Inside this edition
• Fees charged on Overdue Accounts
• Look Through Companies and Use of a Motor Vehicle
• Investors in Guiness Peat Group PLC
• New GST Apportionment Rules – Motor Vehicles
• GST – Stuck under the Old Change of Use Rules
• Claiming GST on Goods Purchased Prior to Registration
Fees Charged on Overdue Accounts – GST Liability
Businesses who charge their customers late payment fees on overdue accounts need to be aware of the changes proposed in the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Bill released in September 2011 (referred to in this newsletter as the ‘September Tax Bill’).
It is proposed that taxpayers are required to return GST on late payment fees charged to customers who are late in paying their accounts. It is important to note that there is a difference between “late payment fees” and “penalty and default interest charges” with the latter being exempt from GST under Section 14 of the Goods and Services Tax Act 1985.
It is expected that the new provisions will apply retrospectively for taxable periods ending on or after 1 April 2003, however, there is a savings provision for taxpayers who have adopted a regular practice of not charging GST on late payment fees. These taxpayers will have up until 1 April 2012 to update their systems to reflect these new rules.
We note that these application dates will most likely be extended as the Bill is yet to be passed in to law.
The proposed rules contain no definition of late payment fees. A distinction needs to be drawn between late payment fees and penalty or default interest payments.
We expect that further changes will be made to the proposed legislation before these rules become law.
Look-Through Companies (LTCs) and the Use of a Motor Vehicle
The LTC is treated similarly to a partnership for income tax purposes where income, expenses and credits flow out to owners in proportion to their ownership interests in the LTC.
For other tax types such as PAYE and GST, the LTC is treated as a company. However, for Fringe Benefit Tax (FBT), there are some modifications to the rules worth noting:
(i) Owners of a LTC are not required to account for FBT where they are provided with a car from the company. This is due to the fact that the owners are deemed to hold the underlying assets of the company personally, therefore any business expenses will need to be claimed on an apportionment basis;
(ii) Employees of a LTC are subject to the normal FBT rules that apply to standard companies. Where an employee is provided with a vehicle that they are able to use privately, FBT will be payable;
(iii) When the LTC rules were first introduced it was considered that a working owner, provided with a vehicle would be subject to FBT rules. A working owner of a LTC is a person who has an employment contract with the company (where the company carries on a non-passive type business) and personally and actively performs duties that are required for carrying on the business pursuant to their contract of employment.
The September Tax Bill introduces an amendment that will clarify that a working owner is not treated as an employee for FBT purposes, therefore working owners are treated similarly to owners outlined in (i) above. The amendment will apply from 1 April 2011.
Investors in Guinness Peat Group plc
When the Foreign Investment Fund (FIF) rules were amended on 1 April 2007, investors that held shares in Guinness Peat Group plc (GPG) qualified for a temporary five-year exemption, i.e. these shares were treated as exempt from the FIF rules and only dividends needed to be returned.
This exemption is set to expire from the beginning of the 2012/13 income year.
The $50,000 threshold will still apply to individual investors, and where the cost of all their FIF investments is less than this threshold they will not be subject to the FIF rules.
Due to the fact that some investors may find it difficult to obtain the cost of the GPG shares acquired, the September Tax Bill has proposed an amendment whereby taxpayers who acquired the GPG investment before 1 January 2005 can elect to treat the cost of the investment at 1 April 2012, or alternative approved balance date, at its market value on as at the commencement of the 2012/13 tax year.
Please contact a member of our Tax Team if you wish to discuss these amendments or any other queries regarding the FIF rules.
New GST Apportionment Rules – Motor Vehicles
Last year the GST adjustment / apportionment rules received a major overhaul, and for any assets acquired after 1 April 2011 where there is an element of private or non-taxable use, certain adjustments are required (see our March 2011 Tax Alert! under the ‘Newsletter’ section of our website for a full explanation of the new rules).
The area which will most likely be affected is the purchase of motor vehicles, e.g. a doctor who practices in his own name purchases a motor vehicle for both private and business use. Under the old rules, provided there was more than 50% business use, full GST could be claimed on purchase and generally period- by-period adjustments were made for the private use.
Under the new rules the doctor is only entitled to claim a proportion of the input tax credit on purchase, based on the expected business use of the vehicle. If the vehicle cost between $10,000 and $500,000 (excluding GST), the doctor is required to make five annual adjustments in the GST return corresponding with his balance date.
Adjustments are required to be made if the value of the change in use is more than $1,000 or the business use changes by more than 10%.The initial view was that taxpayers would have to keep a log-book for three months of each year to ascertain whether any adjustments were required.
The September Tax Bill has introduced an amendment to reduce the compliance costs for taxpayers by introducing a cross-reference to the Income Tax Act 2007 where taxpayers are allowed to use a log-book for three months as the basis of their taxable and private use over the following three years, unless the use of the vehicle changes by more than 20%.
We also note in the example above that if the doctor had a recent log-book on hand, this could be used to determine the initial input tax credit claimed when purchasing a new vehicle.
GST – Stuck Under the Old Change of Use Rules?
The September Tax Bill proposes to amend Section 21H of the Goods and Services Tax Act 1985. This Section limits the number of adjustments required to be made where goods or services were subject to the old apportionment rules (pre 1 April 2011 acquisitions) depending on the market value or book value on 1 April 2011 of that particular good or service.
The amendment seeks to clarify situations where a good or service was acquired before 1 April 2011 but was subject to a fully taxable use or a fully non-taxable use, and subsequent to 1 April 2011, the goods and services are used partly for taxable / non-taxable use. Under the current legislation it is unclear what rules the taxpayer should apply i.e. the old or new GST adjustment rules.
Under the proposed legislation it depends on whether input tax was claimed or not. If the taxpayer has already claimed an input tax deduction, they are subject to the old change of use rules. If no input tax on a good or service has been claimed, the taxpayer can apply the new apportionment rules.
As the limit on the number of adjustments required under the old rules does not apply to land, there is a potential issue for clients who are required to make output tax adjustments until that land is sold. Consider the following example:
Mr Bean set up a company in 2002. The company built a property on a block of land and the owner registered for GST claiming GST on the cost of the building on the basis that the Bed and Breakfast (B&B) they planned to run from the property was more than 50% of the total area of the house. As the owner was living in the house, GST output adjustments were made on a period-by-period basis to reflect the non-taxable use of the asset. The property is still held to-date and Mr Bean is continuing to make GST output tax adjustments in each GST return.
Potentially the amount of GST Mr Bean pays in output tax will exceed the initial input tax claimed when the property was first built.
While Section 21H requires adjustments to continue to be made under the old rules, we consider there may be some solutions for Mr Bean to reduce this cost.
Claiming GST on Goods Purchased Prior to Registration
There are special rules which relate to the timing of GST claimed on goods or services acquired by a person prior to becoming GST registered. The rules are currently contained in Section 21B of the Goods and Services Tax Act 1985.
As currently drafted, the provision allows input tax deductions only when GST has been charged by the vendor and the original cost of the goods or services, excluding GST, was $5,000 or more.
The September Tax Bill will amend this provision (effective from 1 April 2011) to allow GST to be claimed on second-hand goods purchased from unregistered persons or goods imported. Also the $5,000 minimum threshold will be removed.
In what GST period the input tax can be claimed is not clear from the legislation and we provide the following example to assist taxpayers applying these rules in practice. The first thing to note, however, is that the GST is claimed by reference to the original cost rather than the lesser of cost or market value.
The following steps need to be undertaken to determine the amount and timing of the GST to claim:
Step 1: Identify the date when the good was first acquired and check that a tax invoice is held for the purchase.
Step 2: Identify the date when the good was first applied in a taxable activity.
Step 3: Identify the first adjustment period where the input tax will be claimed. This will be the GST period that coincides with the taxpayer’s balance date in the year the good was used in the taxable activity.
Step 4: Estimate the percentage of business use during the year using a fair and reasonable method.
Step 5: Multiply the estimated business use percentage by the number of months the good is used in a taxable activity over the total months the good has been owned.
Step 6: Multiply the result of Step 5 calculated above by the amount of input tax paid when the good was acquired. This is your input tax credit to claim.
Consider the following example:
David purchases a vehicle on 1 October 2010 for $23,000 (this includes input tax of $3,000). On 1 January 2012, David registers for GST and starts using the vehicle in his business. David has a standard balance date of 31 March.
As David has retained a tax invoice for the purchase of the vehicle, he is able to claim an input tax credit under Section 21B.
He estimates his business use for the three months to 31 March 2012 to be 40%. Applying the formula in Step 5 above, we have:
40% x 3/18 = 6.66%
David gets to claim $200 in his February / March GST return. As the cost of the vehicle exceeds $10,000, GST adjustments are required to be made in the following four years. If the vehicle is sold, additional input tax may be claimed under the wash-up mechanism in Section 21F.
Assuming David uses the vehicle for 40% business use in the 2013 income year, a further $1000 GST input can be claimed (being 33.33% of $3,000) in his February / March 2013 GST return.