On 9 September 2021, the Government introduced the Taxation (Annual Rates for 2021-22, GST and Remedial Matters) Bill (“the Bill”) into Parliament.
While the Bill contains more than 100 tax amendments there are a couple of improvements that are welcome.
One positive amendment, more accurately described as a ‘fix’, is in relation to purchases from associated persons. Under current law, if a GST registered person (‘the purchaser’) acquires secondhand goods from an associated person who has not used them to make taxable supplies, and that associate originally purchased the goods from a person who is not GST registered, the purchaser’s secondhand goods deduction is zero.
To illustrate this in a practical sense, we’ll use Joe Smith who owns and lives on a 5,000sqm lifestyle block. Joe purchased it five years ago for $1.15m from a non-registered private family. He has now decided to subdivide the lifestyle block into six sections, sell them and move into a retirement village. He talks to his lawyer who suggests that he mitigate his commercial risk by using a company to undertake the subdivision. So Joe incorporates a company and sells his lifestyle block to the company
Later, Joe visits his accountant to talk through the accounting and tax implications. Joe’s accountant advises there is a problem. If Joe had retained the land and completed the subdivision himself he could have claimed a $150k GST refund from Inland Revenue, being a secondhand goods deduction on the original purchase. However, because the company acquired the land from an associated person, being Joe, and Joe was not charged GST on his original purchase, the company’s GST claim is zero.
In an ideal world, this distinction would be identified beforehand and taken into account (along with the income tax implications of the two scenarios). But I’ve encountered this situation on a number of occasions.
Looking at the current legislation, why the distinction? It has been often viewed as unfair because the company is still required to pay GST on the sale of land, so why deny a GST claim on its purchase.
For taxable periods starting on or after the date the new legislation is enacted, the above scenario should be neutral with Joe’s company able to claim a GST refund. My advice is that, where possible, planned transactions that would benefit from the change should be deferred.
Another positive amendment included in the Bill relates to the GST treatment of assets used partly for business and private use. Under current rules, when a person acquires such an asset, they can make a GST claim on the purchase price based on the proportion of taxable (i.e. business) use. But on sale, GST has to be paid. A washup GST refund can be claimed when it is sold, but it is limited to the GST fraction on the original cost price. Hence, for an appreciating asset such as a bach, GST becomes payable on the full increase in value.
For example, if someone purchases a bach that is used 40% of the time to derive income from Airbnb, a GST deduction can be claimed based on 40% of its cost. But later, when it is sold, GST becomes payable based on the increase in the value of the asset. The problem lies in the washup formula to calculate the GST payable – it ignores the private use element.
This is being fixed, so that the net amount of GST that becomes payable is based on the proportion of taxable use. In the case of the bach above, only 40% of the increase in the value of the bach would be subject to GST.
The above change will not apply to property developers. This is because by virtue of developing the property, their taxable activity is directly linked to the increase in the value of the land. While the above changes are positive, let’s spare a thought for those that were caught out by these rules in the past.
The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.
