9 November 2021

A longstanding snag in the GST legislation has restricted taxpayers from claiming a secondhand GST input tax credit when they purchased items from unregistered associated persons which had no GST content. This would ultimately see the taxpayer out of pocket when they came to sell the item as they would need to charge GST on the sale.

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 and sells the property to a related company 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 results in a tax cost to the company for what is a commercial transaction between associated parties.

To overcome this inequity, the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill is proposing to allow taxpayers to claim an input tax credit on secondhand purchases from associated parties. The input tax that can be claimed will be equal to the GST on the original cost of the item at the time it was purchased by the associated person. Items purchased by the associated person before GST was introduced (1 October 1986) will not be eligible for the input tax credit.

Using the previous example, this means that the company will be able to claim GST input tax based on the purchase price the trust paid for the property.

This is a welcome change and will ensure registered persons are not overtaxed in respect of land they purchase from an unregistered associated person. It is disappointing however, that the change is not retrospective and therefore does not appear to allow taxpayers to balance out the inequity from historic associated person transactions.

The amendment will only apply to GST taxable periods starting on or after the date of enactment of the Bill, which is expected to be before 31 March 2022.

Please contact your Nexia advisor for further information. You can find our general contact details here: www.nexia.co.nz/contact-us

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