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GST on imports and loss ring fencing Bill update

GST on imports and loss ring fencing Bill update

This taxmail considers some of the changes made through the Select Committee process.

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John Cantin - KPMG NZ - Partner

Partner - Tax

KPMG in New Zealand

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The Taxation (Annual Rates 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Bill was reported back to Parliament by the Finance and Expenditure Select Committee last Friday. The Officials Report was also released.

The Bill has three key items:

  • GST on low-value imported items;
  • loss ring fencing rules for rental properties, and  
  • changes to the Commissioner’s Care and Management rules.

For GST on low-value goods, the Select Committee has recommended deferring the start date by two months to 1 December 2019. This is to allow additional time for system changes to cope with the new rules. The rental loss ring fencing rules have been redrafted to make them clearer rather than to make major changes to their effect.

A Supplementary Order Paper reintroducing changes to the Care and Management rules is incorporated to allow the Commissioner to make decisions which are contrary to the “black letter” law in certain limited circumstances.

With an earlier report back, the Bill can be expected to become law by the end of June.

Changes in the reported-back Bill

The detail of the Bill’s proposals are contained in our previous taxmails on GST and loss ring fencing. This taxmail considers some of the changes made through the Select Committee process.

GST on low-value imported goods

The main recommendation is a deferral of the start date by two months. This is expected to have a fiscal cost of $10 million. The change has been made in partial recognition of submissions that the timetable was too tight for offshore suppliers to implement the required systems changes to cope with the new rules.

Offshore suppliers will also have a greater ability to charge GST on supplies of high-value goods. The original threshold, 95% of goods supplied are less than NZ$1,000, has been reduced to 75%. This allows suppliers a greater opportunity for a single system to account for New Zealand GST.

The rule dealing with discounts provided by a marketplace rather than the supplier has also been clarified. Discounts offered will reduce the GST charged even though the discount is not provided by the supplier.

A transitional rule, to cover supplies made after 1 December but pursuant to contracts entered into prior to 1 December, has been recommended. This is aimed particularly at magazine subscriptions which have an annual commitment but periodic payments.

Ring fencing rental losses

As well as re-drafting the provisions, the Select Committee recommends:

  • Excluding employee rental accommodation unless the employer and employee are associated. 
  • Excluding Government enterprises and non-closely (i.e. widely) held companies from the rules.
  • Allowing ring fenced deductions to be used against a wider range of land income, specifically, revenue account land gains and depreciation recovery income.

Care and Management powers

Changes to the Commissioner’s Care and Management powers were originally introduced in an earlier Tax Bill (see taxmail). The proposals were withdrawn for further consideration. A Supplementary Order Paper to the current Bill modifies the original Bill’s proposals. This follows further submissions and consideration.

In short, the Commissioner is able to modify the rules to correct obvious errors, resolve ambiguity or reconcile inconsistencies. These exemptions are temporary and controlled by the requirements of the Bill. Legislative amendments will be required to make the exemptions permanent. Taxpayers are protected from adverse modifications as the Commissioner’s power is not binding on taxpayers.

Our view

GST on low-value imported goods

Offshore suppliers of low-value goods will need to consider and adapt their systems to implement the new rules. Their customers can expect price rises although that could be offset to some extent by lower Customs charges at the border. With the deferral, they may also wish to consider earlier than usual Christmas shopping.

Equally, New Zealand Customs has a significant task to ensure that its systems and processes can adequately cope with the changes so as to limit their impact on the importation of goods.

The change is consistent with Australia’s change to its GST rules on imported goods. There is a departure from requiring the supplier to charge, collect and return GST because of the wider definition of supplier including marketplaces. This appears to increasingly be the international norm.

Ring fencing rental losses

All holders of rental properties will need to consider the changes. They are not limited to expected and ongoing losses due to deductions such as interest costs, for example. A large repair bill may mean the rules apply in one year but not others. The key impact will however be where there are sustained losses.

The exclusion for employee accommodation, where the rental costs are incurred as part of carrying on the employer’s business, will be welcome. This will reduce compliance costs.

We remain of the view loss ring fencing rules are not the best tax policy. The Government’s decision not to proceed with a broader capital gains tax has however reduced the ability to apply a better tax policy.

Care and Management powers

The Care and Management rules are potentially the widest ranging in the Revenue Acts. The powers were introduced in the 1990s to allow the Commissioner room to more rationally apply the tax rules. The extent of the powers was widely debated before the Commissioner issued an interpretation statement. That adopted a more restrictive view of her powers than many thought necessary. This narrow view has continued to cause problems as the Commissioner often refuses to exercise discretion in circumstances where she should, and we would argue, she is able to. Amendments are proposed to extend her powers, under controlled conditions, to provide more flexibility.

The original proposals caused a reaction from some concerned that they would breach constitutional norms – that Parliament makes the laws and that the Executive is bound to enforce them. The modified rules address those concerns.

We have supported a broader view of the existing Care and Management rules and extending the Commissioner’s powers in this area. Allowing the Commissioner some flexibility is necessary for the tax system “to breathe”, in our view. If it is too constrained, odd and unreasonable results will follow. Although we understand the constitutional arguments, we see consistently, the tax rules in operation. There continues to be a need for flexibility.

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