Lastest GST changes come into effect on Friday

Press release

30 March 2011

Lastest GST changes come into effect on Friday (April 1)

For those with short memories, Colin De Freyne, Partner, Tax, for Grant Thornton New Zealand Ltd, recaps on the GST changes that were announced last year but which only come into effect on Friday (April 1).

While there is much interest and discussion about the upcoming May budget, it is the GST changes that were introduced last year that should be exercising the minds of business owners. These changes include:

• Compulsory “zero rating” of certain land transactions;

• Major reform of “change in use” adjustments;

• Tightening the GST definition of “dwelling”; and

• An economic substance approach to transactions involving “nominees”.

The land transaction “zero rating” changes are primarily aimed at eliminating the adverse effects of “phoenix” fraud schemes which saw the purchaser claim back the GST component, with the vendor being left without the ability to pay GST to the IRD. After 1 April 2011, any transaction with a land element, where both parties are registered, will be zero rated. The “land” definition is wide and includes certain rights and options over land. The purchaser must acquire the land for the purpose of making taxable supplies and it must not be used as a principal place of residence. The vendor must obtain information from the purchaser confirming their GST registration and intention to use the land to make taxable supplies (not for a place of residence).

“Change in use” calculations will fundamentally change from a system where input tax is fully recovered or fully denied (with subsequent “drip feed” adjustments), to one where a best estimate of likely use is determined, with subsequent changes only if the estimate is wrong. The objectives of the changes are to bring New Zealand more in line with some of our trading partners, reduce compliance costs for businesses and also to reduce some of the confusion which led to a number of GST cases in previous years. The rules include scope for certain businesses to seek approval for an alternative approach with the IRD.

Accommodation in a “dwelling” should not be subject to GST (eg rental of residential property) but a supply of commercial dwellings should attract GST (eg hotels). The boundary between dwellings and commercial dwellings has become blurred and therefore their definitions have been amended to provide clarity on the boundary. “Dwelling” will now include a requirement for occupation by the recipient as their “principal place of residence” with an entitlement to “quiet enjoyment” of the property. The list of commercial dwellings has increased to include certain serviced apartments and homestays. These changes have not entirely removed the haze from the boundary.

Nomination agreements involve the purchaser in a transaction “nominating” another person (called the “nominee”) to acquire and/or pay for the subject of the sale and purchase agreement. They are normally used where there is some initial uncertainty over which party should be the actual owner. From 1 April 2011 the party making payment will determine the GST consequences unless the sale is of land in which case the nominee is treated as the purchaser.

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