GST and distributions from a trust made for no consideration between associated registered persons

Section 10 of the Goods and Services Tax Act

Section 10 of the Goods and Services Tax Act has been clarified for valuing distributions from a trust and for valuing a gift between associated registered persons.

The amendment ensures that the market valuation rule does not apply if the supply is made for no consideration and the registered recipient applies the goods and services in a taxable activity from the time of supply.

Background

The distribution of property to a beneficiary under a trust on the death of a registered person, or as a gift, is treated as a supply for GST purposes. Such supplies will often be between associated persons.

Supplies for no consideration between associated persons are valued for GST purposes at the open market value of the supply under section 10(3) of the GST Act.

Under section 10(3A) of the GST Act this valuation rule does not apply if the supply was acquired for the principal purpose of making taxable supplies and the associated supplier and recipient are both registered for GST purposes. This is intended to recognise that when one party charges GST and the other party is able to deduct that GST, the result is GST-neutral. In this situation the value of the supply is treated as the amount actually paid which, in the case of a distribution under a trust, is nil.

In the case of a supply made under a trust or as a gift from one GST-registered person to another, the recipient will receive the goods as a beneficiary. The recipient has no purpose of acquisition. Therefore GST that could arguably be charged on the basis of open market value in section 10(3A) would not apply. The beneficiary would also be potentially denied a deduction because the goods were not acquired for the principal purpose of making taxable supplies. The transaction would no longer be taxneutral as intended by section 10(3A). The amendment removes this anomaly.

Key feature

Section 10 of the GST Act 1985 has been amended to preserve the intended revenue-neutral effect of a supply of goods and services between two registered associated persons when the goods or services are applied in the recipient's taxable activity from the time of supply.

Application date

The amendment applies from 1 October 1986. The bill earlier provided that the change would apply from the date of enactment. The application date was changed at the recommendation of the Finance and Expenditure Committee following submissions.