The Inland Revenue is withholding GST refunds from body corporates with leaky buildings, even though it is pretty sure they are entitled to claim them.
Its longstanding position has been that body corporates are not carrying out a taxable activity and are not liable to be registered for GST.
But in a recent issues paper put out for consultation it has reviewed the case law and concludes that most of the cases, including those from most senior courts, favour registration.
The issue has become important because of leaky buildings.
Where a body corporate receives a compensation payment and uses it to finance remedial work (the bills for which include GST), if it is registered it would be able to claim back the GST. But the compensation payment does not incur GST.
Robin Oliver, a principal of Wellington tax firm OliverShaw which pursued one of the cases the IRD has conceded - and a former deputy commissioner of Inland Revenue in charge of tax policy - says that is the right outcome.
If the repair work had been done by the original builders, GST would only have been payable once, whereas under the IRD's traditional position there is double taxation.
The IRD says that in the meantime, until it finalises its position, no body corporate is required to register for GST.
They can register if they choose, but it will not allow registrations to be backdated - effectively excluding the leaky building cases (other than those where it has already conceded the point).
Registration, it points out, might result in unitholders paying higher fees.
"Until a final position is reached, the commissioner is unable to conclude whether backdating is a valid option," IRD told the Weekend Herald.
It is unable to say how much longer it might take before reaching a conclusion, but if it were to reverse the position in its issues paper, registered body corporates would be deregistered and would have to repay refunds they had received.
When asked why it should not be left up to the body corporates to decide whether to take that risk, it offered no response.
Graeme Carruthers, director of Auckland-based nsaTax, said: "Having conceded that body corporates are entitled to register for GST, Inland Revenue should apply the law and allow body corporates who have previously exceeded the registration threshold to register on a backdated basis. Their current refusal to do so not only runs contrary to the law and natural justice, but also is creating real hardship for those entitled to backdated registration."
Oliver also questions the tax department's legal basis for denying retrospective registration.
The normal principle is that those who should be registered for GST are deemed to be registered for GST; people cannot avoid their tax obligations by simply not registering, he says. That principle works both ways.
Later registration at the commissioner's discretion is permitted under the GST Act but the proviso is that it should be equitable.
"That should mean equitable to the taxpayer," Carruthers said.