The introduction of the LTC regime at the expense of LAQCs was sneaky enough being put through on the 20 December 2010, but what about the GST changes that came through at the same time? In many instances, they have largely gone unreported on. However, we have noted some of the changes in terms of the impact they may have on our clients.
Land
Determining Zero Rating
New legislation deems that a seller of land must zero rate the supply, if the supply wholly or partly consists of land. The seller must also insure that the purchaser gives them the following information in order for the transaction to be zero rated.
The supply is being made to another registered person
The purchaser acquires the goods with the intention of using them for making taxable supplies. The purchaser will not use the land as a principal place of residence, nor will an associate of the purchaser do the same thing. We understand the Auckland Law Society will be amending its Sale and Purchase Agreements to include the above conditions.
Transactions Involving Nominations
Nominee transactions normally involve a purchaser nominating another person to receive goods and services to settle the Transaction. Typically, on a sale and purchase agreement the following may have been added “Joe Smith and or Nominee”.
Under the new legislation, the GST treatment will depend upon an economic substance, which means the GST treatment will depend on which party provides payment for the supply of goods or services. In respect of transactions involving land however, the supply will always be treated as being made by the supplier to the nominee.
Land Being Purchased For Taxable Supplies But With Private Element
This typically would represent a farming type scenario where provision needs to be made for a dwelling and curtledge. In these situations, the supply will be zero rated in its entirety and the purchaser will be liable to account for the output tax on the land not used for a taxable purpose under the new apportionment rules.
New Apportionment Rules
Under the new rules, a person must estimate on acquisition how they intend to use the goods and services that have a private use and chose a determination method that gives a fair and reasonable result. This may include previous experience, business plans, valuations or some other suitable method. However, often there will be different private use particularly in the nature of a motor vehicle, hence the introduction of “Adjustment Periods”. The default method for adjustments reverts to a 3 tier system
$5,001 to $10,000 Two adjustments
$10,001 to $500,000 Five adjustments
$500,001 or more Ten adjustments
If the percentage actual use of goods or services differs from the percentage intended use or previous actual use, then an adjustment will need to ne made if the amount is more than 10.00% of the monetary value or more than $1,000.00. so working through an example:
Peter acquires a luxury boat for $500,000 plus GST. On acquisition, Peter estimated that the boat would be used 100% for chartering (taxable purpose) and claimed the full input tax deduction however, in later periods Peter used the boat partly for private purposes.
Because the boat was purchased for $500,000 (not $500,001), there are only five adjustment periods – refer above; so
In first adjustment period, boat used 100.0% for taxable purposes
In second adjustment period, boat used for 80% taxable purposes
In third adjustment period, boat used for 83% taxable purposes
In fourth adjustment period,boat used for 45% taxable purposes
In fifth adjustment period, boat used for 90$ taxable purposes
The first adjustment period is 6 months and the remainder 12 Months; so
First adjustment period
Intended use 100.0%
Actual use 100.0%
No adjustment required
Second adjustment period
Previous actual use 100.0%
Percentage used 86.6%
Percentage use for 2 periods
(100%*6/18)+(80%*12/18)=86.6%
In this calculation the figures 6 and 12 represent the months of the first and second installment, while 18 represents the number of months since the acquisition. The difference from period 1 to period 2 is more than 10.0%, so an adjustment must be made.
Third adjustment period
Previous actual use 86.6%
Percentage used 85.2%
Percentage used for 3 periods
(100%*6/30)+(80%*12/30)+(83%*12/30) = 85.2%
The difference form period 2 to period 3 is less than 10% at 1.4% but this represents a difference of $1,050 which is greater than $1,000, so an adjustment must be made
Fourth adjustment period
Previous actual use 85.2%
Percentage used 73.7%
Percentage used for 4 periods
(100%*6/42)+(80%*12/42)+(83%*12/42)+(45%*12/42) = 73.7%
The difference from period 3 to period 4 is more than 10.0%, so an adjustment must be made.
Fifth adjustment period
Previous actual use 73.7%
Percentage actual use 77.3%
Percentage used for 5 periods
(100%*6/54)+(80%*12/54)+(83%*12/54)+(45%*12/54)+(90%*12/54) = 77.3%
While the variance is only 3.6%, the difference is $2,700, which is greater than $1,000, so an adjustment must be made.
Summary
So some subtle changes but changes with significant impact on cash flow. The new adjustment rules will apply to cars (likely most effected) from 1 April 2011, so if looking to make a change talk to us first.
