Proposed GST changes a step closer to enactment
On 7 June 2013, the Finance and Expenditure Committee reported back to Parliament on the Taxation (Livestock Valuation, Asset Expenditure, and Remedial Matters) Bill (“the Bill”), introduced on 13 September 2012. Among other things, the Bill proposes GST changes which will have far-reaching implications to both New Zealand resident and non-resident businesses.
GST refunds for non-residents
One of the major GST amendments proposed by the Bill concerns the ability of non-resident businesses to claim GST incurred on goods and services acquired in New Zealand. This is a fundamental and positive change for non-residents. Under the current rules, in order to claim GST on goods and services acquired in New Zealand, a person must be registered for GST and must use the goods or services for, or have them available for use in, making taxable supplies in New Zealand. This last requirement often acts as a barrier for claiming GST deductions by non-residents who incur GST costs while in New Zealand, but who do not actually make any taxable supplies in New Zealand. An example of where this may arise is a non-resident business sending its employees to a conference or training course in New Zealand.
In contrast to New Zealand rules, many foreign GST jurisdictions, e.g. the European Union member states, provide for a mechanism that allows non-resident businesses to obtain a refund for GST incurred. The New Zealand Government has recognised that current limitations on the ability of non-resident businesses to claim GST refunds on costs incurred in New Zealand may reduce the competitiveness of New Zealand service providers and jeopardise their ability to attract overseas commercial customers. As such, the proposals in the Bill are aimed to make it easier for non-residents to obtain New Zealand GST refunds.
In summary, a non-resident business will be able to register with Inland Revenue for a “special GST registration” regime and claim GST refunds if:
- The non-resident is not carrying on or intending to carry on a taxable activity in New Zealand.
- The non-resident is registered for a consumption tax in its own jurisdiction, or, if their jurisdiction does not have a consumption tax is carrying on a taxable activity that would render them liable to register for GST in New Zealand if the taxable activity was carried out in New Zealand.
- The amount of the non-resident’s input tax in the first period is likely to be more than $500.
- The non-resident’s taxable activity does not involve performance of services which will be likely to be received in New Zealand by a person who is not registered for GST.
The special GST registration regime will only apply to non-resident businesses that do not carry on a taxable activity in New Zealand. Non-resident businesses that do carry on a taxable activity in New Zealand will still be able to register for GST and claim GST deductions under the normal GST registration rules.
Once Inland Revenue receives the GST return under the special GST registration regime, it will have 90 working days to issue a refund of GST or request further information. This is different from the typical requirement to issue a GST refund within 15 working days and will act as a revenue protection measure.
In the original version of the Bill, the proposed legislation contained an outright prohibition for any non-resident business to register with a New Zealand resident business as a GST group. Following a number of opposing submissions to the Finance and Expenditure Committee, including from Deloitte, objecting to such drastic change (GST grouping with New Zealand residents is often used by non-resident businesses to reduce their compliance costs and provide certainty as to the GST treatment of their supplies), the reported-back version of the Bill removed the outright prohibition on the GST group registration between residents and non-residents. However, to register with a resident as a GST group, the non-resident must be registered for GST under the normal GST registration rules rather than under the proposed special GST registration regime.
Under the new rules, the Commissioner will be able to deregister the non-resident if she considers that requirements for the GST registrations are no longer met.
Deloitte recognises the importance of business to business (B2B) neutrality, and is supportive of the proposed reforms to remove the existing barrier to GST refunds which will help encourage non-residents to undertake business with New Zealand businesses. We expect that the proposed changes should have a positive fiscal impact given the economic benefits of attracting more business to New Zealand.
The new non-resident GST registration rules will apply from 1 April 2014.
An opt-out provision to agency rules
Currently, the GST Act only allows one tax invoice to be issued when an agent supplies goods or services on behalf of a principal supplier. Often, however, accounting systems automatically issue invoices when goods and services are supplied, which may technically result in a breach of the GST legislation. The Bill proposes to allow principal suppliers and their agents to opt out of the agency rules in the GST Act and individually issue a tax invoice in relation to what will be treated as two separate supplies – that is, a supply from the principal supplier to the agent, and from the agent to the customer.
Deloitte welcomes the proposal to allow principals and agents to opt out of the agency rules. We note, however, that the proposed rules will only apply to suppliers and their agents. We have a number of clients that act as buyers’ agents for their customers and which experience the same concerns. We have already notified Inland Revenue regarding the inconsistency and will be looking to work together with them with the view of expanding the proposed rules to buyers’ agents.
The new agency rules will apply from the date of enactment.
Mixed use assets
Claims for income tax and GST deductions on purchases of goods and services which may be used for both private and income-earning purposes (such as holiday houses, boats and aircrafts) are becoming subject to much greater scrutiny from Inland Revenue before they are being approved. Specifically, Inland Revenue is often concerned that deductions are being over-claimed in respect of what in essence is a private asset.
A significant part of the Bill is concerned with the introduction of the new income tax rules ( see feature article) and the corresponding GST rules in respect of claiming deductions for land, boats and aircraft. The Bill provides a formula which will need to be used in order to calculate the extent to which deductions will be available. In respect of GST deductions, we expect that following the enactment of the new rules we will see much greater level of reluctance for the GST refunds to be paid out by Inland Revenue in respect of holiday houses, boats and aircraft. As such, to increase the likelihood of a GST deduction being approved, businesses must be prepared to provide substantive evidence of the proposed business use of an asset.
The Bill is expected to be enacted in the next few months. We recommend that businesses consider these and the other proposals in the Bill and consider whether they may apply to their circumstances.
Please contact your usual advisor to discuss your tax position.
Tax Alert July contents:
- Tax Alert - July 2013
- A taxing holiday: mixed-use assets update
- Thin capitalisation proposals. It ain’t law yet – thankfully
- Deloitte Private: Putting the Customer First
- Proposed GST changes a step closer to enactment
- Exporting goods to related parties in Australia? Be aware of changes to the approach by The Australian Customs and Border Protection Service
- Further accolades for Deloitte’s New Zealand tax team
- September tax bill reported back