GST and exported second-hand goods
2009 changes to the GST Act allows exported second-hand goods to be zero-rated when a registered person has claimed a second-hand goods input tax deduction.
Sections 10(4), 11(3B), 11(3C) and 11(3D) of the Goods and Services Tax Act 1985
Changes have been made to the Goods and Services Tax Act 1985 to allow, in certain circumstances, exported second-hand goods to be zero-rated when a registered person has claimed a second-hand goods input tax deduction. The changes ensure that exported second-hand goods that are not brought back into New Zealand are treated in the same way as exported new goods.
Under section 11(3)(a) of the GST Act, exports of second-hand goods are subject to GST at the standard rate of 12.5% if the exporter, or an associate of the exporter, has claimed a second-hand goods input tax deduction. The specific application of this section was considered by the Taxation Review Authority in Case N66.
The imposition of GST in these circumstances is designed to prevent revenue losses from exporting second-hand goods that have never been subject to GST but gave rise to an input tax deduction when acquired. A further tax base risk arises if the goods are subsequently brought back to New Zealand without GST applying on importation and again sold to the exporter or an associate of the exporter to create another second-hand goods deduction. GST therefore applies to remove the incentive for second-hand goods to be repeatedly imported to and exported from New Zealand to take advantage of the resulting input tax deductions.
The problem with charging GST on exported second-hand goods is that if the goods do not return to New Zealand, they will have been taxed differently from exported new goods.
The changes are consistent with the objective that:
- The GST Act does not distort the tax treatment of second-hand goods that are consumed outside New Zealand.
- The GST base is not exposed to "leakage" arising from transactions that repeatedly seek to claim the deduction available on the purchase of second-hand goods.
Under the amended rules, the supply of second-hand goods in situations - when there is limited prospect of the goods being brought back to New Zealand in substantially the same condition as when they were exported - will be zero-rated.
The zero-rating rules that apply to exported goods have been changed by inserting three new subsections into section 11 of the GST Act.
New section 11(3B) permits registered persons to zero-rate certain exported second-hand goods for which a second-hand goods input tax deduction has been claimed, if:
- the goods are entered for export under the Customs and Excise Act 1996; and
- the goods leave New Zealand within 28 days of the goods being supplied (as determined by the earlier event of the recipient paying for the goods or the supplier issuing an invoice).
New section 11(3B) will apply if the recipient provides the registered person, at or before the time of supply, a written undertaking that the goods will not be brought back to New Zealand by the recipient, or a person associated with the recipient, in a condition that is substantially the same as the condition in which they were exported.
New section 11(3C) is an anti-avoidance provision that requires GST to be charged if all of the following events have taken place:
- the exported goods were previously zero-rated;
- the goods are subsequently imported into New Zealand;
- the goods are reacquired by the registered person in a condition that is substantially the same as when the goods were zero-rated; and
- the registered person had claimed a second-hand goods input tax deduction in connection with the original export of the goods.
New section 11(3D) provides that section 11(3C) applies at the time the goods are reacquired unless GST is levied when the goods are subsequently imported into New Zealand. This change is designed to remove the possibility of double taxation under section 11(3C) and section 12.
A consequential change has been made to section 10(4), which determines the taxable value of the exported goods if section 11(3C) applies.
Example: Exported scrap metal
Company A Ltd pays $630 for scrap metal (2,000 kg of light gauge grade steel and 1,500 kg of oversized grade steel) acquired from the demolition of a haybarn on private property. The owner of the haybarn is not registered for GST, and Company A claims a second-hand goods deduction of $70 ($630 ÷ 9) on the purchase of the scrap metal. Company A cleans and sorts the steel and cuts any oversized components to light gauge specification. The steel is baled and stored with similar gauged steel which is held as trading stock.
Company A receives an order for 6,000 kg of steel from an Indonesian firm.
Supplying the order involves Company A using a mixture of scrap metal that has been acquired from unregistered and registered suppliers (including all of the steel that was formerly part of the haybarn).
The entire export can be zero-rated if the Indonesian firm provides a declaration (for example, a clause in the sale and purchase agreement) that it or a person associated with the firm will not cause the goods to be brought back into New Zealand in substantially the same condition in which they were exported.
"In a condition that is substantially the same"
Section 11(3B) uses the phrase "in a condition that is substantially the same" for the export and re-importation of second-hand goods. The phrase is not defined and is intended to be given its ordinary meaning.
The purpose of the phrase is to ensure, in the event that the goods return to New Zealand (and tax is not levied on the importation), that GST will apply unless any of the following apply:
- the nature of the goods has been fundamentally varied;
- the goods are in a form that is unrecognisable contrasted to the goods when they were exported; or
- the goods have been subsumed into other goods so that they are no longer identifiable from the goods as a whole.
For example, if the scrap metal in the example above returned to New Zealand in the form of metal window frames, the goods would not be considered to be in a condition that is substantially the same. A similar outcome would result if the scrap metal in example 1 returned to New Zealand in the form of an artistic metal sculpture.
The change applies from the date of Royal assent, being 6 October 2009.
1 (1991) 13 NZTC 3,495. The case concerned an exporter of second-hand motorcycles to Japan. The taxpayer acquired the motorcycles from a number of sources, both GST-registered and unregistered. The Taxation Review Authority held that the motorcycles acquired from unregistered persons could not be zero-rated if the second-hand goods input tax deduction had been claimed.