The world is full of acronyms, LOL, MTD, JITSIC..., so I am going to make my own one up; MLE. No, this is not “Maximum Likelihood Estimation”, it stands for “Making Life Easy” or “Make Life Easier” (it can be used interchangeably, that’s the beauty of it).
This Eye on Tax is going to highlight some of the GST changes (that are coming or are already here) that are MLE.
Tax invoices – changes coming soon
These rules are changing from 1 April 2023.
You no longer need to hold a tax invoice to claim a GST input tax deduction, but you do need to hold supporting information. The level of information required increases, depending on the amount of the invoice (and it doesn’t need to be held on a single document).
A lot of the information required (seller’s details, buyer’s details, date of invoice or time of supply, description, GST exclusive amount plus GST, or GST inclusive amount and GST statement) will be on your chosen accounting system.
Mixed use asset rules – currently in a Bill (not law)
In the interests of MLE, we won’t explain in detail the rules as they currently stand. The rules target holiday homes, aircraft and boats that are used in an income earning activity and also privately by the owners and seek to ensure GST claims are restricted to reflect private use.
These rules are on the table to be repealed and to be replaced with a “fair and reasonable” adjustment.
Although some may argue that in most cases the current GST mixed use asset rules already MLE (when compared to income tax), so time will tell how much improvement is gained in this regard
Principal purpose test – currently in a Bill (not law)
GST input tax claims are permitted to the extent the goods and services are used in making taxable supplies. This therefore requires apportionment.
A Bill is currently considering the proposala relaxation of the rules to an “all or nothing test” for assets under $10,000 and revert to the principal purpose test, i.e. if the asset is acquired mainly for a GST activity and is under $10,000 the whole of the GST input tax is available to claim (no apportionment is required).
We'd like to see more in this space in the Income Tax Act (contrast this with the low value asset write-off test of $1,000).
Voluntarily registered persons – currently in a Bill (not law)
Historically it was not uncommon for the owner of a lifestyle block to be registered for GST, i.e. the landowner might lease surplus land for grazing purposes. This approach permitted the landowner to either claim back the GST on the “business portion” (as a second hand goods claimor allowing zero rating) and reduce the cost of acquisition.
However, the (often forgotten) downside is that GST output tax will be due on a future disposal OR if the activity ceases and the landowner is required to de-register for GST (with GST output tax due calculated with reference to the market value at that time).
The Bill is currently considering to relax the rules and match the GST output tax to the time the property is sold (and deem the sale to be a GST sale), in contrast to requiring payment on de-registration.
You could spin this to being MLE (i.e. it “relaxes” to match cashflows and tax cost), but it’s probably more of a reaction to unfair positions where the fruits of GST registration are enjoyed (through lower GST costs or increased input tax claims), but the costs of harvesting (de-registration) are ignored.
It’s best to be balanced before you jump into voluntarily registering for GST.
Second-hand goods claims and associated persons – it’s here
This has historically been quite the trap. Second-hand goods claims for associated person supplies were restricted to the lesser of:
- GST fraction of the purchase price;
- GST fraction of the Market value (if different to the purchase price); and
- GST borne by the associated supplier.
For example, Mr A buys a residential rental property for $600,000 (from a non-registered person). He decides to undertake a major subdivision and sells to his company, A Ltd for $1,000,000 (which is market value). Prior to the rule change, A Ltd’s second-hand goods claim would be restricted to “nil”. This is because there was no GST borne by Mr A when the land was originally acquired.
For improved equity, the second-hand goods claim is modified and the last bullet point removed. The claim is now the GST fraction of the lesser of:
First two bullet points and…
- Supplier’s purchase price (f acquired from a non-associated person);
- Last non-associated purchase price (if supplier acquired from an associated person)
In this case, we improve from a GST claim of nil to GST on the $600,000 purchase price.
You could argue that the rules in themselves are not MLE, however, the change is a step towards MLE (as previously we may have looked at retaining the land to preserve a GST input tax claim, which might not have been as commercially palatable).
Buyer created tax invoices (BCTIs) – it’s here
A BCTI is exactly what it says it is, it is an invoice created by the buyer and not the seller. They are not necessarily common-place across all industries, but might be used where the buyer is in a better position to establish the price of goods or services, rather than the seller. They tend to be mostly used in the agricultural world.
You no longer need to involve Inland Revenue and obtain approval to use BCTIs. You do, however, require an agreement between the registered buyer and seller to use BCTIs. Specifically, both parties must agree:
- The seller won’t issue a tax invoice, the buyer will; and
- Record the reasons for using BCTI.
As a final point, you don’t need to use the wording “buyer created tax invoice – IRD approved” on the invoice.
There are plenty more changes afoot, if you’d like more detailed information on GST and recordkeeping, then please click through to our Tax Knowledge Bank (TKB) here for part one of a three part series. TTFN.