Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Tax by backdoor an odious trick

17 comments
A year after IRD's lawyers found its position on body corporate GST to be wrong, nothing has been done.

Photo / File
Photo / File

We can agree, can we not, that the Inland Revenue ought to apply the tax laws as they stand. And that if ministers are tempted to smuggle a retrospective tax grab into the statute books under the cover of a Budget, they should drive that thought from their minds with blows and curses.

What prompts these observations is the still unresolved question of whether bodies corporate of residential buildings should be registered for goods and services tax.

The reason we should care is not the substantive issue, which is one of those things intensely interesting to those it affects but no one else, but rather because of the troubling light it sheds on the current state of tax administration in this country. That affects us all.

The IRD's longstanding view has been that bodies corporate of residential buildings should not register for GST.

In revenue terms there would normally be little point. Virtually all the costs they incur and levy their members to cover would include GST, generating an input tax deduction to offset the GST on levies.

Why impose the compliance cost?

But the situation changes with leaky buildings.

Where a body corporate receives a compensation payment and uses it to finance remedial work (the hefty bills for which include GST), if it were registered it would be able to claim back the GST.

That is the right outcome, even though the compensation payment does not incur GST. The Government has already received GST when the original faulty work was done. If the repair work had been done by the original builders it would not have got a second bite of the cherry, whereas under the IRD's traditional position there is double taxation.

So the IRD in the person of its chief tax counsel took a closer look at the law.

It put out in May last year an issues paper looking at the Unit Titles Act and examining the relevant case law in New Zealand, Australia and the United Kingdom.

The upshot was that the department's traditional approach was wrong.

Bodies corporate are legally separate entities from their owners. Their levies represent consideration for services they supply and supplying them satisfies the tests of a taxable activity.

If they fall below the de minimis threshold, the bodies corporate have the option of registering for GST and if they come above it they must register.

The issues paper said the "preliminary but considered" conclusion was not completely beyond doubt and some might consider it counter-intuitive.

But crucially it represents the department's best view of the current law.

So it was kind of remarkable that the release of the issues paper was accompanied by a statement from the commissioner of Inland Revenue that until the matter was finalised, she would not allow bodies corporate to file backdated registrations - effectively blocking those with leaky buildings from getting a GST refund.

There the matter still stands, nearly a year later.

The tax department is hanging on, Gollum-like, to the precious GST it has (unlawfully, in the view of its own lawyers) received.

It is blocking moves to allow disputes to proceed to the courts.

There is a disputes process but it requires the IRD to play ball. Instead, the commissioner resembles nothing so much as someone standing in the middle of a tennis court with her arms folded and her racquet on the ground, refusing to move.

The IRD has issued no final statement of its view of the law.

Uncertainty and delay continue, adding an extra layer of stress to people already coping with leaky buildings.

The reason appears to be that the tax department expects the law to be changed.

When the Herald this week asked Revenue Minister Todd McClay if he was contemplating legislation on the issue of GST and bodies corporate, and if so when and to what end, his spokesman said ministers were still considering the issue but no decisions had been made at this stage.

He confirmed there had been nothing further from the department since the issues paper, adding that "it is being looked at; it is definitely on the radar".

This does nothing to allay the suspicion that the Government is preparing to legislate to deny GST refunds to bodies corporate with leaky buildings.

But that would be tantamount to saying: "You were legally entitled to register and claim those refunds. As soon as we realised that we stopped you from doing so by administrative fiat and now we are changing the law so you can't."

Quite apart from that odious retrospectivity, it would raise difficult boundary issues.

Office buildings with a unit title structure routinely register for GST so that the burden of the tax can flow through to end consumers of goods and services rather than businesses, in the normal way. Presumably the Government would not want to disturb that, but how would you draw the line?

If compliance costs are the concern, one option would be to follow the Australian example and, in the case of non-profit organisations like bodies corporate, raise the de minimis threshold below which registration is optional.

Gaining public input on the practicalities of a proposed law change before legislation is introduced is precisely why the generic tax policy process requires a consultation document. There is no sign of one in this case.

The complicating factor is timing. This year's tax bill has already passed its select committee stage.

To introduce a measure like this in a supplementary order paper so late in the legislative process, and to avoid select committee scrutiny, would be objectionable. So would including it in Budget night legislation for the same reason.

If the Government is planning to legislate it should say so and explain why and how.

Let's see if it can come up with a more edifying reason than just saving the revenue a few million dollars.

And in the meantime, Inland Revenue should commit itself, say what the law is as it sees it, and apply it.

- NZ Herald

Have your say

We aim to have healthy debate. But we won't publish comments that abuse others. View commenting guidelines.

1200 characters left

Sort by
  • Oldest

© Copyright 2014, APN New Zealand Limited

Assembled by: (static) on red akl_n3 at 24 Jul 2014 17:34:01 Processing Time: 1387ms