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I'd appreciate feedback from qualified people on this one...
Significant amendments proposed for GST
HODSON, Paul. The Press. Christchurch, New Zealand:Aug 18, 2008. p. B.7
Abstract (Summary)
The land will need to be sold for 12.5% more than its cost or the GST-registered business will have incurred a net GST cost (that does not sound like neutrality), which will give rise to the "dreaded" GST cascade effect, which ultimately sees the end consumer suffering a higher cost than should be the case.
This may result in a GST liability as the land and buildings are removed from the GST net. A turnover threshold of $10,000 is suggested, below which the small-scale accommodation activity must be removed from GST.
The Government is concerned that there have been cases where an insolvent company sells property to a new associated company (the "Phoenix" entity) which obtains a GST refund, but the seller defaults on its GST liability.
Full Text (681 words)
The Press, Copyright of Fairfax New Zealand Limited 2008, All rights reserved.
If a property developer cannot claim GST on purchase of land but is required to account for it on sale - it seems things don't stack up.
This is effectively the impact of one of the proposals outlined in the Government's recently released discussion document Options for Strengthening GST Neutrality in Business-to- Business Transactions.
The document contains proposals which may (if implemented) affect all GST registered persons.
It is likely that the proposals will be enacted as law in substantially the form proposed in the document.
The closing date for submissions was August 11.
While the proposals do deal with some currently problematic technical issues (such as nominees, accommodation and change in use adjustments), the focus is more around protecting the Government's revenue base.
The Government seems very keen to stamp out any chance of errors, or avoidance, in relation to supplies of going concerns, significant assets (costing more than $50m) and all land.
It proposes to do this by introducing a reverse charge rule - where the purchaser returns the output tax on the sale as well as claiming the input tax on the purchase.
This eliminates the need for the purchaser to pay the GST amount.
It will make Inland Revenue's job of auditing GST returns filed easier - there will be far fewer large GST refund claims to audit.
The risk of the supplier not correctly returning the output tax on these transactions will be removed.
In relation to purchases of land from unregistered vendors, the Government is proposing that in all cases (not just for purchases from associates, as is currently the case) the secondhand goods tax credit claimable by the purchaser be limited to the GST (if any) paid by the vendor when it purchased the land.
Leaving aside the practical difficulty of needing to confirm with the seller whether they paid any GST on purchase, this proposal seems unfair and inconsistent with the principles on which GST is based.
If the purchaser cannot claim back any GST on purchase but has to account for GST on the sale (after having used the land in its taxable activity), that seems very penal.
The land will need to be sold for 12.5% more than its cost or the GST-registered business will have incurred a net GST cost (that does not sound like neutrality), which will give rise to the "dreaded" GST cascade effect, which ultimately sees the end consumer suffering a higher cost than should be the case.
Hopefully, the weight of submissions sees this proposal removed.
Owners of home stays, farm stays and similar who are GST registered need to pay particular attention to the proposals, as they may be required to deregister or otherwise remove their small-scale accommodation activity from GST.
This may result in a GST liability as the land and buildings are removed from the GST net. A turnover threshold of $10,000 is suggested, below which the small-scale accommodation activity must be removed from GST.
The Government's concern here is that people have been obtaining GST benefits (ie. input tax claims) in relation to what is primarily their private residence.
The proposals also deal with the often disputed treatment of property developers/builders who build for sale but rent out their property in the meantime.
The proposals include the need to make clear adjustments which can be calculated with greater certainty.
"Phoenix" entities are also targeted.
The Government wants to ensure that it does not refund GST paid to a purchaser when the seller (who is somehow associated with the purchaser) is not able to pay over the GST that it owes on the sale (ie it is insolvent).
The Government is concerned that there have been cases where an insolvent company sells property to a new associated company (the "Phoenix" entity) which obtains a GST refund, but the seller defaults on its GST liability.
The proposal is that the GST refundable will be offset against the GST payable.
These and other proposals are significant - especially with regard to all supplies of land.
* Paul Hodson is a tax partner with BDO Spicers.
I'd appreciate feedback from qualified people on this one...
Significant amendments proposed for GST
HODSON, Paul. The Press. Christchurch, New Zealand:Aug 18, 2008. p. B.7
Abstract (Summary)
The land will need to be sold for 12.5% more than its cost or the GST-registered business will have incurred a net GST cost (that does not sound like neutrality), which will give rise to the "dreaded" GST cascade effect, which ultimately sees the end consumer suffering a higher cost than should be the case.
This may result in a GST liability as the land and buildings are removed from the GST net. A turnover threshold of $10,000 is suggested, below which the small-scale accommodation activity must be removed from GST.
The Government is concerned that there have been cases where an insolvent company sells property to a new associated company (the "Phoenix" entity) which obtains a GST refund, but the seller defaults on its GST liability.
Full Text (681 words)
The Press, Copyright of Fairfax New Zealand Limited 2008, All rights reserved.
If a property developer cannot claim GST on purchase of land but is required to account for it on sale - it seems things don't stack up.
This is effectively the impact of one of the proposals outlined in the Government's recently released discussion document Options for Strengthening GST Neutrality in Business-to- Business Transactions.
The document contains proposals which may (if implemented) affect all GST registered persons.
It is likely that the proposals will be enacted as law in substantially the form proposed in the document.
The closing date for submissions was August 11.
While the proposals do deal with some currently problematic technical issues (such as nominees, accommodation and change in use adjustments), the focus is more around protecting the Government's revenue base.
The Government seems very keen to stamp out any chance of errors, or avoidance, in relation to supplies of going concerns, significant assets (costing more than $50m) and all land.
It proposes to do this by introducing a reverse charge rule - where the purchaser returns the output tax on the sale as well as claiming the input tax on the purchase.
This eliminates the need for the purchaser to pay the GST amount.
It will make Inland Revenue's job of auditing GST returns filed easier - there will be far fewer large GST refund claims to audit.
The risk of the supplier not correctly returning the output tax on these transactions will be removed.
In relation to purchases of land from unregistered vendors, the Government is proposing that in all cases (not just for purchases from associates, as is currently the case) the secondhand goods tax credit claimable by the purchaser be limited to the GST (if any) paid by the vendor when it purchased the land.
Leaving aside the practical difficulty of needing to confirm with the seller whether they paid any GST on purchase, this proposal seems unfair and inconsistent with the principles on which GST is based.
If the purchaser cannot claim back any GST on purchase but has to account for GST on the sale (after having used the land in its taxable activity), that seems very penal.
The land will need to be sold for 12.5% more than its cost or the GST-registered business will have incurred a net GST cost (that does not sound like neutrality), which will give rise to the "dreaded" GST cascade effect, which ultimately sees the end consumer suffering a higher cost than should be the case.
Hopefully, the weight of submissions sees this proposal removed.
Owners of home stays, farm stays and similar who are GST registered need to pay particular attention to the proposals, as they may be required to deregister or otherwise remove their small-scale accommodation activity from GST.
This may result in a GST liability as the land and buildings are removed from the GST net. A turnover threshold of $10,000 is suggested, below which the small-scale accommodation activity must be removed from GST.
The Government's concern here is that people have been obtaining GST benefits (ie. input tax claims) in relation to what is primarily their private residence.
The proposals also deal with the often disputed treatment of property developers/builders who build for sale but rent out their property in the meantime.
The proposals include the need to make clear adjustments which can be calculated with greater certainty.
"Phoenix" entities are also targeted.
The Government wants to ensure that it does not refund GST paid to a purchaser when the seller (who is somehow associated with the purchaser) is not able to pay over the GST that it owes on the sale (ie it is insolvent).
The Government is concerned that there have been cases where an insolvent company sells property to a new associated company (the "Phoenix" entity) which obtains a GST refund, but the seller defaults on its GST liability.
The proposal is that the GST refundable will be offset against the GST payable.
These and other proposals are significant - especially with regard to all supplies of land.
* Paul Hodson is a tax partner with BDO Spicers.
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