The Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill (Bill), introduced to Parliament on 13 September, contains a number of proposed, business-friendly, GST changes, which we welcome. We discuss the two major proposals below. We also look at a significant recent Australian court decision on the meaning of "supply" for GST purposes, and assess its potential ramifications for New Zealand businesses.
Allowing foreign businesses to GST register
Under current rules, non-resident businesses are generally unable to register for New Zealand GST purposes, because they do not make taxable supplies in this country. This is problematic for a non-resident business that does not operate in New Zealand, but purchases services here which cannot be zero-rated by the local supplier.
The issue is demonstrated by way of an example in the IRD commentary to the Bill:
Air Africa is a passenger airline operating out of Cape Town. It flies domestically within South Africa and internationally. It sends some trainee pilots to New Zealand for specialised training and incurs GST on those training costs.
While some services provided to non-residents can be zero-rated for GST purposes, the flight training services in the example cannot. This is because the physical performance of the services is received in New Zealand by an employee of the airline (the trainee pilot). The New Zealand flight training school must therefore charge GST at the standard rate (15%). However, as Air Africa does not itself make taxable supplies in New Zealand, and cannot register for GST, it cannot recover the GST incurred as input tax.
Given that GST is, as a matter of policy, intended to be a tax on final consumers, rather than on businesses, the IRD has acknowledged that this result is inappropriate.
The Bill proposes to address the issue by introducing an enhanced GST registration system, allowing non-resident businesses to register for GST without making taxable supplies in New Zealand, if either:
- they are registered for GST (or a similar consumption tax) in their home jurisdiction; or
- where their home jurisdiction does not have a GST (or similar consumption tax), they carry on a taxable activity outside New Zealand with turnover exceeding NZ$60,000.
On the basis that the South African airline is either registered in South Africa for the purposes of a local consumption tax, or meets the turnover threshold, it would be able to register for New Zealand GST and recover as input tax the GST charged by the flight training school.
This change will benefit New Zealand businesses supplying "exported" services of the nature targeted. Anecdotally such businesses currently come under pricing pressure from their offshore customers due to the irrecoverable GST component in their fees.
There will, of course, be exceptions to the ability of non-residents to register:
- First, there will be a de minimis exception, preventing registration where the amount of input tax claimed in the first taxable period after registration is unlikely to exceed NZ$500.
- Second, and more significantly, registration will not be permitted where the non-resident business itself carries on a taxable activity involving a supply of services received in New Zealand by a non-registered person. This will, for example, prevent a non-resident package tour operator from registering and recovering GST charged on a block booking for tickets to a New Zealand tourist attraction, where the non-resident then "on-sells" a ticket to a customer as part of a package tour of New Zealand. Here, the underlying service will ultimately be privately "consumed" in New Zealand by the customer, such that there should be a net collection of GST by IRD.
Finally, it is noted that non-resident businesses will only be permitted to GST register on a "payments" (rather than "invoice") basis. This will mean they can only make a GST input tax claim once they have paid the New Zealand supplier for the relevant service, not merely after being invoiced. Also, the permitted timeframe for IRD to process and refund input tax claims will be significantly longer than for ordinary registered persons.
Ability to opt-out of the principal-agent GST rules
Under current GST rules, if an agent makes a taxable supply of goods or services on behalf of a principal, a single supply is deemed to have been made by the principal to the end-recipient of the supply. The agent is entitled to issue the tax invoice in respect of the supply, provided the principal does not do so too.
This single supply, and single tax invoice, requirement, has resulted in problems for businesses whose computerised accounting systems automatically generate invoices. In some cases, for example, the principal's accounting system will automatically issue an invoice to the agent, with the agent also issuing an invoice to the recipient of the supply. This is a technical breach of the GST legislation, albeit one that will typically be revenue neutral.
The Bill proposes to rectify this problem by giving affected parties the option of recognising two supplies, and issuing an invoice for each of those supplies, for GST purposes ie one from the principal to the agent, and one from the agent to the recipient. Revenue protection measures will be introduced to buttress the new approach, including:
- a requirement that the agent and principal agree in writing that the new rule applies to their situation;
- a requirement that the principal, even if registered on a "payments" basis, accounts for GST on an "invoice" basis in respect of the supply to the agent; and
- a prohibition on the principal claiming a GST bad debt deduction in respect of the supply to the agent, if the agent has received payment for its supply to the recipient.
A flight of fancy? Australian developments on the meaning of "supply" for GST purposes
A recent decision of the High Court of Australia (Qantas Airways Limited v Federal Commissioner of Taxation) explores the scope of the meaning of "supply" for Australian GST purposes and, in particular, whether a "supply" is made when the customer does not acquire or use the goods or services that are the subject of the underlying contract.
The Qantas decision
The Qantas case concerned just over A$34m of GST that Qantas and its subsidiaries had collected on fares from customers who did not, for one reason or another, show up for their flights, or claim refunds on their tickets (where that was possible). The collected GST was only payable to the Commissioner if it was found that Qantas had made a "supply" to those absentee passengers for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the Australian Act).In a majority decision, the High Court (Australia's highest court) found that Qantas had in fact made a supply within the meaning of s 9-10 of the Australian Act, by making promises, in consideration for the money collected, to its would-be passengers, to "use best endeavours to carry those passengers and their baggage, having regard to the circumstances of the airline's business operations". The majority relied upon the Australian Act's extended meaning of "supply", which includes the creation of any right, and/or entry into an obligation "to do anything".
Federal Commissioner of Taxation v Reliance Carpet Co Pty Limited
The High Court referred to and followed its earlier decision, Federal Commissioner of Taxation v Reliance Carpet Co Pty Limited. The issue in this case was whether a forfeited deposit in a cancelled land sale contract attracted GST in the hands of the vendor.
The Federal Court had held that the contract was for a supply of land which did not occur, meaning that no supply was made and the vendor therefore did not have to account for GST on the forfeited deposit.
The High Court disagreed in a unanimous decision. It held that although no land was supplied, the entry by the vendor into obligations to maintain the property and bear the inherent risks and overheads until settlement, constituted a "supply" for GST purposes, in consideration for the deposit.
Interestingly, Heydon J, who was one of the High Court judges in Reliance, was the dissenting judge in the Qantas decision, holding that Reliance was distinguishable and of no assistance to either party in Qantas.
What about refunds?
The facts in Qantas only concerned cases where either no refund was available, or none was sought by the person who had bought the ticket. The majority did not explain what, if any, GST would have been payable by Qantas if a refund had been paid. On the majority's logic, however, it would seem that the GST component of the fare should not be refunded, since a "supply" had been made, even if not the one the passenger thought he or she was paying for!
Will Qantas impact on New Zealand taxpayers?
In a nutshell, we do not think so. New Zealand's GST law is more sensible and commercially "real".
It is settled in New Zealand that where a land sale contract has been cancelled, GST is not chargeable on a deposit retained by the vendor, nor is the purchaser entitled to an input tax credit on that deposited amount. This is the view of the IRD for three reasons.
First, the IRD considers that the deposit is prima facie part-payment of the purchase price for the land. If the land is not ultimately transferred, no relevant supply takes place. In particular, the IRD's view is that there is no supply of legal rights for which the deposit is consideration.
Second, as the deposit is forfeited because of a purchaser default, following cancellation it becomes a pre-determined sum of compensation for the purchaser's breach, which is not consideration for a supply of "services" by the vendor.
Third, the statutory definition of "supply" for New Zealand GST purposes does not include the "catch-all" terminology of the Australian provision ie the creation of any right, and entry into an obligation "to do anything". This legislative divide is another reason why Qantas and Reliance should not impact on the New Zealand position.
Another point to note is that the New Zealand courts and IRD, unlike the Australian High Court, accept that GST is a tax on consumption. Accordingly, consistent with the position on forfeited deposits, in determining the New Zealand GST consequences of fact scenarios similar to those in Qantas, we believe the focus will be on the "real world" transaction ie. payment for a flight on the Qantas facts. Where the passenger does not fly, nothing is "consumed", even if the passenger does not seek a refund. That gives a meaning to "supply" that matches the description of the transaction the parties would agree on. This was the view of the dissenting judge in the High Court in Qantas and of the Federal Court.