Published December 2010
Recently the focus has been squarely on GST due to the increase from 12.5% to 15%. That focus is set to continue with the release in August 2010 of draft legislation to amend the GST Act with effect from 1 April 2011 which will affect a large number of businesses.
A central principle of the current GST Act is the need for a good or service to be principally acquired for the purpose of making taxable supplies (e.g. sales) before GST can be wholly claimed up-front. If a good or service is not acquired for a wholly taxable purpose a change-of-use adjustment may be required. Depending on the situation, the change-of-use provisions can be complicated and expensive to administer.
It is proposed that the change-of-use provisions are rewritten and the principal purpose test is repealed and replaced with a “use” doctrine such that when an asset is acquired for a mixed purpose, a one-off input tax deduction will be made based on its estimated use. This deduction is subject to adjustment at a later date if the actual use varies from the estimate.
Schemes designed to acquire GST refunds from IRD on the purchase of land where the vendor is unable to meet its GST output liability, have caused the Government to propose zero-rating transactions that include land. Zero-rating will apply to the taxable sale of land by a GST registered vendor to a GST registered purchaser who intends to use the land for the purpose of making taxable supplies. Where land is only a component of a transaction, i.e. the sale of land and buildings, the entire transaction will be zero-rated.
As the purchaser’s use of the land will determine whether zero-rating will apply, a vendor will be required to confirm the purchaser’s intentions, and that they are GST registered. If the vendor fails to meet its obligations to gather the required information, it may be liable to pay the applicable GST. If the vendor is unable to gather the required information because of the actions of the purchaser, the purchaser may be held liable for that GST. If an unregistered purchaser provides false information to avoid paying GST and that is subsequently found out, the purchaser will be deemed to be registered and will be required to pay the applicable GST.
To clarify the boundaries as to what transactions will be zero-rated, a definition of “land” will be inserted into the proposed legislation. As currently drafted, the definition includes an option to acquire land, an estate or interest in land, and rights that give rise to an interest in land. Based on the definition as drafted the commercial leasing of land will be zero-rated. However, it is understood this application to commercial leases is currently being re-considered by Government and is unlikely to be included in the final form of the legislation.
Taking the zero-rating of land and the change-of-use adjustment changes together, if a registered person buys land for a mixed use, the transaction will qualify for zero-rating, however, the purchaser will be required to pay GST based on its estimated non-taxable use.
The distinction between what is a “commercial dwelling” versus a “dwelling” is important for GST purposes as the supply of accommodation in the former is subject to GST, but supplying accommodation in the latter is not. The current definitions have been the source of uncertainty in the past as activities such as homestays, farmstays and serviced apartments have not fit neatly into either definition. In 2006 the IRD issued a draft interpretation statement that broadly concluded these types of activities would not qualify as the supply of accommodation in a commercial dwelling
and therefore are not subject to GST.
The proposed changes will expand the commercial dwelling definition to specifically include homestays, farmstays and serviced apartments. Furthermore, the proposed changes will clarify the law by requiring a dwelling to be a person’s principal place of residence and be subject to their exclusive possession.
If you say ‘yes’ to any of the below then the new tax rules are likely to be relevant to you:
- Buy or sell land in a business-to-business setting
- Enter into certain commercial leases with a lumpy consideration component
- Are not fully taxable for GST purposes
- Are currently making on-going adjustments for exempt or private use of goods or services
- Are involved in nominee transactions
- Provide residential or commercial accommodation
If you fall within any of the above, you will need to assess the effect the new rules will have on your business in conjunction with us, as your accountants. Please contact us directly if you have any questions, would like further clarification on these tax changes.