Cause for celebration? Minister uses modification power for GST remedial

By Viola Trnski & Allan Bullot

In the exciting and ever-changing world of tax, 26 July 2024 marked a historic day. The Minister of Revenue, for the first time, exercised a remedial power to modify an unintended outcome in the GST legislation.

Wait, what superpower?

Sections 6C-6G of the Tax Administration Act 1994 (the Act) were introduced in 2019 as an extension to the Commissioner’s care and management powers. While it will be no surprise to anyone who has seen the size of a hard copy Income Tax Act 2007, Officials’ acknowledged in a 2019 Regulatory Impact Statement:

“New Zealand’s tax system is very complex, and it undergoes significant change regularly. The nature and volume of the tax law changes mean that unforeseen or unintended outcomes (legislative anomalies) arise often. This is likely to continue to be the case into the future given the increasing complexity of tax law and rapidly evolving business practices.”

On average, under the current approach, it takes 670 days after being identified for such “legislative anomalies” to be remedied through primary legislation. In that almost two-year period, taxpayers are required to continue filing returns, sometimes as often as every month for certain GST taxpayers, under the existing rules even if an unintended drafting error means the rules cannot or are not being interpreted as Parliament intended.

The solution? Sections 6C – 6G. These sections provide that the purpose of the modification power is to:

“...provide flexibility to temporarily remedy or mitigate the effect of a provision...by making a modification or granting an exemption when it is reasonably necessary –

a) Due to an obvious error in the provision:

b) To give effect to the intended purpose or object of the provision, to resolve ambiguity, or to reconcile inconsistencies.”

The word “reasonably” requires that an objective and reasonable third person would consider the modification necessary. The modification must also not be inconsistent with the intended effect of the provision.

This is one of many legislative safeguards that exist in the legislation to protect the rule of law (from, say, a hypothetical evil Minister of Revenue who wants to change all the “obvious errors” in the legislation to benefit their personal tax affairs).

Other restrictions and requirements of the amendment power include:

• Limited time period – a modification can not be effective for more than two years from the income year it comes into force (and, if retrospective, no more than five years prior).

• Optional application – taxpayers must have a choice to not apply the modification.

• Must be the most appropriate way of addressing or resolving the issue at the time.

• The extent of the modification must not be broader than is reasonably necessary.

• A consultative process must be undertaken (generally, this will be six weeks of public consultation unless truncated or removed completely).

So, what’s the process?

Generally, the main avenue for a remedial amendment is the annual rates tax legislation, which needs to be passed by 31 March of each year in order to enable tax collection for the following year.

However, from the time a legislative anomoly is identified, the road to include it in a remedial legislative amendment can be long and winding.

The modification powers bypass the usual legislative process by allowing the Minister to amend primary legislation using secondary legislation. In this case, the modification is made via an Order in Council and subsequently reported in the New Zealand Gazette. It is expected that a remedial amendment will also be included in the August tax bill, therefore, the modification that will act as a “band-aid” or temporary fix during the period before the next tax act is passed. In this case (the actual modification is summarised at the end of this article) the modification is revoked on 31 March 2025.

These clauses are also referred to as “Henry VIII clauses” as King Henry VIII was said to have an affinity for legislating via Royal Proclamations rather than through passing laws through Parliament (such a power to do so was conferred on him by the Statute of Proclamations 1539). While such clauses have been subject to criticism (or, in other words, been labelled as “constitutionally eyebrow-raising”) for the power they confer to the executive branch of government, in this case, sections 6C-6G constrain these risks and allow necessary remedial amendments to be made in an efficient and timely manner – a welcome celebration for taxpayers.

What was the modification power actually used for?

The modification power is being used to amend an application provision regarding the GST apportionment rules where there has been a permanent change in use of the asset. The original wording, which was introduced by the Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Act 2023, stipulated that the provision applies “from a registered person’s adjustment period starting on or after 1 April 2023”.

However, due to a complex interplay between a number of sections in the Goods and Services Tax Act 1985, this potentially prevented some taxpayers who acquired an asset before 1 April 2023 from using the simplified adjustment calculation when there was a permanent change in use for that asset on or after 1 April 2023. The new wording makes it clear that the legislation should work as originally intended, by changing the provision so it applies “to a registered person’s adjustment made in returns for taxable periods starting on or after 1 April 2023”.

Inland Revenue is welcoming submissions on the proposed modification. Consultation closes on 12 August 2024. We expect that, following the two-week consultation period, the change will come into effect shortly thereafter.

If you have any questions, please contact your usual Deloitte advisor.