|Tim Stewart||James Lester|
In September 2015 the New Zealand Inland Revenue released an issues paper on GST, consulting on a number of matters. One proposal in the issues paper, which draws on OECD guidance and international practice, relates to the GST treatment of services that are "directly in connection with" land.
New Zealand's GST system is based on the destination principle, meaning that goods and services should be taxed only if they are consumed in New Zealand. The proxy used to determine where a service is consumed is generally the residence of the recipient. However, an exception applies to services supplied directly in connection with land. Under current law, services supplied to non-residents who are outside New Zealand at the time of supply, and that are supplied directly in connection with land situated in New Zealand (or improvements to that land), are subject to GST. Services that are supplied directly in connection with land situated outside New Zealand are zero-rated for GST, notwithstanding that the recipient of those services may be resident in New Zealand.
In interpreting cases that have considered the phrase "directly in connection with" in the GST context, Inland Revenue has concluded that a service will not be supplied "directly in connection with" land when the service merely brings about or facilitates a transaction which in turn has a direct effect on land (for example, conveyancing services). Instead, only services that have a direct physical effect on land will be regarded as being supplied directly in connection with land.
The issues paper considers that such an interpretation is arguably inconsistent with the policy behind the existing rules. The issues paper considers that the "directly in connection with" land test was not intended to create a distinction between services that have a physical effect on land and other professional or intellectual services (such as legal and architectural services) that are supplied with an underlying purpose of affecting the physical or legal nature of the land.
The issues paper proposes an amendment to expand the definition of services that are supplied "directly in connection with" land, to include services where there is a direct relationship between the purpose or objective of the services and the land. The services of real estate agents, architects and lawyers for example would no longer be zero-rated when supplied to non-residents outside New Zealand, where those services "have the purpose or objective of affecting or defining the nature or value of land, protecting land, or affecting the ownership or interest in or right over land".
Similarly, where such services are supplied in relation to land situated outside New Zealand, under the proposed amendment those services would be zero-rated even if supplied to a New Zealand resident.
While the proposals may have a logical theoretical basis, some important issues will need to be addressed before the government makes a decision on implementation. These include:
- Any increased complexity and uncertainty resulting from a change to the law (which is currently widely understood and easy to apply) relative to the revenue impact for the New Zealand government.
- Consistency with rules regarding imported services in other jurisdictions, so that the imposition of GST (or VAT) in two jurisdictions on the same supply does not become widespread.
- Potential bias against New Zealand suppliers, if New Zealand suppliers are required to charge GST on services supplied to non-residents but offshore suppliers of the same services are not.
- The treatment of supplies in a business-to-business context, including the ability for non-resident businesses to obtain refunds of GST charged by New Zealand suppliers. In this regard the current rules (and practice of Inland Revenue) relating to the registration of non-resident businesses for GST may need to be reviewed.
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