Goods And Services Tax Amendment Act 1987

This commentary item was published in Public Information Bulletin Volume 165, September 1987

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Part I

Section 1 - Short Title

This section provides for this Act to be referred to as the Goods and Services Tax Amendment Act 1987. While the Act does not contain a general application date the provisions of this Act, except sections 2(2), 3(4), 4(1) and 6(2), are to be read as though they came into force on 22 June 1987 when the Act received the Governor-General's assent, and apply to supplies made on or after that day.

Sections 2(2), 3(4), 4(1) and 6(2) have different application dates (refer to the comment on those sections for details).

Section 2 - Interpretation

Unconditional Gift

This section makes an amendment to the definition of the term "unconditional gift", which is contained in section 2(1) of the principal Act.

An "unconditional gift" is a payment made by a person to a non-profit body, where that payment does not result in the supply of goods and services.

There was concern that when a non-profit body received a grant from the Government and there was no supply of goods and services to the Government, that it was an unconditional gift and not subject to GST. It is the intention that these payments by the Government be subject to GST.

To ensure that payments made by the Government to non-profit bodies are subject to GST, the legislation has been amended to provide that such payments can not constitute unconditional gifts.

This amendment applies to all payments made by the Government from the introduction of GST, ie, 1 October 1986.

Subsection (1)

amends the definition of the term "unconditional gift" to exclude any payments made by the Government or a public authority.

Subsection (2)

provides for the amendment to retrospectively apply from 3 December 1985, when the GST Act came into force.

Section 3 - Meaning of the Term Supply

This section makes 3 amendments to section 5 of the GST Act 1985. These amendments relate to

• (a) The general liability to GST of goods sold in satisfaction of a debt.
• (b)(i) Goods sold in satisfaction of a debt where those goods were acquired before 1 October 1986.
• (ii) Goods and Services retained by a registered person upon ceasing to be registered where those goods were acquired before 1 October 1986.

Part A - General Liability to GST of Goods Sold in Satisfaction of a Debt

Section 3(1) of the Amendment Act amends section 5(2) of the Goods and Services Act 1985.

Section 5(2) of the GST Act provides that where a good acquired or produced by a registered person in the course of a taxable activity is taken and subsequently sold by another person in satisfaction of a debt owed by that registered person, that forced sale is deemed to be a taxable supply and is subject to GST. The person who seizes and subsequently sells the good is required to furnish any required returns and account for any GST.

This type of supply commonly arises where a mortgagee or a bailiff sells a good in satisfaction of a debt. Under the previous legislation the mortgagee or bailiff was required to determine whether the debtor was a registered person and whether the good being sold formed part of the debtor's taxable activity. This caused practical difficulties for the mortgagee or bailiff in that it may not have been possible to determine the status of the good being sold (ie, whether it is subject to GST or not), particularly where the debtor was not available to be questioned or refused to supply the information. This left the mortgagee or the bailiff to guess the status of the supply.

Section 5(2) of the GST Act has been redrafted to remove any uncertainty that existed in determining the status of the good being sold. The section now provides that all such forced sales in satisfaction of a debt by a mortgagee or bailiff are subject to GST unless the person whose good is sold furnishes to the person, exercising the power of sale, a statement in writing that the supply of that good is not a taxable supply and giving the reasons why.

It is therefore possible under this amendment that a good sold in terms of section 5(2) will be taxable even if it is owned by a non-registered person or does not form part of a taxable activity, if that person has not furnished the required statement.

This amendment applies to all supplies made on or after the assent date of this Amendment Act (22 June 1987).

Section 5(2) has also been redrafted to ensure that supplies of such goods are subject to GST irrespective of whether they were acquired before or after 1 October 1986.

Part B- (i) Goods Sold in Satisfaction of a Debt Where Those Goods Were Acquired Before 1 October 1986

- (ii) Goods and Services Retained by a Registered Person Upon Ceasing to be Registered Where Those Goods were Acquired Before 1 October 1986

Subsections 3(2) and 3(3) amend respectively subsections 5(2) and 5(3) of the GST Act 1985.

Subsection 5(2) of the GST Act 1985 is concerned with the sale of goods, which form part of a registered person's taxable activity, and are sold by another person in satisfaction of a debt owed by the registered person. This forced sale is deemed to be a taxable supply and is therefore subject to GST. The person who seizes and subsequently sells the goods is required to furnish any required return and account for any GST.

Subsection 5(3) of the Goods and Services Tax Act 1985 is concerned with the retention of assets, forming part of a taxable activity, by a registered person upon cessation of their registration. This subsection deems a taxable supply of those assets to have occurred and output tax must be accounted for on the retained assets.

An amendment was required to ensure that the wording of these two subsections clearly reflected the intention that these subsections should apply to all goods, irrespective of when they were acquired or produced by the currently registered person. This ensures uniform application to all goods whether they were owned by the registered person prior to the introduction of GST and/or the registration of their taxable activity. It has always been the Department's interpretation that the deemed supplies which occur under 5(2) and 5(3) are taxable, irrespective of the status of the goods and the owner at the time of acquisition. The deemed supply is a completely separate transaction; consumption is now occurring and should be taxed.

Subsection 3(2)

removes the words "acquired or produced" in subsections 5(2) and 5(3) of the GST Act and replaces them with the phrase "applied on or after the 1st day of October 1986". Therefore, this amendment provides that where goods are sold in satisfaction of a debt, and those goods were part of the taxable activity of the debtor at the time of sale, then a deemed supply of those goods takes place.

This amendment is deemed to have come into force on the 3rd day of December 1985 (the date of assent to the Goods and Services Tax Act 1985) and therefore applies to all such supplies made on or after 1 October 1986. It should be noted that this amendment only applies from 1 October 1986 to date of assent of the GST Amendment Act 1987 (22 June 1987). This is because section 3(1) of the Amendment Act repeals the original subsection and replaces it with the new subsection discussed in Part A above. This concept that section 5(2) applies to all goods irrespective of the date of acquisition or production is still applicable under the new subsection 5(2).

Subsection (3) of section 3 removes the words ", being goods or services in relation to which a deduction pursuant to section 20(3) of this Act has been made,". This removes the concept that the asset must have been acquired or produced during the course of a taxable activity. As long as the assets are part of the taxable activity at the time of cessation of that activity, there is a deemed supply, irrespective of when the asset was acquired or produced and for what purpose it was originally obtained and used.

This amendment is deemed to have come into force on the 3rd day of December 1985 (the date of assent of the Goods and Services Tax Act 1985) and therefore applies to all such supplies made on or after 1 October 1986.

Section 4 - Value of Supply of Goods and Services

Section 4 amends section 10 of the principal Act. That section sets out the rules for valuing supplies of goods and services.

Section 10(12) provides the method for valuing the supply of services that occurs when a person places a bet on a race. The value of the supply for a bet is the sum of the deductions made under sections 42 and 97 of the Racing Act 1971. These deductions are made from the investment pool for each race before the dividend payable to the punter is determined.

The deductions fall into two classes; totalisator duty, and the various levies collected for the Racing Clubs and the New Zealand Racing Authority (NZRA). The levies are taxable charges as they are imposed by registered persons, eg, the Racing Clubs, TAB, and the NZRA. These were increased to take account of GST. In contrast, the totalisator duty (consolidated fund revenue) when deducted from the betting pool is GST exclusive. This was not automatically increased for GST.

Section 10(12) of the GST Act 1985 provides that the total GST liability in respect of the investment pool is calculated as one-eleventh of the total deductions made, including totalisator duty.

As the levies deducted had increased to take account of GST, this calculation correctly determined the GST liability in respect of these levies. Although the totalisator duty itself is not a charge for services, it should be subject to GST when built into the final price of any produce or service, ie, gambling. However, the legislation provided that a liability for GST arose as a result of the duty being treated as a GST inclusive amount, and the legislation had to be amended to recognise this fact.

The main amendment to section 10(12) gives effect to a treatment of betting on races that is consistent with the treatment of other types of gambling, such as lotteries. In those cases the Government duty forms part of the determination of the consideration for the supply.

It is expected that GST returns will be furnished on the current basis by the Racing Clubs and to a lesser extent the TAB, until 31 July 1987.

Due to section 10(12) being amended the Racing Clubs and to a lesser extent the TAB may request reassessments of their GST returns which relate to races held during the period 1 October 1986 to 31 July 1987.

The method of calculating the reassessments is fairly complex, so a separate TPC dealing with the calculation of these reassessments will be issued shortly.

The other amendments are consequential to amendments made to the Racing Act 1971.

Consequential Amendments

Section 4(1) inserts a new subsection (12A) into section 10 of the GST Act. The new subsection ensures that totalisator duty is increased by the rate of GST for the purposes of calculating the consideration for a supply of services under section 10(12). This amendment will apply to bets placed on races held on or after 1 August 1987.

Section 4(2)(a) amends subsection (12) as a result of the insertion of the new subsection (12A). Sections 4(2)(b) and 4(2)(c) delete the references to subparagraphs (i) and (ii) of section 42(1)(e) and (f) of the Racing Act 1971. These subparagraphs have been removed from the Racing Act, so were redundant in the GST Act. The amendments made by section 4(2) of the Amendment Act 1987 apply from the general application date of this Amendment Act.

Section 5 - Special Returns

Section 5 amends section 17 of the GST Act.

Section 17 provides that where a supply is made in terms of section 5(2) of the GST Act, the person selling the goods is required to furnish a special return in the prescribed form to account for the GST on the supply.

The amendments to section 17 are consequential to the amendment to section 5(2) of the principal Act as inserted by section 3(1) of the Amendment Act. The term "registered person" where it appears is no longer appropriate and has been replaced with the word "person". This is because section 5(2) no longer applies only to a registered person. Also the registration number of the person whose good is sold is only to be shown if that person is registered.

The amendments to section 17 apply to returns furnished in respect of all section 5(2) supplies made on or after the assent date of this Amendment Act.

Section 5 amends section 17(1) of the principal Act as follows:

• (a) The word "registered" is omitted where it first appears.
• (b) The words "if registered", are inserted before the words "registration number" in paragraph "(a)(ii)".
• (c) The word "registered" is omitted in paragraph "(c)".
• (d) The word "registered" is omitted where it last appears.

Section 6 - Adjustments

Section 6 amends section 21(1) of the Goods and Services Act 1985.

Where an asset which is used principally for making taxable supplies is used in a non-taxable activity, section 21(1) of the GST Act 1985 requires a registered person to account for output tax on the minor private or exempt use of that asset.

An amendment was required to ensure that the wording of this section clearly reflected that this section should apply to all goods, irrespective of when they were acquired or produced by the currently registered person. It ensures uniform application to all goods whether or not they were owned by the registered person prior to the introduction of GST and/or their registration. It has always been the Department's interpretation that the non-taxable use of goods is a deemed supply under section 21(1) and is taxable. It must be remembered that such a deemed supply is completely unrelated to the status of the goods and the owner as at the time of acquisition. The deemed supply is a completely separate transaction; consumption is now occurring and should be taxed.

Subsection (1) replaces the words "acquired or produced" with the word "applied". This emphasises the concept that as long as the good is applied principally in the taxable activity then an adjustment must be made for any lesser use of that asset in a non-taxable activity. A SUPPLY IS STILL DEEMED TO OCCUR.

Subsection (2) deems this amendment to have come into force on the 3rd day of December 1985 (the date of assent to the GST Act 1985) and therefore applies to all such supplies on or after 1 October 1986.

Section 7 - Assessment of Tax

This section makes 4 amendments to section 27 of the principal Act. These amendments provide:

• (a) For the Commissioner, in certain circumstances, to make an assessment in respect of a return furnished under section 17 of the principal Act.
• (b) That the person whose goods were sold in terms of section 5(2) of the GST Act is liable for the tax assessed where this person furnished an incorrect statement required under section 5(2).
• (c) That a copy of the assessment is to be issued where an assessment is made in respect of a return furnished under section 17 of the principal Act.
• (d) That Parts III, IV, VI and X of the GST Act 1985 apply in respect of the assessments made.

Part A - The Commissioner to Make an Assessment in Respect of a Section 17 Return

Section 27 provides for the Commissioner to make an assessment of tax in various circumstances in relation to a taxable period return. The Commissioner may make an assessment where -

• (a) There is a default in furnishing a return; or
• (b) The Commissioner is not satisfied with any return; or
• (c) The registered person is not satisfied with any return made in respect of a taxable period; or
• (d) Any non-registered person purports to charge tax on supplies.

An assessment is only made where any one of these 4 circumstances applies. Generally, an assessment is not made where a registered person furnishes a return and makes a payment. GST is basically a self-assessed tax. An objection can not be made to a return unless an assessment is made by the Commissioner.

However, where a section 17 return is furnished in respect of a section 5(2) supply (a good sold in satisfaction of a debt), this legislation did not provide for the person selling the goods to be able to request an assessment and thereby object. This is because section 27(1) of the principal Act referred to returns IN RESPECT OF A TAXABLE PERIOD. Further, it did not allow the person whose goods were sold pursuant to section 5(2) to request an assessment and then make an objection.

Therefore section 27 has been amended by inserting a new subsection (1A) to provide that the Commissioner is able to make an assessment of tax in respect of a section 17 return (form GST 121) which is required to be furnished together with the GST charged where a good is sold in satisfaction of a debt (section 5(2) supply). This amendment allowing an assessment to be made applies where -

• (a) There is a default in furnishing a section 17 return; or
• (b) The person who furnished the return is not satisfied with the return; or
• (c) The person whose goods were sold in satisfaction of a debt is not satisfied with the return furnished; or
• (d) The Commissioner is not satisfied with any section 17 return.

This amendment allows an assessment to be made by the Commissioner in respect of a section 17 return furnished or required to be furnished thereby giving the right of objection. An objection can be made either by the person who sold the goods or the person whose goods are sold. In most cases the person who sold the goods is liable to pay any tax outstanding and is entitled to any refund arising from the assessment.

A significant difference from section 27(1) is that the person whose goods were sold in terms of section 5(2) is entitled to request the Commissioner to issue an assessment in respect of the section 17 return furnished. This is because this person has a vested interest in the supply so the supply by them is deemed to be a taxable supply. Therefore, if the supply has been incorrectly charged with tax because of the statement required by section 5(2) not being furnished, this person is able to supply the correct information in respect of the supply.

Part B - Person Liable to Pay Tax Assessed Where Section 5(2) Statement Incorrect

Under this new section 27(1A) the person who sold the goods is liable to pay any tax assessed even though this person acted on the basis of the statement furnished in terms of section 3(1) of the Amendment Act. This would happen where the person whose goods were sold furnished a written statement stating that goods were not taxable. On that basis the person selling the goods would not have charged GST and therefore would not have furnished a section 17 return. However, if at a later date the Commissioner determined that the sale was taxable, the Commissioner would be able to make an assessment of the tax payable in terms of section 27(1A) and the person who sold the goods would, other things being equal, be liable to pay.

Therefore, to protect this person section 27 is further amended by inserting a new subsection (1B). This amendment provides that the person whose goods were sold in satisfaction of a debt is liable to pay the tax assessed in respect of an assessment. This will apply in respect of a section 17 return when the Commissioner makes an assessment because of default in furnishing the return or the Commissioner is not satisfied with the return and the person required to furnish the return holds the written statement required by section 5(2) that is incorrect. The person whose goods were sold and the person who sold the goods are able to object to the Commissioner's assessment.

Part C - Copies of Assessments Issued to Other Persons

Section 7(2) amends section 27(3) of the GST Act 1985.

Section 27(3) provides for the Commissioner to send the notice of an assessment to the person liable to pay the tax. The amendment rewrites this provision to allow the Commissioner to send the notice of the assessment to the person liable to pay the tax and a copy to the other party where the assessment is made under either subsection (1A) or (1B). This means that when an assessment is made in terms of section 27(1A) the notice of assessment is sent to the person who sold the goods and a copy is sent to the person whose goods were sold. Alternatively, when an assessment is made in terms of section 27(1B) the notice of assessment is sent to the person whose goods were sold and a copy to the person who sold the goods. This then allows both parties to know of the existence of an assessment, thereby giving them an opportunity to object.

Part D - Application to Other Parts of the Act

Subsection (3) of section 7 amends section 27(6) of the GST Act 1985.

This amendment provides that subsections (1A) and (1B) apply to Parts III, IV, VI and X of the GST Act 1985. This allows a person to be deemed a registered person even though they may not be registered.

These amendments apply from the date of the Governor General's assent, being 22 June 1987.

Section 8 - Limitation of Time for Assessment or Amendment of Assessment

Section 31 of the GST Act is amended by section 8 of this Act. Section 31 prescribes the limitation of time for an assessment to be made or altered by the Commissioner where a person has furnished a return in respect of a taxable period. The period to make an assessment or alter an assessment is limited to 4 years from the end of the taxable period in respect of which the return was furnished or the assessment was made. However, where the Commissioner is of the opinion that the person has knowingly or fraudulently failed to make a full disclosure of the facts necessary to determine the amount of tax payable for any taxable period, the Commissioner may make an assessment or alter an assessment at any time. As this section refers to a return in relation to taxable periods it does not apply to a return or assessment made in respect of a section 17 return.

Section 8(1) of the Amendment Act amends section 31 by inserting a new subsection (1A). This subsection applies where a person furnishes a return pursuant to section 17 or is assessed for tax pursuant to section 27(1A) or (1B). It limits the Commissioner from making an assessment or altering an assessment after the expiration of 4 years from the end of the month in which the sale was made pursuant to section 5(2) or the assessment was made.

Section 8(2) rewrites section 31(2) to allow the Commissioner to issue an assessment or alter an assessment at any time in respect of any taxable period return furnished or return furnished pursuant to section 17. This applies where the Commissioner is of the opinion that the person has knowingly or fraudulently failed to make a full disclosure of the facts necessary to determine the amount of tax payable.

This amendment to section 31 applies to all assessments made on or after the date of assent of this Amendment Act.

Section 8(2) repeals subsection (2) and substitutes a new subsection to allow the Commissioner to make or alter an assessment at any time in respect of any taxable period return or return furnished pursuant to section 17. This applies where a person knowingly or fraudulently fails to disclose all the facts necessary to determine the amount of tax payable for any taxable period or return furnished pursuant to section 17.

This amendment applies from the date that the Governor General gave his assent, being 22 June 1987.

Section 9 - Cancellation of Registration

This section amends section 52 of the GST Act 1985 which sets out the rules for the cancellation of GST registrations.

Section 52(1) provided that a person must remain registered for at least two years before being allowed to apply for cancellation of their GST registration unless all of their taxable activities have ceased. The purpose of the minimum two year registration period was to prevent persons from registering for a short period of time, claiming input tax credits, and then cancelling their registration.

The amendment removes the requirement that a person must remain registered for a minimum of two years. As section 5(3) of the Act effectively deems a supply to take place of goods and services that have not been consumed upon cessation of registration, the two year limitation on the cancellation of registration is not necessary. The amended section 52 allows a person's registration to be cancelled where the Commissioner is satisfied that the level of taxable supplies in the next 12 month period will fall below the registration "threshold" of $24,000.

This amendment applies from the date this Amendment Act received the Governor-General's assent (22 June 1987).