Home > Updates > More changes to GST second-hand goods rules
A longstanding snag in the GST legislation stopped taxpayers from claiming a second-hand GST input tax credit when they purchased an asset from an unregistered associated person which had no GST content. This snag would result in the taxpayer being out of pocket when they came to sell the asset, as while the taxpayer would need to charge GST on the sale of the asset, they would not have received a GST input tax credit in respect of the purchase of the asset.
Typically, this would arise in respect of property transactions. For example, a trust owns a large residential property that was purchased for private use from a private seller. Over time, the unitary plan has changed to allow the property to be subdivided into a multi-unit property. The trustees wish to subdivide and develop the property for sale. The trust sells the property to a related company at the property’s current market value to undertake the subdivision and development. Because the company is associated with the trust, the company would not be able to claim GST input tax on the purchase even though GST will need to be charged on the sale of the developed lots. This unfairly results in a tax cost to the company for what is simply a commercial transaction between associated parties.
To overcome this inequity, the GST legislation was amended in 2022 to allow taxpayers to claim an input tax credit on second-hand purchases from associated parties. Using the previous example, this means that the company would be able to claim GST input tax based on the purchase price the trust paid for the property.
However, an unintended effect of the amendment was that some taxpayers could claim a higher GST input tax credit in the situation where the same goods are sold multiple times between three or more associated persons (from one unregistered person to another unregistered person) before being acquired by a registered person.
A further change to the GST legislation has now been made to fix this unintended effect. The change applies retrospectively to limit GST input tax on arrangements when second-hand goods have been sold between several associated persons before being sold by an unregistered supplier to an associated registered person. In most cases, the GST input tax is limited to the GST on the purchase price of the item when it was last supplied by a non-associated person.
The retrospective change applies to assets acquired by a person on or after 30 March 2022, however, a savings provision applies to preserve tax positions taken before 26 August 2024 meaning Inland Revenue won’t require prior GST returns to be amended.
If you’re unsure how these GST changes may affect your trust, business or recent transactions, please get in touch with your Nexia advisor to discuss your specific circumstances.
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