives a service that is a “dwelling” (exempt) or a “commercial dwelling” (taxable). And finally, there are instances where there is a supply of “domestic goods and services” as part of the total accommodation package, which has its own set of rules (effectively lowering the GST rate).
So far, so confusing. And expensive to administer, particularly over time with wide ranging exempt, mixed and taxable supplies. The supply-by-supply policy simply does not work in very complex supply situations that can vary over time. Hence the proposed change in the rules.
“Relief from high compliance costs could be provided by a more aggregated approach to estimating the amount of input tax that may be deducted, which takes into account the specific business circumstances of the taxpayer and reaches a similar overall outcome to that which would be available by applying the apportionment and adjustment rules.”
The suggested solution is to apply various considerations per taxpayer (or group) taking into account their specific circumstances and reach an agreement to have an apportionment agreement. That agreement would then remain in place with regular reviews (suggested every 3 years) and with the obligation to self-review earlier if the situation changes and to declare where the agreed methodology creates an anomaly from the norm (e.g. when a large capital purchase alters the otherwise fair and reasonable result).
The intention is that this ability is limited to very large organisations where the compliance costs and complexity justifies something other than the status quo. Hence a recommendation that applicants would have an annual turnover of $24 million or more.
It is proposed that financial service providers will be excluded from this proposal as they already are able to reach an apportionment agreement under current legislation.
What we like: It just makes sense, supply-by-supply adjustments in complex mixed supplies is a nightmare. We know that the Inland Revenue has struggled with the issues of GST and retirement village issues since GST was introduced. So good on them for having another go at it.
What we don’t like: The cost of obtaining an approved alternative method will be considerable and very time consuming to get over the line. This will be like a binding ruling, but weighted down with a few heavy sinkers, and no binding-ness about it. Plus the Inland Revenue “could refuse to enter into agreements when the benefits arising under an agreement, such as compliance cost savings, would not justify the administrative cost of agreeing upon, and maintaining, an alternative methodology.”
And there it is in a nutshell. To qualify for an alternative methodology, not only do you have to prove that the existing compliance cost is prohibitive, but that somehow the Revenue will not be disadvantaged in any way whatsoever.
There are other proposed changes including:
- GST treatment of alloy gold (as a second-hand good)
- What services are “directly in connection with land” (reducing the ability to zero rate services to non-residents where the services relates to New Zealand land)
- Zero rating of land in commercial lease situations
- Accounting for GST on the “time of supply” when the consideration is not (fully) determined
- Agents acting for taxpayers
- Non-resident registrations
If any of these issues trigger a feeling of wellbeing (or the opposite) and you want to encourage/discourage the Inland Revenue then you can make a submission on the Issues Paper topics, closing date 30 October 2015. Any questions on how these or other changes could affect your business, contact us and learn to unlock your business potential.
The comments in this paper are the personal opinion of the writer and are not necessarily the opinions of Shellock Consulting Ltd.