Zero-rating of supplies of sail-away boats - use as security or offered for sale

We have been asked to clarify some issues relating to zero-rating of supplies of "sail-away boats" under section 11(1)(i) of the Goods and Services Tax Act 1985 ("the GST Act"). In particular, the issues relate to the exercise of the Commissioner's discretion under section 11(8) to extend the 60-day period within which a recipient of the supply of a boat ("the recipient") must export the boat under section 11(7)(a), where the boat is used as security or offered for sale while it is in New Zealand.

This article replaces the guidelines published on page 43 of the Tax Information Bulletin, Vol 6, No 6 (December 1994).

(Note: All legislative references in this item are to the GST Act.)

Background

Generally, goods are subject to GST if the supply of the goods is made in New Zealand. However, section 11(1)(i) and (7) allows for the zero-rating of a boat which is supplied in New Zealand but then exported, under its own power, by the recipient (commonly known as a "sail-away boat") if:

1. the boat is supplied by way of sale, and
   
2. the recipient exports the boat under its own power to a place outside New Zealand (that is, when the boat departs its final New Zealand port there is an intention that the boat's next port of call will be outside New Zealand):
   1. within 60 days of the recipient or their agent taking physical possession of it (later referred to as "the 60-day period"), or
   2. within a longer period allowed by the Commissioner under section 11(8), and
      
3. the supplier (who is the vendor of the boat) or the recipient (who is the purchaser) keeps and makes available to the Commissioner the necessary documentation in relation to:
   1. records of the sale of the boat, and
   2. limitations on dealings in and the uses that the boat will be put to before export, and
   3. the proposed and actual date of export.

Inland Revenue published some guidelines on what would constitute limitations on dealings in and the uses of the sail-away boat. The guidelines can be found on page 43 of Tax Information Bulletin, Vol 6, No 6 (December 1994) and the relevant extract is cited as follows:

• ...
• a written statement from the purchaser that the boat will not be hired, given away, offered for sale, used as security or otherwise disposed of while it is in New Zealand
• ...
• ..."

Inland Revenue has reviewed the above guidelines and replaces them with the statements below.

Revised operational guidelines on the zero-rating of supplies of sail-away boats

The Commissioner may extend the 60-day period under section 11(8) if:

1. the supplier of the boat applies in writing, and
   
2. the Commissioner is satisfied that circumstances beyond the control of the supplier and recipient have prevented or would prevent the export of the boat within the 60-day period.

When seeking an extension of the 60-day period under section 11(8), the supplier must advise the Commissioner of the circumstances which have prevented, or would prevent, the boat from being exported within 60 days. The supplier must also advise when the recipient will be expected to export the boat under its own power to a place outside New Zealand.

For example, during sea trials a major mechanical problem is encountered which can only be repaired after ordering a spare part from overseas. This will mean a delay which will prevent the recipient from exporting their boat under its own power within the 60-day period. The supplier of the boat, when applying for an extension of the 60-day period in writing, should give details of the mechanical problem and explain how this has prevented the export of the boat within the initial 60-day period. The details may include the order of the spare part made, the date by which the boat is expected to be repaired and the date by which the recipient is expected to export the boat under its own power to a place outside New Zealand.

Furthermore, the supplier must keep and make available to the Commissioner the following documentation:

1. a written statement from the recipient that the boat is not intended for use within New Zealand before it is exported and that the boat will be exported from New Zealand,
   
2. a written statement from the recipient that the boat will not be hired or given away before it is exported,
   
3. a written statement from the recipient that where the boat is offered for sale while it remains in New Zealand, the boat will be exported under its own power to a place outside New Zealand before the completion of the sale, and
   
4. a record of the sale.

In order to support the zero-rating of the supply of the sail-away boat under section 11(1)(i), the supplier needs documentary evidence to show that the recipient exported the boat. In addition to the documentation set out in (a) to (d) above, the supplier must keep and make available to the Commissioner a copy of the clearance document issued to the recipient by the New Zealand Customs Service upon leaving New Zealand.

Where the supplier does not have a copy of the clearance document, the supplier will need to make available other documentation, which as a whole, proves that the boat has left New Zealand. Acceptable evidence includes, and is not limited to the entry for export, documents issued by the foreign customs authority evidencing arrival of the boat, evidence of foreign registration of the boat, etc.

Discussion

A sail-away boat can now be used as security for the recipient without affecting the zero-rating of the supply

The revised operational guidelines no longer prohibit the recipient of the supply from using a sail-away boat as security while the boat is within New Zealand. This is because such a prohibition does not accord with commercial practice nowadays. Recipients may use their sail-away boats as security for financing arrangements for the purpose of building the boats or/and for other commercial purposes. Using the boat as security does not of itself constitute physical "use" of the boat within New Zealand.

However, if the recipient defaults on loan repayments and the security is called upon within New Zealand before the boat is exported, the supply of the boat by the supplier to the recipient cannot be zero-rated under section 11(1)(i). This is because the recipient has not exported the boat under its own power to a place outside New Zealand. This means that GST is to be returned by the supplier on the supply of the boat.

A sail-away boat can be offered for sale by the recipient of the supply before exporting the boat under its own power to a place outside New Zealand

These revised operational guidelines have clarified the "offered for sale" restriction before the boat is exported. Inland Revenue considers that a mere offer for sale (for example, advertising to invite potential buyers) by the recipient of the supply before exporting would not constitute "use" of the boat in New Zealand. Therefore, merely offering the boat for sale while it is still in New Zealand will not affect the zero-rating of the supply.

However, if the recipient of the supply sells the boat to a person in New Zealand before they export it, the supply of the sail-away boat from the supplier to the recipient will not be zero-rated under section 11(1)(i).

On the other hand, if the recipient of the supply agrees to sell the boat to a person outside New Zealand and the person will complete the resulting sale by making full payment only after the recipient or their agent has sailed the boat under its own power to a place outside New Zealand, the supply of the sail-away boat from the supplier to the recipient will still be zero-rated under section 11(1)(i). This is because the boat will be exported under its own power before the completion of the subsequent sale.