Compulsory Zero-Rating Of Land

by

The compulsory zero-rating (CZR) of land rules have applied since 1 April 2011. The rules were introduced to combat a pattern of transactions where Inland Revenue (IRD) was paying GST refunds to land purchasers, but there was no corresponding GST returned by the vendor.

Although simple in principle, mistakes are being made. To recap, the rules require a transaction that wholly or partly consists of land to be zero-rated if:

  • The vendor and purchaser are both GST registered; and
  • The purchaser intends to use the land for the purpose of making taxable supplies; and
  • The purchaser or a person associated with the purchaser does not intend to use the land as a principal place of residence.

The reduced rate applies not to just the land component of a transaction, but to the entire supply. For example, if zero-rating applies to the sale of land and assets, the assets are also zero-rated. Also, the supply of “land” is not limited to the transfer of freehold title, but also includes an assignment of an interest in land. For example, if a business sells assets and an assignment of a lease (of land), zero-rating is likely to apply.

In practice, the standard form Auckland District Law Society (ADLS) agreement includes a statement that the purchaser completes for GST purposes and is used by the vendor to determine whether the sale should be zero-rated. The agreement also includes a question on the front page of the contract asking whether the vendor is registered for the purpose of the supply. A common error is for the question to be answered “no” because the transaction is the sale of a residential home irrespective of the vendor’s circumstances. If however, a property developer has built the house in the course of their taxable activity, GST will apply to the sale and the question should be answered “yes”.

A fundamental element of the contract is whether to express the price as “Plus GST (if any)” or “Inclusive of GST (if any)”. Disputes have arisen because a GST registered vendor understands the buyer is GST registered and the price is agreed as GST Inclusive. The rationale being that the transaction will be zero-rated and the price stated will be received ‘in the hand’ by the vendor. However, seeing an opportunity a purchaser might at the last minute, nominate a non-registered purchaser. The transaction does not then qualify for zero-rating and the vendor is required to pay GST at 15% to IRD, leaving the vendor ‘out of pocket’.

In practice, it is recommended the agreement includes warranties regarding the GST status of the parties and that vendors execute agreements on a plus GST basis. Contracting ‘plus GST’ provides the right to increase the cash price to fund an unforeseen GST liability, thereby preserving the net amount receivable.

A further pricing misconception is that a “GST inclusive” price means that GST is included at 15% and can be deducted for GST purposes. However, if the transaction is zero-rated, a GST inclusive price simply means there is GST, but the amount of GST is zero.

A GST registered purchaser might contract on a zero-rated basis, because they have failed to understand that they are not purchasing the land to make taxable supplies. For example, the purchase of a residential property by a GST registered purchaser is unlikely to qualify for zero-rating. In this situation, the purchaser would be liable for the GST that would have otherwise been payable by the vendor.

It is normal for a contract to be subject to ‘Solicitor’s approval’. Having a contract reviewed by your accountant is also worthwhile.

Changes To IRD Admin System

by

The manner in which we interact with Inland Revenue (IRD) is likely to change dramatically over the next two years as the upgrade of IRD’s IT system and associated legislation comes on-line. IRD’s broad objective is to reduce the amount of time and cost it and private business spends on tax administration by modernising its software platform.

At present, both GST and PAYE processing costs are higher than necessary and there are problems with the quality and timeliness of information submitted. These issues not only impose costs on employers and the IRD, but also limit the Government’s ability to provide effective social services.

IRD is currently working with third party software providers to design digital solutions that will integrate tax obligations into everyday business practices. To ensure the changes are well designed and beneficial to all parties, feedback is being sought on potential changes via discussion documents.

One of the most recent discussion documents outlines potential changes to GST and PAYE. The IRD is currently requesting feedback on proposed changes and poses several questions that are designed to challenge our thinking on the current approach. For example, whether changes should be made to the calculation of PAYE on extra pays, holiday pay and years that include an extra pay period?

GST related changes include the ability to allow GST return filing and payment processes to be integrated with digital accounting platforms. This would allow GST-registered persons to submit their GST returns through their chosen accounting software programme as they fall due, effectively eliminating the requirement to file a separate GST return as a separate process. Such changes would remove the need to double-enter information, and reduce the potential for error. IRD’s proposals also include making GST refunds via direct credit to a customer’s bank account compulsory, unless it would cause undue hardship or is not practicable.

PAYE could shift to a semi-automated process. Similar to the GST proposal above, businesses would be able to submit payroll information to the IRD direct from their accounting system and make necessary payments to the IRD at that time. For example, PAYE information could be submitted to IRD at the same time that a ‘pay run’ occurs. Under this design, employers’ PAYE obligations would be integrated with their current business procedures, eliminating certain processes such as the need to file nil employer monthly returns. PAYE payments to IRD might be due at the same time the employee is paid.

By increasing the quality and timeliness of the information provided, IRD should have greater capability to improve individual’s access to social entitlements and identify and prevent errors; such as overpayments of family assistance.

The changes represent a shift to a framework in which IRD’s system would no longer work on a stand-alone basis. Instead, IRD would ‘talk’ to software providers, ensure their system worked in accordance with its view of applicable legislation and would then accept what it was sent. Such changes would provide the business and IRD with greater confidence regarding the accuracy and correctness of a tax return.

Employer Provided Car Parks

by

Employers are required to pay FBT on non-cash benefits provided to staff. However, like most taxes, there are exemptions. It is important to be aware of the exemptions to ensure FBT is not overpaid. One such exemption provides that benefits (other than travel, accommodation or clothing) provided and used on the employer’s premises will not be subject to FBT. The provision of carparks fits within this exemption category.

Historically, what qualifies as “premises of the employer” has been uncertain. For example, if an employer is located next door to a carpark building and arranges and pays for six employees to have access to carparks in the building, do these carparks qualify as being provided on the employer’s premises?

The IRD has recently finalised two Public Rulings that include a change to its position on what qualifies as “premises of the employer” in this situation. Previously, the legal form of the car parking arrangement was the determining factor. For instance, carparks were required to be owned or leased by the employer to qualify for the exemption. Licence agreements did not satisfy the exemption requirements, even if the substance of the agreement was more akin to a lease.

In its Ruling, the IRD has softened its view and allowed a ‘substance over form’ approach. This will increase the number of situations that fall within the exemption by allowing license agreements to be regarded as being “on premises”, provided that the employer has a “substantially exclusive” right to use the carpark.

IRD has defined the phrase “substantially exclusive right” to mean that no one, including the carpark operator or any other third party, can use or control the carpark in a manner inconsistent with the employer’s substantially exclusive right.

The IRD provide a list of practical considerations which help to determine whether the employer has a ‘substantially exclusive right’. Although not definitive, the FBT exclusion is likely to apply if the employer has unrestricted access to the carpark, the carpark remains vacant when the employer is not using it, the employer may permit others to use the car parking space, if an unauthorised person parks in the space the employer has the right to tow the unauthorised vehicle and, the employer can decide how the car parking space is used.

What this effectively means is that the nature of the agreement, rather than the label on the document will determine whether the exclusion applies. In recognition of the change in position, IRD are allowing employers to request refunds of previously paid FBT where employers have relied on the old approach.

GST On Foreign Supplies

by

Imposing Goods and Services Tax (GST) on the digital economy has been a hot topic this year as New Zealand retailers push for equal GST treatment between local and foreign suppliers.

At present, foreign providers of cross-border services and intangibles (including music, e-books, videos and software purchased from offshore websites) do not have to pay GST on sales to New Zealand based consumers. This puts local based providers at a substantial disadvantage because they have to charge GST, which will, at a minimum, increase their prices by 15% when compared to foreign competitors.

Currently, whether or not GST applies to a particular transaction depends on a number of factors, such as the location of the supplier or where the services are performed. Because most e-tailers are not based in New Zealand, and their services are not performed from New Zealand, GST does not apply.

This issue is not isolated to New Zealand with many countries facing similar GST/VAT non-collection issues. Given the significant revenue at stake, governments worldwide have a vested interest in reform. The Organisation for Economic Co-operation and Development (OECD) has released guidelines on GST/VAT treatment, which countries are considering adopting.

The New Zealand Government has now released its own discussion document titled ‘GST: Cross-border services, intangibles and goods’ which broadly proposes to align New Zealand with the general direction of reforms undertaken by a number of countries.

The key suggestions include:

  • Introducing a new ‘place of supply’ rule so that services and intangibles supplied remotely by an offshore supplier to New Zealand-resident consumers will be treated as performed in New Zealand and therefore subject to GST.
  • The new rules to apply to a wide range of ‘services’, which capture both digital and traditional services.
  • A requirement for offshore suppliers to register and return GST when they supply services and intangibles to New Zealanders if their services exceed a given threshold in a 12 month period.
  • In situations where offshore suppliers do not directly supply services to their customers, and instead use electronic market places to market and sell their services or intangibles, the electronic marketplace may be required to register for GST instead of the principal offshore provider.

While not confirmed in the discussion document, the expectation is that the proposed changes will not require offshore providers to return GST when they make supplies to New Zealand businesses (who would normally be able to claim the GST back). The new rules would focus on taxing business-to-consumer supplies.

At present, GST not collected on low-value goods imported into New Zealand is also an issue. The Government intends to align, where possible, the collection of GST on imported goods with the changes relating to cross-border services and intangibles. The New Zealand Customs Service is looking at options for simplifying the collection mechanism and reducing the threshold before GST is charged on imported goods (currently $400), while balancing the cost to collect that GST.

As e-commerce continues to grow, the volume of services and imported goods on which GST is not collected is becoming increasingly significant. It has passed the tipping point where the Government is now moving to capture that lost tax revenue.

Businesses should also be mindful of similar changes being implemented in other countries that may result in GST/VAT being required to be paid.

Health & Safety Reform

by

Each year on average, 75 people die on the job and 1 in 10 people are injured at work. With statistics this high, it’s not surprising the Government is reforming New Zealand’s health and safety landscape.

A new Health and Safety Reform Bill (the Bill) is currently before Parliament and is expected to pass later this year. The Bill will create the new Health and Safety at Work Act, replacing the Health and Safety in Employment Act 1992 and aims to reduce workplace injury and death tolls by 25 per cent by 2020. The Bill introduces changes to the allocation of health and safety duties in the workplace and increases the compliance and enforcement tools available to inspectors.

Under the current legislation, there is a primary focus on the employer and employee roles and duties are carefully placed on defined participants (such as employers, principals, the self-employed etc).

The new Bill introduces the concept of a ‘Person Conducting a Business or Undertaking’ (PCBU), which replaces the previous duty holders. The PCBU will be allocated primary duties of care with regards to health and safety at work where they are in the best position to control risks to work health and safety.

The primary duty of care requires all PCBUs to ensure, so far as is reasonably practicable:

  • the health and safety of workers employed or engaged or caused to be employed or engaged, by the PCBU or those workers who are influenced or directed by the PCBU (for example, workers and contractors), and
  • that the health and safety of other people is not put at risk from work carried out as part of the conduct of the business or undertaking (for example visitors and customers).

This means that PCBUs will need to think broadly about who they affect through the conduct of their business or undertaking, rather than just direct employees or contractors. Where there are overlapping health and safety duties (such as multiple contractors on a building site), each PCBU has a duty to consult and co-operate with the other PCBUs to ensure health and safety matters are managed.

A new duty proposed under the Bill is that an ‘officer’ of a PCBU (such as a company director or partner), must exercise due diligence to ensure that the PCBU complies with its duties. This places a responsibility on people at the governance level of an organisation to actively engage in health and safety matters, reinforcing that health and safety is everyone’s responsibility.

Workers also have specific health and safety duties at work and the Bill defines the duties they owe and are owed (for example, a duty to take reasonable care of their own health and safety). The Bill will also apply to volunteers in certain circumstances.

The Bill provides a wider range of enforcement tools for inspectors and for increased penalties for infringements. There will be three types of offences for a breach of a health and safety duty and a breach will be graded based on the conduct of the duty holders and the outcome of the breach. For example, a person may be jailed for up to five years if they have a health and safety duty and, without reasonable excuse, are reckless and engage in conduct that exposes a person to a risk of death or serious injury or illness. A body corporate in a similar position may be fined up to $3 million.

There will be several months between when the Bill is passed and when it comes into force to give people time to prepare for the new regime.

Modernising New Zealand’s Tax System

by

The Government has released two discussion papers to engage in public consultation on options for simplifying and modernising New Zealand’s tax system. The documents introduce taxpayers to the general direction the Government intends to take to improve administration of the tax system.

Basically, the Government wants to simplify tax for individuals and businesses by reducing compliance costs, and making interactions with the IRD faster, more accurate and convenient with a greater use of electronic and online processes. As the IRD puts it, “tax obligations should be easy to comply with and hard to get wrong”.

The first discussion paper ‘Making tax simpler – A Government green paper on tax administration’ outlines the overall direction of the tax administration modernisation programme. Key elements of potential change include:

  • Simplifying tax for businesses, for example by streamlining the collection of PAYE, GST and other withholding taxes and integrating these obligations into business processes. Options will be investigated for simplifying the calculation of provisional tax – with more emphasis on real time information, together with payment options that better reflect taxpayer’s cash flows.
  • Simplifying tax for individuals by providing online income tax statements for individuals pre-populated with income details, so that all that would be required is to ‘check and confirm’. Technology will be used more effectively to better manage both overpayments and underpayments of tax.
  • Social policy objectives would be met by using information that the IRD or the Government already holds, providing for timely payments on a more real-time basis, resulting in certainty for individuals and families. With faster, more accurate information, there should be less chance of people receiving too much and going into debt.

The IRD wants to make tax obligations part of the normal day-to-day business processes, making it quick, easy and harder to get things wrong.

Consultation closes on 29 May 2015.

The second discussion document ‘Making tax simpler – Better digital services’ outlines proposals for greater use of electronic and online processes. In particular the discussion document considers whether secure digital services can be delivered using the current policy and legislative framework and discusses options to move people to digital services, these include:

  • The IRD working with third parties such as banks and business software developers so that tax interactions are built into a customer’s regular transactions rather than managing tax separately at specific times of the year.
  • Non-digital services will need to be provided for those who still cannot use digital services.
  • A process would be developed for moving to a digital format those who could potentially use digital systems for some services – in circumstances where there would be wider benefits accrued.

Consultation closes on 15 May 2015.

These are the first two releases in a series of public consultations designed to modernise and simplify the tax system. Further discussion documents will be released over the next two years and public feedback is requested.

The significance of this process can’t be overstated. In an age where changes in lifestyle as a result of technology have moved at an explosive rate, the design, administration and technology associated with our tax system have not kept up.