09 Mar Avantisteam Stated: Terry Baucher notes a GST policy paper that has good news f…
Early last week Inland Revenue released a GST policy issues paper.
The paper “covers a number of issues which have been identified where the legislation produces an outcome that does not reflect the underlying policy intent. The paper is designed to address those issues and maintain and in doing so, maintain the certainty and efficiency and fairness of the tax system”. And so what the paper does is outline technical issues that have arisen in the GST area and then suggesting potential policy options and solutions to those issues.
There’s a whole number of issues covered in here. For example, the paper starts off by talking about tax invoice requirements. Then there’s a discussion on the apportionment and adjustment rules which are complex and difficult to apply, and they’re looking to see how they can improve those set of rules. The apportionment and adjustment rules do cause headaches in the GST area. So another look at that area is always welcome.
There’s a proposal dealing with the treatment of GST and courier business practices where part of an international delivery is subcontracted. There’s an interesting proposal relating to business conferences and staff training. The paper points out that for overseas businesses it’s impractical for them to register for GST to claim a GST refund for a one off expense of sending their staff to a conference or training course in New Zealand. This is something we’ve encountered from time to time. And it’s a deterrent to businesses who might want to come here for a tax conference or any other conference, actually, because if they don’t manage it correctly, then their costs go up by 15 percent. And from the perspective of a New Zealand conference centre this is also an issue for them because they may not be getting business they could otherwise expect.
The proposal here is to zero-rate conference and staff training services supplied to non-resident businesses. That’s a good initiative. It is also actually conceptually logical because if the conference is being carried out for business purposes, then a GST registered business would be able to recover the GST on that. So this proposal is sort of short circuiting that process.
There’s also commentary on managed funds, insurance payouts to third parties, some tweaking of the rules in relation to compulsory zero rating of land and various other remedial issues.
But the issue that’s caught my eye and is quite welcome is in relation to the GST treatment of crypto assets. Now, what the paper notes is that at present there are over 5,000 crypto-assets and the total global market value of all such assets is in excess now of over 300 billion U.S. dollars. But the GST treatment is very inconsistent.
GST was originally designed by the French way back in the 1950s as part of the forerunner of the European Union, the European Economic Community. The designers of GST didn’t ever contemplate crypto-assets and nor did our legislation which dates from 1985. And as the paper points out, crypto-assets have a very different GST treatment to either money or financial services. It’s not clear, for example, whether the supply of crypto-assets could either be an exempt financial service, subject to 15 per cent GST or it’s a zero rated supply to a non-resident. So there’s a lot of confusion on this.
And it’s a matter that we have been discussing with Inland Revenue and clients. Work arounds have been established, but there’s always a level of uncertainty. So we were looking for guidance from Inland Revenue from on the matter and this paper gives that by proposing to exclude crypto currencies from GST and the financial arrangements rules.
Now, the financial arrangements rules, as regular listeners will know, are a minefield for most taxpayers. It would certainly be a big problem for crypto-asset investors if Inland Revenue had decided that crypto-assets could be within the financial arrangements regime, because, given the volatility, many investors would probably be subject to being taxed on an unrealized basis. So good to hear they’re planning to clarify that this won’t be the case which is a big win for crypto currencies.
There’s another little win as well in that GST registered businesses raising funds through issuing security tokens or crypto assets, which, quote, “have features that are similar to debt or equity” such as a right to share of the profits of a project, should also be able to claim input tax credits on their capital raising costs. This is a good move, and it means that crypto-asset businesses are not disadvantaged if they wanted to try and raise capital through issuing crypto-assets which are a substitute for debt or equity. That’s a good clear rule and also good to see this.
The paper also points out, inevitably, that income tax rules still continue to apply to crypto assets. These changes only relate to GST. The income tax rules set out in the Frequently Asked Questions issued last year will still apply.
Submissions on this issues paper close on 9th of April. If everything progresses as usual, you might see these proposals included in an omnibus tax bill released towards the end of this year. This means that all of this could possibly be in law by 1st of April 2021. Or maybe a little later than that if the omnibus bill is delayed, perhaps because of the election. Still this paper is good news for crypto-asset investors.
Moving on. As many tax practitioners will know, in dealing with Inland Revenue it’s often the case that it’s “Heads they win. Tails you lose.” And this can emerge where Inland Revenue, for example, loses a case in court and then promptly changes the law to what it thought should have been the result.
And this is about to happen. Late last year, the Court of Appeal ruled in the case of Commissioner of Inland Revenue vs. Roberts that a gift of forgiveness of debt made to a charitable trust which was progressively forgiven and donation tax credits claimed represented money and therefore qualified for the donations tax credit.
In the case in question, Mr and Mrs. Roberts had transferred $1.7 million to a trust by way of loan and then started executing deeds of gift, releasing the trust from the liability to repay specified amounts of that loan and the trust then claimed a tax credit on the basis that the forgiveness of debt was a charitable gift. And the High Court said, “Yes that’s acceptable” and the Court of Appeal upheld that decision on the 17th of December. Immediately Inland Revenue said we’re going to change the law so it’s only gifts of cash that can be eligible for the donation tax credit.
And this week, the Government has released a Supplementary Order Paper to a tax bill going through Parliament right now, which addresses that matter.
And it makes it very clear that only gifts of cash will qualify for the donations tax credit and the 33% rebate back in cash from Inland Revenue.