Risks areas remain

GOODS AND SERVICES TAX

Risk areas remain

The previous scheme of the GST legislation created various risks for taxpayers, especially in complex transactions. Some of these risk areas haven't been addressed in the latest changes, so we see further potential for improvement.

Land / asset transactions

The majority of commercial asset transactions are zero rated for GST purposes and that may mean the GST implications of transactions are overlooked, especially when unusual features of the transaction create novel GST issues. A typical example would be a transaction with multiple vendors where only one is selling ‘land’ that qualifies for zero rating.

Where the zero rating rules are incorrectly applied to a transaction, purchasers face risk as the GST legislation can automatically transfer the vendor’s GST liability to the purchaser in some cases. There may be heightened risk in any transaction where it is not clear whether ‘land’ will be supplied (for example, a lease may not be able to be assigned or novated). ‘Land’ can also mean easements, or forestry or fishing rights, rather than just land.

Errors in this area are often high value given the nature of these transactions.

GST warranties / pricing

We are seeing errors arising from parties not understanding how GST warranties should be completed in standard sale contracts – for example, whether a vendor should declare that it is GST registered for a particular transaction when the relevant property may be exempt. Changes in the status of the purchaser or a nomination to a new entity can also create issues.

A frequent error is where pricing is stated as ‘inclusive of GST’ when the GST treatment of the transaction is not yet determined. That can lead to unusual outcomes where one party may receive an effective windfall at the expense of the other party.

In the event that a party gives an incorrect GST warranty and a GST return is filed on that basis, the IRD may impose penalties. The end result would usually be that a claim is made for breach of warranty which could lead to costly litigation.

GOODS AND SERVICES TAX

Risk areas remain

There remains room for legislative improvement.

Settlements paid via insurance

Out of court settlements can produce potential GST issues – in some cases resulting in an unexpected GST liability. An example would be where a settlement is funded by an insurer and paid directly to a third party. This can give rise to an unexpected GST liability for the recipient of the payment – despite the insurer not being visible until the time of payment (if at all).

We had hoped to see remedial measures in this year's Act (as IRD had proposed reforms in this area).

Commercial transactions including housing

The GST implications of transactions that include residential dwellings are sometimes not well understood. These dwellings may be main homes which are usually exempt from GST (potentially separate from a non-residential part of the property), for instance where a farm (subject to GST) has a main dwelling (exempt from GST) attached. Or they can be types of housing that fall within the GST net (such as temporary accommodation).

These types of issues are especially complex for industries such the retirement sector, where a village may include a range of accommodation, from houses to serviced apartments and hospital care. In other cases the distinction between a residential and commercial dwelling is not well defined, for example, student accommodation.

The IRD has recently published a discussion paper (discussed further below) that proposes some reforms to this area of GST law, but legislation may be some time away.