In February, Inland Revenue published an update to its guidance regarding the GST treatment of directors' fees (discussed in our Tax Law Update here).
Further draft guidance has now been provided on the GST position of a director or board member who provides their services through a personal services company.
The guidance has been issued for consultation as a draft "Questions We've Been Asked" statement with feedback sought by 6 July. The specific question is:
If a director provides their services through a company, will the company be able to register for GST when the director would not be able to register if they were providing their services in their capacity as a natural person?
It is clear from the 44 pages issued in February, together with this further guidance, that the GST issues in this area are not particularly straight-forward. The published position from Inland Revenue will be relevant to both professional directors and companies regularly paying directors fees where GST considerations are relevant.
Key point for professional directors
The key point provided in the February guidance was that professional directors do not carry on a "taxable activity" for GST purposes if they provide only director services and do not have a separate consulting practice or other business activity of which the directorships form part. Such directors should therefore not be charging GST on their services and should not be claiming GST on costs incurred as part of those directorships. Inland Revenue noted, however, that many professional directors were nevertheless registered for GST having taken the incorrect view that they are carrying on a taxable activity.
As an extension to that position, the latest Inland Revenue guidance provides further comment on the scenario where a director provides services through a company. The key point, as noted in the February guidance, is that the GST treatment here depends on whether services are being supplied by the director's company in the course or furtherance of a "taxable activity".
The latest guidance further addresses that question from the perspective of two different scenarios whereby: (1) the director's services company contracts to provide a director's services; or (2) a director contracts directly to provide their services but must account to the director's services company for their fees.
(1) Services company contracts to provide a director's services
According to the draft guidance, the situation which Inland Revenue considers to have the most certainty is where a services company contracts directly with a company for the provision of an individual director's services.
In such a case, the services company is supplying the services of a natural person (the director) to the company to fulfil the director role. Accordingly, the draft guidance states that, provided the service company's supply of those services is part of an activity which is carried on continuously or regularly, the services company will be carrying on a "taxable activity". The statutory exclusion that applies to natural persons does not apply in the case of a services company because the company is not engaged as a director and cannot be under section 151(3) of the Companies Act 1993.
As a result, a services company that contracts directly to provide the services of an individual director should be regarded as carrying on a taxable activity and may register for GST (or must do so if the level of supplies exceeds $60,000 per annum). This is irrespective of the fact the professional director is not carrying on a taxable activity and may not register for GST as an individual.
(2) Director contracts to provide services but obliged to account to services company for fees
The draft guidance suggests the GST treatment is less certain where a professional director contracts directly for their services, but is obliged to account for directorship fees to their services company in circumstances where the director is employed by their company.
This scenario is addressed specifically in section 6(4) of the GST Act. Section 6(4) was included in the GST Act in 2014 and is intended to address a perceived potential mismatch whereby an employer is required to return GST on fees where there is no corresponding input credit for the payer of those fees.
In this situation, the professional director is not carrying on a taxable activity relating to the directorship services supplied. In addition, the services company has not contracted directly with the company receiving the director's services. However, the accounting of fees by the director to their services company is treated under section 6(4) as consideration for a deemed supply of services by the services company (the director's employer) to the company that made payment of the fees to the director.
The draft guidance notes there is some uncertainty as to whether a services company may be registered solely on the basis of these deemed supplies. The view ultimately taken is that, although there may be no formal contractual arrangement between the services company and the company receiving the directorship services, the services company is "in effect" supplying the services of the director. As a result, Inland Revenue is on balance satisfied that a services company can have a taxable activity in these circumstances and may register for GST.
Other points to note
In February, Inland Revenue issued an Operational Position (OP 23/01) which stated that professional directors who are not carrying on a "taxable activity" must deregister with effect from 30 June 2023 or such other date as may be determined by the Commissioner. That Operational Position will be revisited as a result of the latest guidance given its focus on natural persons and not service companies.
Please contact Greg Neill or Audrey Gregan if you would like to discuss the above or your usual Russell McVeagh contacts.