Proposed Changes to GST Regime
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Articles by Matthew Gilligan
In June 2008 the Government released a tax policy issues paper for public consultation that looked at options for reducing risks that GST can present to both businesses and the Government. Following submissions in relation to this, the Government has now released a follow up discussion document that reinforces many of the proposals initially made but with one notable omission.
One of the most controversial elements of the original June 2008 issues paper was the proposed denial of GST input claims on the purchase of land from unregistered vendors. In short, the original issues paper proposed that no GST should be able to claimed when a GST registered buyer buys land from an unregistered person. The rationale was that there are different tests for transactions between associated and unassociated persons. In the case of associated vendors and purchasers, no GST can be claimed when an unregistered vendor sells to a registered purchaser. Rather than having two different tests, the issues paper suggested that the associated persons test should be extended to unassociated transactions. Needless to say this would have had a dramatic impact on taxpayers engaged in property dealing in development activity where often stock is purchased from unregistered parties.
Fortunately the new discussion document makes no mention of such a rule so it seems to have fallen by the wayside.
Some of the proposed changes that have survived though include the following:
- A domestic reverse charge system is slated to apply to land and going concern transactions. The domestic reverse charged system is one that sees the obligations of both returning and claiming GST in relation to a transaction imposed upon the purchaser. This regime will apply to transactions between two GST registered parties. At present if a GST registered vendor sells a property for say $1m plus GST to a GST registered purchaser, the GST registered purchaser will claim $125,000 of GST as an input claim and the vendor will be expected to return the same as output tax. The Government are concerned with potential risks to the tax base where the purchaser makes the claim but the vendor either cannot or does not pay. The domestic reverse charge system would see the vendor sell the property for $1m plus GST and the purchaser, rather than paying the GST to the vendor, would return the GST output tax in their return and make the claim at the same time so the transaction is neutral from all parties perspectives and the IRD are not required to make a payout.
- One very positive proposal is the pragmatic view of transactions involving nominations. At present there is a degree of uncertainty as to whether transactions involving nomination legally involve one or two supplies. The new proposals talk of taking a pragmatic approach whereby the ultimate nominee will be regarded as the recipient of the supply and therefore any issue of there being two supplies is removed.
- Existing change in use rules are proposed to be replaced with an approach that apportions the input tax deductions in line with actual use. At present, GST is claimable on the purchase of an asset if the principal purpose is to apply it to a taxable activity. If the asset is then partially applied towards a non-taxable purpose, adjustments are required. Under the new rules an apportioned claim would be made upfront and adjustments only required if actual use differed from that anticipated. Whether this proposed overhaul of a complex area of the law is any less complex than the law it will replace, remains to be seen.
- The Government is very concerned about lost GST on so-called de facto mortgagee sales. At present there is legislation in place to protect the IRD's right to collect GST when there is a mortgagee sale. Where sale takes place before the mortgagee takes possession, however, the Inland Revenue does not enjoy such preferential status. The discussion document proposes a new rule whereby a sale that is an “in substance” sale in satisfaction of a debt is treated as the same as a mortgagee sale. What they are talking about here is where the mortgagee has initiated or controlled the sale of the property, but doesn't formally sell it as a mortgagee. In such cases it will be treated as if it were a mortgagee sale and the GST debt will take priority.
- Another welcome change is a clarification of the definitions of dwelling and commercial dwellings. Since June 2006 there has been uncertainty surrounding the Department's position in relation to whether the likes of holiday homes and serviced apartments fell within the GST regime. The new proposals are encouraging in that they indicate an attitude that is based on the use of property rather that its function. Accordingly holiday homes and serviced apartments that are let out on a genuinely short-term stay basis and not occupied by tenants as their primary residence will clearly be regarded as commercial dwellings.
On balance we think that the proposals are generally sensible. We note that we are of course just at discussion document stage at this point. Next step from here is another round of public submissions which close on 18 December 2009. From there one would expect draft legislation to be introduced to Parliament to be followed by the Select Committee stage, which involves a further round of public submissions before final legislation is enacted and implemented. If you are concerned about the potential impact of any of these proposed tax rules changes on your affairs, contact us at GRA.
Matthew Gilligan
Managing Director and Property Services Partner
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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