Practical Thoughts on the Proposed Tax Reforms

 The worse kept secret has been the government indicating a rise in the GST rate to 15%. If past reforms are anything to go by, the rate increase could be effective from as early as October 2010. While the implications of a rate increase seem simple enough, there are a number of practical issues to consider. How will the GST increase be transitioned?  What rate of the GST will apply to contracts that are contracts that are conditional or unconditional on the date the GST rate changes? What happens if I have a fixed price contract made at the 12.5% rate but it doesn’t settle until after the 15% rate applies – do I have to pay the extra tax, and if so can I recover it from the other party? These are just some of the practical questions that spring to mind.   

 While the details of any changes will not be finalised until after the budget announcement, it is likely that GST cut-off date will be set (say 1 October 2010) and that the time of supply date will be the trigger point of determining whether supplies are subject to GST at 12.5% or 15%. Whether time of supply has been triggered will therefore become a crucial consideration, particularly for a big ticket items or large adjustments such as a change in use adjustment or deregistration.

 The time of supply is generally at the earlier of the invoice or payment, however there are some exceptions to this such as supplies made between associated persons (the time of supply when the services are provided or goods are made available). In the case of a land contract where the GST portion can be significant, we recommend reviewing your contracts with additional care where the contract is to span the GST rate increase.

 What about fixed price contracts? You are allowed to increase the purchase price and recover the additional GST from the purchaser where the contract has been entered into within 3 months of the rate change coming into force, not where the contract specifically prohibits an increase or where the parties have already contemplated the rate increase in agreeing the fixed price. Case law has held that where a contract is “GST inclusive”, the parties have contemplated the rate increase. We recommend that fixed rate contracts are reviewed carefully in the lead up to any change in the GST rate. Clearly whether a supplier on-charges the additional 2.5% to its customers may be a commercial decision, however for the large purchase spanning the GST rate increase it may be worthwhile to consider whether specific additional clauses should be included to ensure you do not incur an unexpected GST cost.

 In the case of the voluntary registrations, consideration should be given to deregistering prior to any rate change should registration no longer be required.

 Another issue to consider is where you may be considering purchasing second hand goods from a non registered vendor. A GST input tax claim is available in relation to second hand goods (subject to the usual limitations) equal to one ninth of the purchase price. Delaying an intended purchase of second hand goods until after any GST rate increase would mean a GST input tax claim could be made at 15% (purchase price x 3/23). The GST portion on the same $100,000 purchase price would be $13,043.

 If any of this applies to you please feel free to contact us..

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IRD shifts approach on GST applied to land

 Inland Revenue has signalled a further shift in its approach on GST when applied to land sales.

 It is aiming its guns at “phoenix” property companies which claim GST rebate for inputs but which end up “at the bottom of the harbour” by the time the Department comes to collect a the other end of the GST process.

 In November, Inland Revenue proposed a “domestic reverse charge” by which the obligation to account for the GST on land and other transaction on assets worth more  than $50million is put onto the buyer rather than the vendor.

 Submissions on that closed just before Christmas and Inland Revenue has now gone back to submitters with further refinements to the proposals. 

 These include a wider definition of the land and a proposals that Inland Revenue have greater powers to “deem” people GST registered.

 The New Zealand Institute of Chartered Accountants (NZICA) has broadly endorsed the new proposals although it says the extension of the definition of land may not be needed.

 The new proposals extend then reverse charge: they still zero rate the vendor and pick up the GST from the purchaser.

 It will apply to all GST registered persons involves in selling land or transactions which involve a missed supply if land and another component.

 Vendors will have to establish that the purchaser is a GST registered before a transaction can be zero-rated: if it is not, and the purchase goes ahead, Inland Revenue will have the power to deem the purchaser GST registered and to claim the GST off them.

 The NZICA says this may not be necessary and that there is a risk of “legislative overshoot” – it could potentially catch leases, which are not part of the issue Inland Revenue, is trying to address.

 To protect purchasers from unscrupulous vendors who may represent themselves as being not registered for GST, the NZICA suggests some way for recipients to be able to check whether a vendor is GST registered, and also a provision allowing the Department to pursue the vendor if a misrepresentation has been made.

 The NZICA also suggests including a “checkbox” on GST to record if the taxpayer had made a zero-rated land transaction.

 “This is suggested with the thought that Inland Revenue may be interested in the undertaking audit activities to know who is undertaking zero-rated supplies of land.”

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What’s it worth?

 When a business is offered for sale, or is being valued on the basis of Fair Market Value, the terms and conditions relating to the potential sale can have a significant impact upon the value of the business. Some valuers apply one single earnings multiple to an industry whiteout considering the difference that these term of sale (and other value modifiers) can have on the value of a business.

 Two businesses with similar public practices are offering their practice for sale – But with markedly different sale terms: 

 It is not difficult to see that the offered by business ‘B’ are far more beneficial to a potential buyer than the terms offered by business ‘A’. The spread of the capital payment at a low interest rate, the adjustment for any clients lost in the transfer, the lower hourly rate and greater flexibility of vendor support; all these terms of sale offer much more value to potential purchaser.

 Even though the two businesses have similar turnover and profit, the business offered by business ‘B’ has a higher value – because of the terms and conditions offered.

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Why We Want Your Birthdate

Our Business Services Support staff member Jo Reading will be contacting you over the next few months to obtain your birthdates.

The reason this is so important is that the Inland Revenue now requires this information on file.  If you do not get the call from us, you may receive it from the Inland Revenue.

We are advising you of this as Jo has already made a few calls, and people have been wary of disclosing this information because of identity theft.  If anyone from our office calls (David, Maggie, Ben or Jo) they can be trusted that any information requested is purely for use with completing your taxes or financial statements.

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Tax System Explained in Beer

 People who grizzle about ‘tax breaks for the rich’ should read this:

Everyday, ten men go out for beer and the bill for all ten comes to $100.

They decided to pay the bill by apportioning the total cost of all the drinks in the same way that we, in NZ. Pay our taxes.

This meant that:

•  The first four men (the ‘poorest’) would pay nothing.
• The fifth man would pay $1.
• The sixth man would pay $3
• The seventh man would pay $7
• The eighth man would pay $12
• The ninth man would pay $18
• The tenth man (the richest) would pay $59.

The ten men drank in the bar every day and seemed quite happy with this arrangement – until one day, the owner threw them a curve.

“since you are all such good customers,” he said “I’m going to reduce the cost of your daily beer by $20.

“Drinks for the ten of you will now cost just $80”.

The group will still wanted to pay their bill the way we pay our taxes – so the first four men were unaffected. They would still drink beer for free. But what about the other six men? The paying customers?

How could they divide the $20 windfall so that everyone would get his fair share?’ They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested a graduated price reduction based on what each man was currently paying, so that everyone would benefit. They all agreed that this was A good idea so he proceeded to worked out the amounts each should pay:

•  The fifth man, like the first four, now paid nothing (100% savings)
• The sixth man now paid $2 instead of $3 (33% savings)
• The seventh man now paid $5 instead of $7 (28% savings)
• The eighth man now paid $9 instead of $12 (25% savings)
• The ninth man now paid $14 instead of $18 (22% savings)
• The tenth man now paid $49 in stead of $50 (16% savings)

 Each of the six was better than before. And the first four continued to drink for free. But once they got outside the restaurant, the men began to compare their savings. “I only got a dollar out of the $20.” Declared the sixth man. He pointed to the tenth man. “But he got $10!” “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I did!” “That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the brakes!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine mean surrounded the tenth and beat him up.

The net night the tenth man didn’t show up for drinks, so the nice sat down and had beers with out him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half the bill! And that, boys and girls, journalists and college professors, this is how our tax system works. They people who pay the highest tax get the most benefit from the tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. On fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

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CRUISING

David and Maggie are taking a 2 week holiday to celebrate their 5 year wedding anniversary.  They will be out of the office from 24th May to 8th June 2010. 

The office will be run by Benjamin Anderson during this time and if you have any queries, please do not hesitate to contact him as he can contact David and Maggie if the matter is urgent.

Both David and Maggie's mobiles will be left behind.

Bon Voyage!!