The Taxation (GST and Remedial Matters) Bill ("Bill"), introduced on 5 August 2010, proposes significant reform to some fundamental areas of the GST system. The changes take effect from 1 April 2011 and include:
- zero-rating land transactions between registered persons;
- clarifying the treatment of transactions involving nominees;
- a new regime for change-in-use adjustments; and
- better delineating the boundary between taxable and exempt accommodation.
For a copy of the Bill and the Commentary on the Bill ("Commentary"), click here.
Less than a week later, the Government released draft rules aimed at easing transition to the 15% GST rate, which applies from 1 October 2010. These address issues arising where arrangements straddle 1 October. For a copy of the draft transitional rules and related technical paper, click here.
Zero-rating of land transactions
Introduction - objectives / what is covered
The Bill proposes to zero-rate transactions between GST registered parties involving land (including mortgagee sales). The stated aim is to protect the tax base from "phoenix fraud"; this is an arrangement in which a purchaser receives a GST refund, but the vendor is wound up before accounting to Inland Revenue for the corresponding GST output tax.
The other benefit of the proposal is that the cashflow impact of funding the payment of GST pending its refund is eliminated. It will also produce real savings in compliance and transaction costs, through not having to arrange GST offset arrangements with Inland Revenue.
The zero-rating rule will only apply where the purchaser intends to use the land to make taxable supplies, and not for use as the purchaser's or their relative's principal place of residence. This is to ensure that GST registered sole traders cannot zero-rate the purchase of their family home. The zero-rating should apply to most business sales, eliminating the need to consider whether the historically problematic "going concern" test is satisfied (all of the transaction is zero-rated, not just the land component).
"Land" is broadly defined for zero-rating purposes to include any interest or estate in land, rights giving rise to an interest in land, or options to acquire land. Mortgages, and leases of dwellings, are excluded. This suggests that commercial leases can be zero-rated, as the rule applies to any "supply" (not only to a "sale" or other outright disposal) of land. This point should be clarified as part of the Select Committee process.
Shifting GST liability from vendor to purchaser
Importantly - subject to certain conditions - the zero-rating rule shifts GST liability from vendor to purchaser, if a transaction cannot be zero-rated due to mistake or misrepresentation by the purchaser. This will be the case where the vendor has obtained:
- the purchaser's "GST registration details" (presumably this means the purchaser's name and GST registration number, and not further details);
- confirmation that the purchaser is acquiring the land with the intention of using it for making taxable supplies; and
- confirmation that the land is not intended to be used as the principal place of residence for the purchaser or their relatives.
Although the Commentary does not elaborate on this, the confirmations could be secured by way of purchaser representations/warranties in the sale and purchase agreement. If the vendor is unable to obtain the information listed above, the vendor must "make sufficient inquiries into the [purchaser's] registration status and otherwise obtain all the information that the Commissioner requires in relation to the supply of land". Neither the Bill nor the Commentary clarifies what is envisaged by this.
Given the importance of clearly allocating GST risk, the Inland Revenue should publish guidelines confirming precisely what a vendor must do in order to meet these requirements. For example, is an email from a purchaser's solicitor confirming their client's GST registration number sufficient, or should a vendor request a copy of relevant Inland Revenue correspondence.
Such guidelines are also important because, if actions of the vendor and the purchaser mean that the information-gathering obligations are not satisfied, the Inland Revenue can choose which party is liable for GST. This is the case even where the purchaser has made a mistake or misrepresentation. Any guidelines should confirm the basis on which the Inland Revenue will make that choice.
The Bill also contains mechanics whereby, if a purchaser provides incorrect information regarding its GST registration status (whether mistakenly or otherwise), the purchaser is deemed to have made a supply to itself. In those circumstances the purchaser must register and account for the applicable GST, and cannot claim a corresponding input tax credit.
Information-gathering/record-keeping obligations
In addition to the requirements discussed above, vendors must maintain records of the name, address, and GST registration number of the purchaser, a description of the land and the applicable consideration.
The compulsory nature of the zero-rating and information-gathering/record-keeping rules could present difficulties where a party is acting as agent for a non-disclosed principal. There are often important commercial reasons for such anonymity, which is at odds with the proposed regime that requires full disclosure of identification and GST registration information. Presumably this issue will be raised in submissions to the Select Committee; it could be dealt with by imposing record-keeping obligations on the agent similar to those currently contained in section 60(3) of the Goods and Services Tax Act 1985 ("GST Act").
Transactions involving nominees
The Bill proposes to clarify the GST treatment of transactions that involve nominees. This is a welcome development in an area fraught with uncertainty and divergent views/approaches.
Under the proposals:
- The party that provides full payment will be treated as the "recipient". This is relevant for input tax credit / zero-rating purposes.
- If both the purchaser named in the contract ("named purchaser") and the nominee contribute to payment (eg the named purchaser has paid the deposit), the default position is a supply from the vendor to the named purchaser. The named purchaser and nominee can agree in writing that the supply be treated instead as from the vendor to the nominee (unless the named purchaser has already claimed an input tax credit for the transaction).
- If the named purchaser is GST registered and the nominee is not (or vice-versa), the supply is treated as from the vendor to the nominee.
This final nominee rule could prove problematic in the context of the new zero-rating rules, where a transaction could initially be zero-rated but ultimately turn out to be standard-rated (or vice-versa). Contracts will need to clearly provide for the vendor to recover GST in these circumstances. Credit note/debit note implications may also arise, and there will need to be a clear statutory basis for a vendor to claim back any output tax already paid.
In practice, parties will be incentivised to make nominations prior to the time of supply being triggered, to avoid potential complications.
Change-in-Use Adjustments
The GST Act contains rules designed to ensure that the correct amount of input tax is claimed where goods or services are applied for mixed (ie taxable and non-taxable) purposes. The existing rules are complex and have given rise to considerable uncertainty in practice.
Under the proposed rules, the "principal purpose" test for input tax is removed. The proportion of GST that can be claimed up-front as an input tax deduction will be based on the estimated extent to which the goods or services are intended to be used for making taxable supplies.
Subject to de minimis thresholds, ongoing yearly adjustments will be required, to the extent that actual taxable use differs from originally estimated (or previous actual) use. Except in relation to land, the number of yearly adjustments can be capped by reference to the relevant asset's value or estimated useful life. Special rules apply where land is used concurrently for taxable/non-taxable purposes.
A final adjustment is required on the sale (or deemed sale - for example, upon a taxpayer's deregistration) of the asset. This ensures that the total adjustments do not exceed the full input tax credit that could have originally been claimed, had the asset been acquired solely for taxable use.
Purchasers of land under the new zero-rating rules will also be required to make adjustments where the land is used for mixed purposes. The purchaser must identify the nominal GST component of the purchase price, as if GST had been standard-rated. This forms the basis of yearly adjustments as described above.
The current change-in-use rules can still be used for goods and services acquired before 1 April 2011. It is possible to elect for the new rules to apply to assets held as at 1 April 2011; this is achieved through a deemed sale/re-acquisition at market.
Accommodation
For some time there has been uncertainty regarding the boundary of exempt (dwelling) and taxable (commercial dwelling) accommodation. The policy intention was a narrow exemption for residential accommodation, ie only where there is a reasonable level of substitutability with owning a home. This is consistent with a broad-based, low-rate GST.
The Bill narrows the definition of "dwelling" by restricting it to situations where a person occupies premises as their principal place of residence, and has exclusive possession of the premises. This changes the focus from the functional nature of the premises to the nature of the occupation/use.
The definition of "commercial dwelling" has been expanded to expressly include homestays, farmstays and bed-and-breakfast establishments. A "serviced apartment" is also specifically included and defined. A serviced apartment not falling within the new definition could still be a "commercial dwelling", because the expanded commercial dwelling definition will include a catch-all for "premises other than a dwelling".
The attempt to clarify the taxable/exempt boundary is welcomed. This is particularly so in the area of serviced apartment and unitised hotel developments, which rely on clear GST treatment for their marketing/sale and related funding. The new zero-rating and nominee rules will also be helpful in this context.
Rate change transitional rules
On 10 August 2010, Inland Revenue outlined rules aimed at easing the transition to the new 15% GST rate on 1 October 2010 ("rate change day").
In a statement released at the same time, the GST Advisory Panel noted the consultation process had highlighted the need for "an overhaul of the GST time of supply rules to bring them into line with business practicalities". The Government has agreed to a future review of this area.
The key transitional measures are as follows:
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Annually reviewable contracts that span the rate change day (eg general and health insurance contracts): The 12.5% rate can be applied for the period up to the next review date, if the remaining GST for that period is accounted for up-front by the supplier (in the period including 30 September 2010). The supplier must also notify its customers of the continued 12.5% rate.
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Finance leases that span the rate change day (less than 5 year term): The 12.5% rate can be applied for the balance of the lease term, if the lessor elects and notifies the lessee accordingly. For this purpose a "finance lease" is a lease with a payment profile calculated on the basis of amortising principal/interest over its term. It does not apply to operating leases or hire purchase arrangements.
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Subrogation payments received by insurers for underlying claims that are accepted and settled before the rate change day will be subject to GST at the 12.5% rate.
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Goods and services provided for periodic payments (eg utilities or telecommunications): To reflect existing practice, the time of supply for GST purposes can be treated as the invoice date, not the date on which the invoice is actually issued (meaning the 12.5% rate applies), if:
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the relevant goods/services are provided before the rate change day;
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the invoice is dated 30 September 2010 (or earlier), and is issued on or before 11 October 2010; and
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payment is due no later than 60 days from the invoice date.
The transitional measures also address particular issues arising in the context of lay-by sales and private training establishments, and provide flexibility in relation to replacement tax invoices.