The Big Picture: Goods and Services Tax in 2022 and beyond

THE PICTURE: AND SERVICES TAX

In 2022 and beyond

GOODS TAX

Changing to meet challenge

Acollection

of changes to New Zealand’s GST regime will keep taxpayers on their toes in 2022. From addressing impractical rules for GST documentation, to the taxation of cryptocurrencies, a diverse array of areas have been scrutinised and modernised.

Often praised for its relative simplicity and broad-base, with limited exceptions, New Zealand’s GST regime is constantly changing. The evolving business landscape produces many challenges and tax reform is needed to keep abreast of these developments.

The latest taxation Act isn’t wholesale reform – though as we note below, a full rewrite is not

beyond the realms of possibility. It remains important for all businesses to keep pace with developments in this area and to anticipate material changes that may have an impact on their operations.

In The Big Picture: Goods and Services Tax we look at the implications for taxpayers of the most significant areas of change put forward in the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022, which was passed into law on 30 March. We review areas which aren’t subject to change, but where taxpayers are encountering challenges, and we look at what the future could hold for GST.

New developments

Thelegislation introduced brings in some notable changes to the New Zealand GST system.

Modernising information requirements

The GST legislation that had been in place for almost 40 years previously prescribed documentation requirements that are now well out-of-step – not surprising given those rules predated the widespread use of modern digital business systems.

Rigid rules around GST documents (tax invoices and credit/debit notes) contained strict formalities that raised significant compatibility issues with current invoicing systems. What might on the surface appear a minor issue could in fact come at a huge cost if a mistake was made – in the past deficient tax invoices, debit notes or credit notes have put tax credit claims at risk. For a significant transaction, these claims could amount to millions of dollars.

Those rules had simply not kept pace with modern digital systems and electronic

documents and there were widespread views that they had become impractical. Modern multinationals often use their own bespoke systems to generate uniform invoices, yet under previous rules were forced to meet GST formats resulting in disproportionate compliance costs.

The changes simplify documentation requirements and provide flexibility for required GST records. Most notably, tax invoices have been replaced by a requirement to hold sufficient information to verify transaction details (although the

implementation date for these changes has been deferred by a year).

Other changes included removing the need for IRD approval before a 'buyer created' tax invoice can be issued (these types of invoices are common in arrangements such as commission contracts).

The reforms reduce the compliance work in preparing GST documentation as well as reducing the risk of basic errors having disproportionate consequences.

DENIED

‘Business A buys IP rights from Business B - GST applies at 15% to that transaction.

The amount of GST shown in the tax invoice is NZ$10 million.

Business A claims that NZ$10 million as a GST credit, but there is a deficiency in the tax invoice (no date is recorded).

Based on the current law, IRD could deny that GST credit claim and potentially impose penalties for claiming the credit.

New developments

GST treatment of crypto assets

Retrospective legislation now exempts 'crypto assets' such as bitcoin and other cryptocurrencies from GST. However, 'non-fungible tokens' (NFTs) remain subject to GST on the basis that they have similar properties to artworks or collectibles.

This may present challenges for taxpayers involved in selling NFTs as they will need to identify the location of customers to be able to apply the new GST rules correctly. This GST issue for NFTs may extend to offshore companies, which may be liable for GST on sales to New Zealand consumers under the special rules for remote services.

Because many blockchain transactions take place without the parties being able to identify counterparties, the change raises questions as to how a vendor would determine that a buyer of an NFT is non-resident. In practice it isn’t clear how to do this, or how the rule will be enforced. With NFT use still nascent in New Zealand, it’s not a major revenue loss right now – but it seems likely further refinement could come if NFT use grows and the rule proves truly unworkable.

New developments

GST groups

The

changes also clarify the treatment of GST groups and resolve ambiguities.

In theory a GST group should have one tax return under the current rules. However, there are some technical questions as to how these rules are applied.

The intended effect of the changes is to clarify that a GST group is treated as a single registered person with most internal transactions being disregarded. These rules also adapt the GST grouping rules so they are consistent with modernising of information requirements – for example, a single member of the group will be responsible for those requirements.

There are also changes that affect the joint and several liability for a member of a GST group that leaves the group — the new rules now align the treatment with that of a consolidated group for income tax purposes.

Property development and GST credits

A welcome change is that property developers are now able to acquire a new property in an individual’s name, then transfer that land to an associated company (as opposed to a 'nomination' where that company is nominated to acquire the property directly).

This is a path often taken, because a company intended to develop the property might only be set up after confirmation the property is in hand. But it comes with a sting. Previously this type of transfer resulted in a loss of any input tax GST credits because of restrictions on transfers between related parties.

The loss of the GST credits was an unintended effect, and the new rules will reverse this.

Reform of GST adjustment rules

In March, IRD also published a discussion document proposing reform to the various adjustment mechanisms in the GST legislation that deal with changes in use or a mixed use of assets (see diagram).

The GST adjustment provisions as currently drafted are highly complex and in some cases impractical to apply. As such, any reform in this area would be a welcome development.

Clarify the distinction between commercial dwellings and residential dwellings

Simplify the GST treatment where developers use properties for residential purposes

KEY PROPOSALS

Allow tax payers to exclude assets from their taxable activity

Introduce various quality of life improvements such as reducing the frequency of and need to make adjustments

Risk areas remain

Theprevious scheme of the GST legislation created various risks for taxpayers, especially in complex transactions. Some of these risk areas haven't been addressed in the latest changes, so we see further potential for improvement.

Land / asset transactions

The majority of commercial asset transactions are zero rated for GST purposes and that may mean the GST implications of transactions are overlooked, especially when unusual features of the transaction create novel GST issues.

A typical example would be a transaction with multiple vendors where only one is selling ‘land’ that qualifies for zero rating.

Where the zero rating rules are incorrectly applied to a transaction, purchasers face risk as the GST legislation can automatically transfer the vendor’s GST liability to the purchaser in some cases. There may be heightened risk in any transaction where it is not clear whether ‘land’ will be supplied (for example, a

lease may not be able to be assigned or novated). ‘Land’ can also mean easements, or forestry or fishing rights, rather than just land. Errors in this area are often high value given the nature of these transactions.

GST warranties / pricing

We are seeing errors arising from parties not understanding how GST warranties should be completed in standard sale contracts – for example, whether a vendor should declare that it is GST registered for a particular transaction when the relevant property may

be exempt. Changes in the status of the purchaser or a nomination to a new entity can also create issues.

A frequent error is where pricing is stated as ‘inclusive of GST’ when the GST treatment of the transaction is not yet determined. That can lead to unusual outcomes where one party may receive an effective windfall at the expense of the other party.

In the event that a party gives an incorrect GST warranty and a GST return is filed on that basis, the IRD may impose penalties. The end result would usually be that a claim is made for breach of warranty which could lead to costly litigation.

Risk areas remain

There remains room for legislative improvement.

Settlements paid via insurance

Out of court settlements can produce potential GST issues – in some cases resulting in an unexpected GST liability. An example would be where a settlement is funded by an insurer and paid directly to a third party. This can give rise to an unexpected GST liability for the recipient of the payment – despite the insurer not being visible until the time of payment (if at all).

We had hoped to see remedial measures in this year's Act (as IRD had proposed reforms in this area).

Commercial transactions including housing

The GST implications of transactions that include residential dwellings are sometimes not well understood. These dwellings may be main homes which are usually exempt from GST (potentially separate from a non-residential part of the property), for instance where a farm (subject to GST) has a main dwelling (exempt from GST) attached. Or they can be types of housing that fall within the GST net (such as temporary accommodation).

These types of issues are especially complex for industries such the retirement sector, where a village may include a range of accommodation, from houses to serviced apartments and hospital care. In other cases the distinction between a residential and commercial dwelling is not well defined, for example, student accommodation.

The IRD has recently published a discussion paper (discussed further below) that proposes some reforms to this area of GST law, but legislation may be some time away.

On the horizon

WhileCovid-19 may have delayed reform in some areas, further changes are anticipated.

GST Act rewrite

Unlike the income tax legislation, the GST legislation has not had any substantial 'rewrite' and has become cumbersome and difficult to follow. In particular, the rules dealing with ‘adjustments’ for partial taxable use or changes in use are difficult to navigate and sometimes impractical to administer.

A full rewrite of the GST Act has been recommended by stakeholders and this may remedy some of these issues. If such a rewrite takes place, there may also be room for broader discussion around other outcomes that could be achieved through indirect tax.

Build-to-Rent / Rent-to-Own reform

As various measures are deployed to assist with home ownership and improving property supply, one potential lever is taxation. Some incentives for the building industry have been

introduced to the income tax regime, but so far there is little to offer through the GST regime.

Potential areas for reform might include specific incentives for the ‘build-to-rent’ and ‘rent-to-own’ sectors. In ‘build-to-rent’ projects involving residential property, a key disadvantage is the inability to recover GST on expenses which are incurred in the development process – this is because residential rent is exempt from GST so related expenses do not give rise to GST

credits. ‘Rent-to-own’ can involve some complications in terms of timing and when GST liabilities are incurred as ‘rent’ is paid towards an effective house deposit. These are issues which could potentially be addressed through tax legislation to help turn on new sources of housing supply.

The IRD has noted the issues for 'build-torent' in its discussion paper on proposed changes to the GST adjustment provisions, but no changes are proposed (although submissions were invited on this topic).

Our indirect tax practice

Bell Gully has a leading specialist tax team. We are the only New Zealand law firm with a team dedicated to GST. We are client and solutions-focused with a track record of achieving excellent outcomes for clients.

We provide assistance on a wide range of tax matters including comprehensive direct and indirect tax services, including GST, and expert disputes and litigation advice, to domestic and international corporate entities and individuals.

We have a long history of offering expert guidance on difficult tax issues. We continue to be ranked in the top tier of global directories including Chambers Asia Pacific, The Legal 500 Asia Pacific, World Tax and World Transfer Pricing.

Our market leading team is able to provide advice on all tax-related matters including:

• All general corporate tax matters (such as funding arrangements, distributions, capital reorganisations, and others).

• Inbound and outbound investment (for example, income attribution, thin capitalisation).

• Transfer pricing (debt, products and services).

• Employee taxation and share schemes (scheme design, implementation and on-going management).

• GST, indirect taxes and import duties (with dedicated Special Counsel resource).

• Charities and trust law (registration and DIA engagement, donations and distributions).

• IRD engagement on risk reviews, audits and investigations, disputes and rulings.

• Immigration and broad ranging advice to high net worth clients and family offices (with a dedicated specialist team).

• Trusts formation and advice (contentious and non-contentious).

• Matrimonial and related advice.

• Financing arrangements and securitisations.

• Cross-border supply and service arrangements.

• Insolvency and work-outs.

• Land transactions.

Bell Gully’s tax team

If you have any questions about this report, please contact one of the team listed below or your usual Bell Gully adviser:

Graham Murray

DDI 916 21 909 graham.murray@bellgully.com

Campbell

Hugh Magee

Mathew McKay

Willy

Hayden Roberts

Toa Vulangi

WELLINGTON

VERO CENTRE 48 SHORTLAND STREET NEW ZEALAND

BELL GULLY BUILDING 40 LADY ELIZABETH LANE NEW ZEALAND AUCKLAND

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any further action in relation to the matters dealt with in this publication. The views expressed are our own. No client views are represented in this publication.

All rights reserved © Bell Gully 2022