TAX UPDATE 21 Sep 2012
TAXABLE ACTIVITY OR NOT
With the changes to the GST rules and the limitation on claims that can be made in relation to assets that are acquired prior to GST registration, the question of when a taxable activity has commenced has become an increasingly important one.
A recent court case gives some guidance on this issue, and reminds us what is required in order for a taxable activity to have commenced.
A trust was settled in May 2007. On 7 June 2007, the trustee resolved to purchase and subdivide a residential property and resell it. On the same date, the trust (as nominee) purchased a property. It was envisaged that the trust could subdivide and develop at least three townhouses on the land. The property purchase was settled on 21 June 2007. GST registration was granted by the Inland Revenue Department ("IRD"), effective from 1 June 2007.
Nine days after purchase, the property was listed for resale subject to the proposed subdivision and refurbishment of the dwellinghouse. It did not sell.
In August 2008, after approximately $40,000 had been spent on repairs and maintenance to the property, it was eventually resold, undivided and undeveloped, back to the original vendor (the second mortgagee). The trust had undertaken no further activity since that time and was by then insolvent.
On 16 February 2011, the IRD retrospectively declined the trust's claim for a GST input credit and deregistered it for GST.
The Taxation Review Authority ("TRA") noted that anything done in connection with the beginning or ending, including a premature ending, of a taxable activity is part of that activity. The TRA also noted that mere preparatory steps cannot be counted unless a taxable activity eventuates.
The TRA found there was consideration of the development potential of the property and the purchase of that property. Setting up the purchase and ownership structure involved time and effort. There was also refurbishment work, landscaping of the section, detailed survey and sub-divisional work, and extensive marketing work undertaken. The TRA considered that at all material times, until the sale, the trust was carrying on the taxable activity of a property developer.
How it affects you
This case gives us comfort that as long as reasonable steps are taken, and there is documentation to support an argument that a taxable activity has commenced, it will be easier to prove your position at a later time.
The AA Smartfuel Programme is a rewards scheme whereby customers obtain entitlements to buy fuel at a discounted price from certain fuel providers by purchasing goods or services from certain retailers (Participating Reward Providers ("PRPs")). The fuel providers may also be PRPs in respect of both fuel and non-fuel purchases. The IRD has issued a Ruling on the correct GST treatment of the various components of the scheme.
The sale of goods and services by a PRP results in the customer providing "consideration" for a single supply of goods and services and the right to buy fuel at a discount. To the extent the PRP makes a taxable supply to the customer, the amount paid by the customer is subject to GST.
Payments AA Smartfuel Limited ("AASL") makes to a fuel provider are "consideration" for a taxable supply of services from the fuel provider to AASL. The amount AASL pays to the fuel provider is therefore subject to GST. In calculating the amount of tax payable in a taxable period, AASL will be entitled to an input tax deduction for all the GST charged in respect of supplies made by a fuel provider to AASL in that taxable period.
Where a customer uses fuel discount entitlements to purchase fuel at a discounted price, GST on that supply is chargeable only on the discounted price payable by thecustomer to the fuel provider.
Payments a PRP makes to AASL are "consideration" for a supply of services from AASL to the PRP. The amount the PRP pays to AASL is therefore subject to GST.
To the extent that the single supply (comprising the right to buy fuel at a discount) made by a PRP to a customer is a taxable supply, in calculating the amount of tax payable in a taxable period, the PRP will be entitled to an input tax deduction, or (where s 20(3) applies) a deduction from the amount of output tax payable by that PRP, for the GST charged on supplies made by AASL to the PRP in that taxable period.
When an amount is refunded to a PRP, either:
- AASL will be required to provide the PRP with a credit note; or
- The PRP will be required to provide AASL with a buyer-created credit note.
This Ruling will apply from 1 November 2011 to 31 December 2014.
How it affects you
Make sure that you treat these transactions correctly for GST purposes as the IRD will no doubt be checking this.
POINTS OF INTEREST…
The IRD has changed SPS 11/01 to state that the IRD will accept instalment arrangements for the payment of provisional tax when that provisional tax is able to be calculated in accordance with the rules in subpart RC of the Income Tax Act 2007.
The FMA has announced its plans to overhaul the class exemption notice for Real Property Proportionate Ownership Schemes.
A taxpayer appeal against the lawfulness of an Inland Revenue Department raid on their home and business premises have been dismissed.
TO THE POINT…
"Be as smart as you can, but remember that it is always better to be wise than to be smart. "
TAX UPDATE 28 Sep 2012
FURTHER LIVESTOCK VALUATION CHANGES
The recently released Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill contains further changes to livestock valuation options to implement the announcements in the 2012 Budget, whereby an election to use the herd scheme valuation method became an irrevocable election.
The main feature of the changes is the introduction of an associated persons test for transfers of livestock valued under the herd scheme. The Bill states that where a transaction is undertaken between associated persons, other than in the ordinary course of business, the herd scheme election and base herd scheme numbers will transfer to the associated person who acquires the livestock. There is an exception for intergenerational transfers where the only reason the parties are associated is due to a blood relationship. In these circumstances, the vendor will be allowed to make a one-off election. They will need to dispose of all of their specified livestock in the year of transfer and cease deriving income from the disposal of specified livestock.
Other changes include the introduction of an exception to the general irrevocable nature of a herd scheme election. An exception will exist for changes in the farming operation. A change in farming operation will only occur to the extent that female breeding livestock cease being intended to be used for breeding purposes and the livestock are then used in a fattening farming business in the starting income year. A same year election will be allowed in these circumstances, dispensing with the two year election period that previously applied.
The present cease farming elections have been modified. For the 2013 income year onwards, it will be compulsory to adopt the opening livestock values under the herd scheme when a farmer completely sells their specified livestock before 1 November. Previously, farmers had a choice whether to revalue under the usual herd scheme rules or lock in the opening values. In practice, this election was only ever made where there was a tax advantage available to the farmer. The introduction of a set date and the mandatory use of the provision will largely remove any available tax opportunity.
With the introduction of the associated person's rules the current special rule that applies on the death of a farmer will be repealed.
How it affects you
If you are farming and you want to know how the changes will affect you, and what, if anything, you can or should do now, contact your Business or Taxation Advisor.
DOUBLE TAXATION OF TRANS-TASMAN DIVIDENDS
altered over recent years to encourage overseas investment into New Zealand. We have seen the introduction of Limited Partnerships because overseas investors wanted the taxation relief of a look through vehicle and the anonymity of a closed "register". A Limited Partnership is an entity from a legal and commercial perspective, but the public's ability to search details of the partners and the financial position of the Limited Partnership are limited. From a taxation perspective, it is a look through entity, thereby eliminating much of the double taxation that can arise if investing in a company.
It has recently been reported that business lobbyists in New Zealand are continuing to push policy makers for a change to the double taxation of dividend returns that cross the Tasman, saying it deters investment and holds back economic growth.
At the present time, if imputation credits from New Zealand are attached to dividends paid to a non-resident shareholder, the credit for the tax is generally not able to be claimed by that shareholder. Similarly, if franking credits from Australia are attached to dividends received by a New Zealand resident shareholder, the credit cannot be claimed in New Zealand and the net dividend is taxable in the hands of the New Zealand shareholder.
It has been reported that mutual recognition of imputation and franking credits, where businesses provide against tax on shareholder returns for tax paid at the company level, would lift Trans-Tasman gross domestic product by $5.3 billion by 2030.
Australia has consistently opposed mutual recognition of the tax credits for many years because it claims it would cut Australia's national Federal tax take for New Zealand's benefit.
Since 2009, New Zealand and Australia have been working to accelerate the creation of a single economic market by aligning a range of areas in business law.
However, it seems unlikely that in the near future we will see mutual recognition of tax credits being introduced.
How it affects you
We are seeing more and more cases of people being affected by the "double taxation" of Trans-Tasman dividends. It is an additional cost that people often do not consider, and in some cases the amount of "additional tax" can be significant.
POINTS OF INTEREST…
The New Zealand Law Society (NZLS) submission on taxation of lease inducement payments suggests that such payments pose no significant threat to the income tax base.
The September Tax Bill provides that a deduction will be allowed for riparian planting, aligning the legislation with present treatment.
The Taxation Review Authority have held that tax avoidance provisions apply regardless of whether a taxpayer has been defrauded.
The Government has recently introduced a new Social Security Bill to support the move to paid work for beneficiaries.
TO THE POINT…
"Farming looks mighty easy when your plow is a pencil and you're a thousand miles from the corn field".
Dwight D. Eisenhower