Part III - Goods and Services Tax Amendment Act 1989

This commentary item was published in Public Information Bulletin Volume 181, June 1989

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Section 1 - Short Title And Commencement

This section provides for this Act to be referred to as the Goods and Services Tax Amendment Act 1989 which amends the Goods and Services Tax Act 1985.

This Act came into force on the 22nd of March 1989, the date on which it received the Governor-General's assent. The provisions of this Act apply to supplies made on or after that date, except sections 3(1), 3(3), 8, and 9.

Section 2 - Interpretation

Section 2 amends a number of the definitions contained in section 2 of the GST Act.

Subsection (1) - extends the meaning of the term "associated person" to cover the relationship between a company and a person, where that person is associated with another person who is associated with the company. This caters for the situation where, for example, a trader supplies goods or services to a company that belongs to a relative of the trader i.e., the trader's brother.

The effect of this amendment is that such supplies will now be subject to the special rules that apply to supplies between associated persons.

Subsections (2) and (3) - amend the definition of the term "input tax" in respect of the supply of secondhand goods from a non-registered person to a registered person.

Subsection (2) - ensures that a registered person can only be entitled to claim an imputed tax credit in respect of a supply of secondhand goods where the goods are supplied by way of sale. Where secondhand goods are supplied other than by way of sale (e.g. a lease, a distribution, etc.) the registered person will not be eligible to claim the secondhand goods imputed tax credit. A sale is the exchange of a commodity for money or other consideration (Concise Oxford Dictionary).

Prior to this amendment, the GST Act provided that a registered person was entitled to claim a secondhand goods imputed tax credit in relation to all goods supplied provided the goods were acquired for the principal purpose of making taxable supplies. This meant the imputed tax credit could be claimed in respect of the leasing of goods since a leasehold interest in personal or real property is goods for GST purposes.

Subsection (3) - ensures that the consideration for a supply of secondhand goods is limited to the lesser of the purchase price or open market value of those goods where the consideration for that supply also relates to other matters. The effect of this is to ensure that the imputed tax credit is only available to be claimed in respect of the purchase of secondhand goods.

Section 10(18) of the GST Act provides for the consideration of a taxable supply to be properly attributed to the matters to which it relates. This allows the consideration in respect of a supply to be apportioned where the consideration relates to both a taxable supply and an exempt supply. This apportionment does not, however, apply where the supply is not a taxable supply. This means that a secondhand goods imputed tax credit could have been claimed in respect of a supply of services where the consideration for the supply of secondhand goods also includes a supply of services.

Subsection (4) - amends the definition of the term "secondhand goods" to exclude livestock. This means that where a supply of livestock is not taxable, the recipient will not be entitled to claim a secondhand goods imputed credit.

Prior to this amendment there was uncertainty whether livestock constituted secondhand goods within the normal meaning of that term.

In addition, the legislation also makes a distinction in the treatment of progeny and livestock acquired in relation to the secondhand goods imputed tax credit. This amendment removes any doubt by explicitly excluding livestock from the meaning of secondhand goods.

Section 3 - Value Of Supply Of Goods And Services

Section 3 makes two amendments to section 10 of the principal Act which relates to the valuation provisions.

Subsection (1) - rewrites section 10(3) of the principal Act to ensure that this valuation provision applies to both taxable and non-taxable supplies made between associated persons. This means that the consideration for a supply made between associated persons, whether the supply is taxable or not, will be deemed to be the open market value.

Prior to this amendment, section 10(3) only applied where the supplier was a registered person. It deemed the consideration for a supply made by a registered person to an associated person for little or no consideration to have been at open market value, unless the recipient was entitled to claim an input tax credit in respect of that supply.

In addition, subsection (1) also inserts a new subsection (3A) into section 10 of the principal Act to ensure that the provisions of section 10(3) do not apply where the supplier and the recipient are both registered persons. The new subsection (3A) applies where the recipient is entitled to claim an input tax credit and provides that the consideration for the supply is the actual amount of the consideration payable (if any). This has the same effect that the original section 10(3) had.

A consequence of this amendment is that non-registered persons who make supplies to associated persons will have to value such supplies at open market value. If the open market value of such supplies exceeds the $24,000 registration threshold there will be a requirement to register in terms of section 51 of the principal Act.

Subsection (2) - amends section 10(5) of the principal Act to ensure that the provisions of section 10(5) apply to both taxable and non-taxable supplies. Currently, section 10(5) only applies in respect of a taxable supply.

Section 10(5) provides that the consideration for a supply of goods and services made pursuant to a credit contract is the cash price (as defined in the Credit Contracts Act 1981) in relation to that supply. This amendment will ensure that a secondhand goods imputed tax credit cannot be claimed in respect of the credit element of a credit contract under which the secondhand goods are supplied.

Subsection (3) - makes a consequential amendment. It repeals subsections (2) and (3) of section 8 of the GST Amendment Act 1986 which had previously amended section 10(3) and (5).

Subsection (4) - provides for subsections (1) and (3) of this section to apply in respect of supplies made on or after the 1st day of April 1989.

Section 4 - Imposition Of Goods And Services Tax On Imports

This section amends section 12 of the GST Act which relates to GST being imposed on goods that are imported into New Zealand for home consumption. This amendment reflects the original intention of the legislation to ensure that only fine metals are not subject to GST on importation.

The previous provision enacted to exempt fine metals from the imposition of GST on importation was drafted too widely. This meant that other goods, the supply of which is exempt in term of section 14 of the Act, were also not subject to GST on importation. The term "fine metal" is defined in section 2 of the principal Act.

Subsection (1) - removes from section 12(1) the words "(not being goods the supply of which is exempt from tax pursuant to section 14 of this Act)" and replaces them with the words "(not being fine metal)". The effect of this is that the exemption is limited to fine metal only.

Subsection (2) - inserts into section 12(6)(a) the words "fine metal" to ensure that for the purposes of section 12 the meaning of the term "fine metal" is as defined in section 2 of the principal Act.

Subsection (3) - repeals section 10(1) of the GST Amendment Act 1986. That section had inserted the exemption now replaced by subsection (1) of this section.

Subsection (4) - provides for this section to apply in respect of all goods imported on or after the day this Act was assented to.

Section 5 - Accounting Basis

This section makes a drafting amendment to correct a wrong cross-reference contained in section 19 of the GST Act.

Section 6 - Calculation Of Tax Payable

This section amends section 20(3)(a) of the principal Act to ensure that a registered person cannot claim an imputed tax credit in respect of secondhand goods except to the extent that the goods have been paid for during the relevant taxable period. This is the same treatment that is afforded to a registered person who accounts for GST on the payments basis.

Prior to the amendment, section 20(3)(a) of the principal Act allowed a registered person, who accounted for GST on the invoice basis, to claim a deduction for input tax. A registered person was eligible to claim a full imputed tax credit in respect of any secondhand goods acquired during the taxable period in which that person received an invoice or made a payment.

The effect of this amendment is to prevent a registered person making a claim for an imputed tax credit in relation to the acquisition of secondhand goods until a payment is made in respect of that supply. The imputed tax credit will be limited to 1/11th of the payment made in that taxable period.

Subsection (1) - amends section 20(3)(a)(i) to ensure that the supply of secondhand goods does not qualify for the imputed tax credit even though the goods may have been supplied to that registered person during the taxable period.

Subsection (2) - inserts a further subparagraph into section 20(3)(a) to allow an imputed tax credit for the supply of secondhand goods to the extent that a payment has been made during the taxable period for that supply.

This means that the imputed tax credit will be available in the taxable period in which the goods are paid for even though the supply to the registered person may have been made in another taxable period.

Section 7 - Allocation Of Taxable Supplies Following Investigation By Commissioner

This section inserts a new section 20B into the principal Act. The purpose of section 20B is to provide for the allocation of taxable supplies where an investigation by the Commissioner has revealed a discrepancy relating to a period containing more than one taxable periods.

Subsection (1) - inserts the new section 20B into the GST Act.

The new section 20B(1) defines three terms for the purposes of section 20B.

"Discrepancy" is defined as any understatement or overstatement of taxable supplies made or received by a registered person as calculated or ascertained in respect of any specified period.

"Specified period" is defined as a period which exceeds a single taxable period and to which the discrepancy relates.

"Tax discrepancy" for the purposes of this section is defined as an amount equal to the tax fraction of the amount of the understated or overstated taxable supplies made or received by a registered person.

Subsection (2) of section 20B - provides how the amount of the discrepancy is to be allocated to the taxable periods contained in the specified period.

Paragraph (a) provides that where the Commissioner has calculated or ascertained that there is a discrepancy in a specified period (i.e. a discrepancy which covers more than one taxable period) then the amount of the discrepancy is deemed to be taxable supplies made or received by the registered person at a uniform daily rate throughout that specified period. Those taxable supplies are then deemed to have been made or received in the taxable periods, or any part of a taxable period, spanned by the specified period.

Paragraph (b) provides that where the Commissioner is satisfied that the registered person did not carry on the taxable activity for any part of the specified period, the discrepancy is deemed to be taxable supplies made or received at a uniform rate throughout that part of the specified period during which the taxable activity was undertaken. The supplies are then deemed to have been made or received during the taxable periods, or any part of a taxable period, in that part of the specified period during which the taxable activity was carried on.

Paragraph (c) provides that where the registered person is able to satisfy the Commissioner that a different method of allocation is more appropriate, the discrepancy shall be allocated on that basis.

Subsection (3) of section 20B - provides that the "tax discrepancy" (the meaning of which is explained above) is deemed to be either output tax or input tax for the purposes of section 20 of the principal Act. (Section 20 provides the mechanism for the calculation of tax payable in respect of a taxable period.)

It should be noted that the taxable supplies allocated in terms of this new section are allocated for all purposes of the principal Act. This means that the penalty, incremental interest, penal, and prosecution provisions will apply in respect of the discrepancy so allocated.

Subsection (2) - provides that the new section 20B applies in respect of assessments issued on or after the date this Amendment Act received the Governor-General's assent.

Section 8 - Adjustments

This section makes two amendments to section 21 of the principal Act.

Subsections (1), (2), and (3) - amend section 21(3) of the principal Act which deems a supply to occur where a registered person provides or grants fringe benefits to employees in the course of a taxable activity carried on by that registered person. These amendments insert a new subsection (3A) into section 21 of the principal Act to replace the provisos to section 21(3). This new subsection also includes two new provisions which exclude certain fringe benefits from the application of the provisions of section 21(3).

Subsection (1) omits the reference to the provisos in section 21(3) of the principal Act and replaces it with a reference to the new subsection (3A).

Subsection (2) repeals both provisos to section 21(3).

Subsection (3) inserts the new section 22(3A) which makes it clear that fringe benefits that are lump sum bonuses, gratuities, retiring allowances, or redundancy payments will not be treated under section 20(3) of the principal Act as supplies of goods and services made in the course of a taxable activity. This is because such payments are monetary remuneration and therefore should not be subject to GST.

Subsection (4) - inserts a new subsection (6) into section 21, of the principal Act. The new subsection ensures that a registered person is entitled to claim an input tax credit in respect of assets retained on cessation of a taxable activity and which are subsequently reapplied by the registered person to another taxable activity.

When a registered person ceases to be registered for GST purposes and retains any goods and services forming part of the assets of the taxable activity, a supply is deemed to occur in respect of those retained assets. This supply is deemed to occur in terms of section 5(3) of the principal Act and is valued at the lesser of cost or open market value. If that person subsequently commences a taxable activity at a later date and the assets retained on the cessation of the previous activity are applied to make taxable supplies in the new activity, this new subsection will allow an input tax credit to be claimed in respect of those assets.

This new subsection also applies where the assets retained on cessation are reapplied by a partnership for the purposes of making taxable supplies where the assets were previously retained by a partner of that partnership. In addition this new subsection applies to any assets retained on cessation in terms of section 5(3) of the principal Act even though the assets may have been acquired or produced prior to the 1st of October 1986.

The new subsection reflects the original intent of the legislation and therefore applies in respect of such supplies made on or after the 1st day of October 1986 being the introduction date of GST.

Subsection (5) - consequentially repeals section 18(5) of the GST Amendment Act 1986.

Subsections (6) and (7) - provide the application dates for this section. Subsections (1), (2), (3), and (5) apply from 1 October 1988 and apply in respect of any fringe benefit provided or granted on or after that date. This coincides with the application of the new tax regime in respect of retiring and redundancy payments. Subsection (4) applied from 3 December 1985.

Section 9 - Relief From Tax Where New Start Grant Made In Respect Of Drought Relief

Section 9 inserts a new section 48A into the GST Act. The new section provides for tax owing by drought stricken farmers who have received a new start grant to be written off. The write off is limited to the GST which relates to the grant itself and the taxable activity in respect of which the grant was made. The section also provides for relief for registered persons who are associated with the person who received the grant.

Under the current provisions of the GST Act, the grant (when paid to a registered person) is subject to tax. The reason for this is that the grant is paid to refrain from carrying on a taxable activity (i.e. farming) and is therefore consideration for a supply of services in connection with the termination of that activity.

The sale of the farm, livestock, plant, etc., unless supplied as a going concern to another registered person, is subject to tax and will give rise to an output tax liability of 1/11th of the lesser of the cost or open market value of the respective assets. If the farming activity is supplied as a going concern to a registered person the supply is zero rated.

The GST Act deems the retention of any assets forming part of the taxable activity to be a supply. An output tax liability of 1/11th of the lesser of cost or open market value will be incurred if any assets (e.g. personal chattels, motor vehicle, tools of trade) acquired for use in the taxable activity are retained by the registered person.

Section 9(1) inserts the new section 48A into the GST Act.

Subsection (1) of new section 48A defines the term "new start grant" for the purposes of the section. That term means a grant which is paid to a person in respect of drought relief by the Government of New Zealand with the approval of the New Zealand Rural Trust and designated by the Minister of Agriculture as a new start grant.

To qualify for the payment of the grant the criteria set by the New Zealand Rural Trust must be met. Briefly these criteria require that:

1. The applicant or vendor must be a bona fide farmer with the farm being within a defined drought area.
2. An arrangement must have been entered into in which all claims to the title of the property and other assets have been relinquished following an unconditional sale and purchase agreement.
3. The solicitor acting on behalf of the farmer must have confirmed that all criteria have been met.

The farmer will, however, be entitled to keep a motor car, household and personal chattels, and tools of trade.

Subsection (2) provides for the Commissioner to write off the GST relating to the new start grant and to the farming activity.

For the subsection to apply the registered person must:

1. Have received the new start grant in respect of a taxable activity; and
2. Have furnished all returns required under the GST Act (that will establish the liability for tax); and
3. Be liable for GST in respect of the new start grant, or the taxable activity.

In addition to the GST arising from the termination of the taxable activity, any GST (to the extent that it relates to the taxable activity for which the new star grant was made) owing at the date the new start grant was received is also subject to the write off provisions. If the registered person operates more than one taxable activity an apportionment will be necessary to determine the amount of tax to be written off. There is no authority for refunding any tax paid prior to the new start grant being received.

Prior to writing off the tax the Department will need assurance that a new start grant, as defined, has been received. There is no obligation for the registered person to sign a declaration but evidence must be sighted prior to the tax being written off. Such evidence will include the letter from the Ministry of Agriculture enclosing the grant and copies of correspondence that preceded the payment of the grant. A copy of the solicitor's letter to the New Zealand Rural Trust confirming the criteria for the grant is an example of such correspondence.

If the above requirements have been met the Commissioner is required to write off all the tax owing that relates to that taxable activity for which the grant was provided.

Subsection (3) of section 48A provides for tax for registered persons who are associated to the person who received the new start grant to be written off.

The write off for associated persons is discretionary and the Commissioner must take into account several factors prior to determining the amount (if any) of tax shall be written off. The Commissioner will consider writing off the tax if a person (associated with the registered person, as discussed below) has received a new start grant and the registered person is liable for tax in respect of:

1. The taxable activity (including its termination); or
2. Land on which the taxable activity was carried on (including the sale or disposition of that land).
3. The liability may have been incurred through the termination of the activity or the sale or disposition of the land, through the retention of assets, or may have been owing prior to the new start grant being made. If more than one taxable activity is carried on an apportionment will be required to determine the tax applicable to the activity for which the grant was made.

Before the Commissioner may write off any tax all returns must have been furnished. Those returns will establish the liability that exists.

It is at the discretion of the Commissioner as to the amount, if any, of tax that shall be written off. Not only must all the above requirements be met but the Commissioner will also take into consideration the circumstances of the registered person and the relationship with the person who received the new start grant.

Section 10 - Group Of Companies

This section amends section 55(7) of the principal Act which deals with the consequences of group registration.

Subsection (1) - replaces paragraph (c) of section 55(7). Currently, in terms of section 55(7)(c) of the GST Act, taxable supplies made by a member of a group to another member may be disregarded for GST purposes. However, this does not apply if the recipient of the taxable supply is not entitled to claim an input tax credit in respect of that supply. The result of this is that output tax is required to be accounted for by the representative member of the group where a recipient member of the supply carries on an exempt activity and receives taxable supplies from other members of the group.

This amendment removes this qualification in the treatment of intra-group supplies by allowing all taxable supplies between members of a group to be disregarded.

Subsection (2) - introduces two new paragraphs (db) and (dc) into section 55(7) to ensure that section 21 of the GST Act applies where goods and services are applied for purposes other than for which they were originally acquired. A taxable supply is deemed to occur in terms of section 21(1) or section 21(5) of the principal Act if the representative member of the group applies any goods and services for purposes other than for which they were originally applied by the registered person who acquired them (now being part of the group). This is the same treatment that is afforded to a registered person who makes both taxable and exempt supplies.

Example:

A Ltd. is a fully owned subsidiary of B Ltd. Both companies are registered for GST purposes. A Ltd. is a property holding company whose taxable activity is the leasing of a building. The building is leased on the following basis:

Forty percent of the area space is leased to B Ltd with the balance to third parties.

B Ltd. is a financial institution who makes principally exempt supplies. Eighty-five percent of the supplies made by B Ltd are exempt and the building leased from A Ltd is used solely for the purpose of making those exempt supplies.

A Ltd and B Ltd are a group in terms of section 55 of the GST Act. B Ltd is nominated to be the representative member of the group. Section 55(7) of the principal Act provides that the representative member (B Ltd) carries on all the activities of the members of the group and makes and receives all the supplies of the group whether taxable or exempt.

B Ltd is now deemed to be carrying on the taxable activity of A Ltd and therefore applying the goods and services of A Ltd, namely the building, for a purpose of making other than taxable supplies. This change in usage arises because A Ltd only applied the building for making taxable supplies whereas B Ltd (the representative member) is now applying the building for making both taxable and exempt supplies. In terms of the new paragraph (db), section 21(1) of the principal Act now applies to deem a supply to occur to the extent that the building is used for making other than taxable supplies. The value of this deemed supply is the lesser of cost or open-market value in terms of section 10(8) of the principal Act and is accounted for as output tax.

If the building had a cost of say $1 million (exclusive of GST) and is constructed of reinforced concrete (that is, the straight line depreciation rate of 1% is used to calculate the adjustment), the adjustment for any 2 monthly taxable period would be as follows in respect of the application of the building:

$1,000,000 * .01	* 40%	= $666.66
6
$666.66	* 10%	= $66.66

6% being the number of taxable periods in a year

40% being the application of the building for making exempt supplies

10% being the rate of GST

An adjustment will also be required in respect of revenue expenditure incurred in respect of the building to the extent that the building is used for making other than taxable supplies during any taxable period.

As the building is still being used in a taxable activity any subsequent sale of that building will be a taxable supply.

The new paragraph (dc) works in the manner outlined above, but is the converse of paragraph (db) in that it applies in respect of section 21(5). Paragraph (dc) applies where the goods services acquired or produced by the registered person were for the principal purpose of making other than taxable supplies. The subsequent application by the representative member for purposes of making taxable supplies deems a supply to occur which allows the representative member to claim an input tax credit in respect of that supply. This only applies in respect of goods and services acquired or produced after the 1st day of October 1986.

It should be noted that section 21(1) or section 21(5) may require one-off adjustment to be made. This will occur where the subsequent application of the goods and services of one member of the group by the representative member of that group are solely for purposes other than for which the goods and services were acquired.

For example, a subsidiary may provide computer services to its parent body and these services are used solely in the course of making exempt supplies by the parent body. The subsidiary and the parent body group. As the representative member is now applying the goods and services of the subsidiary for the sole purpose of making other than taxable supplies, a one-off adjustment will be required in relation to capital assets.

This section will affect groups already in existence on the application date of this section and registered persons that group on or after that date.

Subsection (3) - repeals section 29(2) of the GST Amendment Act 1986. That section had previously amended section 55(7)(c).

Test Of Association

To be considered for the write off the person or entity must be associated to the person who received the new start grant. Section 64FB(3) of the Income Tax Act provides the test as to whether a person is associated to the person who received the grant. To qualify the registered person and the person who received the grant must be associated within the meaning of section 245B of the Income Tax Act. Each case will need to be considered separately and section 245B must be referred to when determining whether the two persons are associated. However, situations in which two persons could be considered to be associated include:

• a company and a person who holds an income interest of 50 percent or more in that company
• 2 persons who are relatives (as defined in section 2 of the Income Tax Act)
• a partnership and any person who is a partner in the partnership
• a trust and a beneficiary or settlor.

In addition, the associated person must also either carry on or have carried on a farming activity in respect of which a new start grant was provided, or is the owner or lessor of the land used to carry on the activity for which the grant was made. The Commissioner must also be satisfied that the registered person has a substantial degree of control over the associated person or that there is a substantial identity of interests between the two persons.

Subsection (2) of section 9 provides that this section is deemed to have come into force on the 4th day of November 1988. That was the day on which the Government announced the details of the South Island drought relief package. Any grants paid on or after that date are to be considered under this section.