2011 GST amendments including input tax adjustment on disposal of goods or services and entitlement to input tax deductions.

Input tax adjustment on disposal of goods or services

Section 21F of the Goods and Services Tax Act 1985

A change has been made to the Goods and Services Tax Act 1985 (GST Act) to clarify that goods and services that have been zero-rated and to which the apportionment rules apply are subject to section 21F which applies an adjustment on disposal of the goods and services.

Background

The Taxation (GST and Remedial Matters) Act 2010 introduced a number of substantial changes to the GST rules, including new apportionment rules and the zero-rating of supplies that involve land.

Under the new apportionment rules, the portion of a deduction that a registered person can claim in respect of acquired goods and services must correspond with the portion of the asset's use for making taxable supplies. When a registered person disposes of, or is treated as disposing of, goods or services in the course of a taxable activity and has not claimed a full input tax deduction, section 21F allows them to claim an additional amount of input tax.

The amount of the deduction that is available under the provision is calculated by reference to a formula. Although the formula works as intended where the GST is charged at the standard-rate on both the acquisition of goods or services and their subsequent disposal, it provides an incorrect result where the original acquisition or the subsequent disposal have been subject to GST at the rate of 0%.

Key features

Subsection (4) has been inserted into section 21F to provide a formula for calculating an input tax deduction on the disposal of goods or services which were zero-rated when they were originally acquired by the supplier:

tax fraction x consideration x (1 - previous use)

Subsection (5) provides definitions for terms used in subsection (4).

Tax fraction is the meaning given in section 2(1), unless subsection (7) applies to the disposal.

Consideration is the amount of consideration received, or treated as received, for the supply.

Previous use is the percentage intended use or the previous actual use in the period before the period in which the disposal occurs.

Subsection (6) specifies that the amount calculated under the formula must not be more than the amount of output tax that is accounted for by the person under section 20(3J)(a)(iii) - in effect, the initial amount of the deduction not claimed - together with any later adjustments already made under the apportionment rules.

Subsection (7) provides that if GST on a disposal is charged at the rate of 0%, the tax fraction in the new and old formulae in section 21F is treated as 15%.

Application date

The amendments apply to supplies made on or after 1 April 2011.


Entitlement to input tax deductions where the change in use is a result of the changes in the GST Act

Section 21HB

Changes have been made to the GST Act to amend the apportionment rules to allow input tax deductions where the change in use occurs as the result of the changes to the definitions of "dwelling" and "commercial dwellings" and the affected person is required to be GST-registered.

Background

The GST Act exempts the supply of accommodation in a "dwelling", but not accommodation that is in a "commercial dwelling". The main reason for exempting the supply of accommodation in a dwelling from GST, as described in the 1985 White Paper on Goods and Services Tax, was to ensure that those in rental accommodation were not disadvantaged compared with owner-occupiers. For this reason, the definition was intended to apply to situations when there was a reasonable level of substitutability between renting and owning a home.

This goal was arguably not being achieved because of the potentially wide interpretation of the definition of "dwelling". The definitions of "dwelling" and "commercial dwelling" have therefore been amended.

A result of new definitions is that some supplies of accommodation that were treated as exempt before 1 April 2011 will now be subject to GST.

If a supplier has been treated as making exempt supplies of accommodation before 1 April 2011, they would likely not have claimed input tax deductions in respect of the supplies. If these suppliers are required to charge GST on their supplies after 1 April 2011, they should be able to claim input tax deductions for GST on goods and services related to the making of the supplies.

Key features

Section 21HB(1) specifies that section 21HB applies when goods or services acquired or produced before 1 April 2011 were not acquired or produced for the principal purpose of making taxable supplies but, because of the changes made to the definitions of commercial dwelling and dwelling, the goods or services are treated from 1 April 2011 as being used for making taxable supplies. For the purposes of the provision, the person making the adjustment must be registered for GST under section 51(1) either before or after 1 April 2011.

If section 21HB applies, subsection (2) allows a person to deduct input tax under section 20(3C), the general input tax apportionment provision, to the extent to which a deduction has not been made under the old apportionment rules. For the purposes of the apportionment rules, the person must treat the goods or services as acquired on 1 April 2011 at their original cost (section 21HB(3)).

Application date

The amendments apply to supplies made on or after 1 April 2011.


The requirement to provide the registration number of the recipient

Section 78F

A change has been made to section 78F of the GST Act to require a GST-registered recipient to provide their registration number to the supplier.

Background

The new zero-rating rules, which apply from 1 April 2011, require a supply that involves land to be zero-rated for GST purposes where both the supplier and the recipient are registered for GST and certain other conditions are met.

In these circumstances, section 78F requires the recipient to provide a statement in writing to the supplier as to whether they are, or expect to be, registered for GST.

In contrast, section 75(3B) requires the supplier of a zero-rated supply to maintain sufficient records to enable the registration number of the recipient to be ascertained.

A reconciliation of the two sections is necessary to require the recipient to provide their registration number to the supplier.

Key features

Section 78F(2B) requires a recipient, who is a registered person, or who expects to be a registered person, to provide their registration number to the supplier at or before the date of settlement.

Application date

The amendments apply from 29 August 2011.


Information requirements for zero-rating transactions that involve undisclosed agencies

Sections 78F(6) and (7), and 75(3C), (3D) and (3E) 

Changes have been made to section 78F of the GST Act to allow an agent for an undisclosed principal to make limited representations to the supplier for the purposes of the zero-rating rules.

Background

To help the supplier to decide whether a supply of land should be zero-rated, section 78F requires the recipient to provide to the supplier the information regarding their registration status and intentions in respect of land.

A purchaser may use an agent to acquire goods or services on their behalf. In some situations, the agency may be done on the basis that the identity of the de-facto purchaser, or principal, will remain unknown to the supplier.

The purpose behind the undisclosed agency would be defeated if, in order to zero-rate a supply of land, the undisclosed principal had to reveal their identity and provide their registration details to the supplier. Moreover, since in undisclosed agency situations the supplier would be unaware of the identity of the recipient, the supplier would not be able to satisfy the requirements in section 75(3B) to maintain sufficient records to enable the name and address of the recipient and the registration number of the recipient to be ascertained.

Key features

Section 78F(6) states that when a supply is made to a person who is, for the purposes of the supply, an agent acting on behalf of an undisclosed principal, the information requirements of section 78F(2) are met if the agent provides a statement in writing to the supplier as to whether, at the date of settlement, the principal as recipient:

  • is, or expects to be, a registered person;
  • is acquiring the goods or services with the intention of using them for making taxable supplies; and
  • does not intend to use the land as a principal place of residence for them or a person associated with them under section 2A(1)(c).

Section 78F(7) specifies that the agent must also provide their registration number to the supplier at or before the date of settlement.

As a consequence of the above changes, suppliers' record-keeping requirements have also been amended.

Sections 75(3C), (3D) and (3E) state that when a supply that wholly or partly consists of land is made to a person who is, for the purposes of the supply, an agent acting on behalf of an undisclosed principal, the supplier's record-keeping requirements will be met if the supplier maintains sufficient records to enable the particulars of the name, address, and registration number of the agent to be ascertained. In turn, the agent must maintain sufficient records in relation to the undisclosed principal to enable the name, address, and registration number of the principal to be ascertained.

Application date

The amendments apply to supplies made on or after 1 April 2011.


Exclusion of certain dwellings from zero-rating rules

Section 5(15)

Changes have been made to section 5(15) of the GST Act to deem the supply of land that falls under section 14(1)(d) to be a separate supply from the supply of any other real property included in the supply.

Background

Section 14 lists supplies that must be treated as exempt supplies for GST purposes and includes under section 14(1)(d) a sale by the registered person in the course of or furtherance of their taxable activity of a dwelling that has been used for making supplies of accommodation for a period of 5 years or more before the date of supply.

The GST Act requires a supply that involves land to be zero-rated if certain conditions are satisfied. In theory, a sale of land that falls under section 14(1)(d) would also be zero-rated if it was supplied as part of a larger supply of land.

There are no policy reasons for zero-rating rather than exempting such supplies of land used for dwelling. Therefore, the legislation has been amended to deem the supply of land that falls under section 14(1)(d) to be a separate supply from the supply of any other real property included in the supply.

Key features

Section 5(15) has been amended to state that when either of the following supplies are included in a supply, they are deemed to be a separate supply from the supply of any other real property that is included in the supply:

  • a supply of a principal place of residence; and
  • a supply referred to in section 14(1)(d).

Prior to the amendment, only a supply of "principal place of residence" was treated as a separate supply.

Application date

The amendment applies to supplies made on or after 1 April 2011.


Input tax deductions in respect of taxable use by partnerships

Section 21B

Changes have been made to section 21B of the GST Act to extend the application of section 21B relating to input tax deductions for pre-registration goods and services to situations where the person's partnership uses the goods and services for making taxable supplies.

Background

Section 21B allows a registered person to claim input tax deductions for goods and services purchased by them before registration.

The section applies when, before becoming GST-registered, a person acquires goods and services that were subject to GST and later becomes registered for GST and uses the goods and services for making taxable supplies.

In some situations, the person may conduct their business through a partnership and allow the partnership to use in making taxable supplies the goods and services that were acquired by the person while not registered. To ensure that the business choice of acting through a partnership does not prevent an input tax deduction from being claimed, section 21B has been extended to situations where the person's partnership uses the goods and services for making taxable supplies.

Key features

Subsections (1)(b), (2) and (3) of section 21B have been amended with references to a "partnership", therefore extending the application of section 21B to situations where the person's partnership uses the goods and services for making taxable supplies.

Application date

The amendments apply to supplies made on or after 1 April 2011.


Drafting amendment in section 11(8c)

A change has been made to the transitional rule in section 11(8C) of the GST Act to refer to the time of supply as being "on or after" 1 April 2011.

Background

The zero-rating of land rules applies to supplies made "on or after" 1 April 2011.

Section 11(8C) provides an election to apply the new rules if there is a binding agreement before 1 April 2011, and the time of supply is "after" 1 April 2011.

Key features

To ensure consistency with the zero-rating provisions, section 11(8C) is amended to refer to a time of supply "on or after" 1 April 2011.

Application date

The amendment applies to supplies made on or after 1 April 2011.


Definitions of "principal place of residence" and "land" in the GST Act

Section 2

Changes have been made to section 2 of the GST Act to ensure that the definition of "principal place of residence" only applies for the purposes of the definition of "dwelling" and that the definition of "land" only applies for the purposes of the zero-rating of land rules.

Background

Provisions in the GST Act concerned with the definition of "dwelling" and the zero-rating of supplies that involve land, use the term "principal place of residence". Although the same term is used, it is intended to convey slightly different meanings in the context of different provisions. In the context of the definition of "dwelling" the "principal place of residence" is intended to mean premises which are being supplied as accommodation to a person and which the person occupies as their main residence for the duration of an agreement. In the context of the zero-rating provisions the "principal place of residence" is intended to indicate land which is used by its owner or their relatives as their main place of residence.

Section 2(1), among other things, defines the "principal place of residence" for the purposes of the definition of "dwelling". However, owing to an oversight, the definition is also stated to apply to the zero-rating provisions (sections 5(15), 11(1)(mb), and 78F) in the GST Act.

Section 2(1) also includes a definition of "land" for the purposes of the zero-rating rules. The definition has been drafted broadly to ensure that most land-related supplies that could give rise to "phoenix" fraud concerns are zero-rated. The term "land" is also used in a number of provisions concerned with the apportionment of input tax. In the context of those sections, "land" is intended to be interpreted in accordance with its usual meaning.

Owing to an oversight, the definition of "land" in section 2(1) is also stated to apply to the apportionment provisions (sections 21E, 21G(5), 21H(3)) in the GST Act.

Key features

The definition of "principal place of residence" in section 2 has been amended to omit references to the zero-rating provisions in the GST Act.

The definition of "land" in section 2 has been amended to omit references to the apportionment provisions in the GST Act.

Both of the amendments are subject to savings provisions to protect persons who relied on the definitions as they were before the amendments.

Application date

The amendments apply to supplies made on or after 1 April 2011.