A Week in Review
GST & Trust Distributions
Recently I commented on a draft interpretation statement issued by IR, which considered the GST issues associated with a trust that makes a distribution of goods that form part of its taxable activity, to a beneficiary of the trust.
IR’s views in that regard, have now been finalised via the issue of IS 18/02 – Goods & Services Tax – GST treatment of distributions made by a trading trust to a beneficiary.
To summarise the main points of IS 18/02, a core element in any transaction of this nature from a GST perspective, is the associated nature of the parties involved, a beneficiary of a trust associated with the trustees of the trust in accordance with section 2A(1)(f) of the Goods & Services Tax Act 1985.
As a consequence of this relationship, even though the distribution of the goods may have occurred for no consideration (which is often the case), a supply will still be deemed to have been made for the open market value of the goods, thereby triggering an output tax liability at the time of supply (where one also needs to be conscious of the specific time of supply rules that apply to associated party transactions). Naturally, with no cash received from the recipient beneficiary, the trustees will need to fund the output tax liability from other sources.
The aforementioned consequence can be ignored however, with the consideration for the supply still being treated as nil, where the recipient beneficiary themselves is GST registered, and will be using the distributed goods in their own taxable activity.
The making of supplies of goods which form part of the trust’s taxable activity, to a beneficiary, may also lead to GST registration issues for the trust. For example, the trust, while carrying on a taxable activity, may not have registered for GST, because the annual value of supplies does not exceed the $60k mandatory registration threshold, however the deemed supply at open market value of the goods to a beneficiary may breach the threshold, requiring the trust to register. Equally, if the goods distributed to the beneficiary comprise all of the assets of the taxable activity of the trust, the trust may be required to deregister from GST.
The principles espoused by IS 18/02 should not be new to you and are not in themselves overly technical, however I would suggest the key “takeaway” from this article is simply the trigger point to not forget the potential GST issues associated with any in-kind distributions to beneficiaries. Often I see the income tax potential issues have been fully considered, or at least a question raised, but unfortunately no mention ofwhether the transaction (proposed or processed) will trigger any GST consequences for the trustees.
Considering the more rigid timing issues associated with GST filing positions, as opposed to those attached to income tax, where timing will often be on your side, overlooking the GST implications of a beneficiary distribution that occurred part way through an income year, can be costly for your client, and therefore potentially yourself.
Don’t Leave it Until the Last Minute to Get Yourself Sorted
One of the services our Tax Team provides is negotiating tax debt repayment arrangements with IR. Unfortunately at times, we enter the river in the IR stream of negotiation, having to try to back paddle against the current flow, because the taxpayer has left the issue unresolved to the point of IR having become entirely frustrated with the taxpayer’s responsiveness, or lack thereof, and having been left with no choice therefore but to issue a statutory demand.
A recent High Court decision stresses the importance of not leaving things until the last minute (IR’s application to liquidate the company), and that where you are successful in a prior negotiation of an arrangement, that you meet your agreed commitments.
The taxpayer in the case was seeking relief from the Commissioner’s application to liquidate the company. The company had made two separate repayment proposals to IR, both of which had eventually been declined post it would appear due consideration having been given and additional time provided to allow for further information requested by the IR case office to be filed. Not helping the taxpayers case however, was the fact that the company had received the benefit of a previous write-off of GST and PAYE debt (already frowned
upon because of the “trust monies” concept attached to both of these tax types), but then failed to meet its agreed commitments as part of the write-off agreement.
The Court in this instance was left with little choice but to decline the relief application, deciding that IR had fairly, without any pre-determination, considered each separate repayment proposal, that there was no evidence filed of any reasonable basis of the company being able to repay the debt (and therefore it was clearly insolvent), and that there were public interest matters at stake, considering the nature of the taxes for which payments had been defaulted on.
You would be surprised how often in scenarios like these, I have had a client approach me with a bundle of unopened letters from IR, somehow with the belief that if the envelopes remained unopened, the issue would magically disappear. Clearly not the right approach, although understandable to a point when considering the human emotions one may be dealing with having found themselves in the financial predicament they are now in.
So what is the key point here? Don’t leave it until the last minute to get yourself sorted with IR. They are usually very willing to try to come to some sort of arrangement if you are pro-active (which also means you do not have to wait until the tax is actually overdue if you think there may be a payment issue), particularly if you make the first contact, as opposed to waiting for them to start chasing you.
Need some help, then let us know and we will be more than happy to assist, whether it be some simple advice on your next steps, or to manage the whole negotiation process on your behalf.
In case you need to know
But hopefully you don’t, the latest update on how documents are required to be served (remembering that getting the process right can often be a critical element in any court proceedings) on the Commissioner for objections and challenges filed in accordance with Parts 8 & 8A of the Tax Administration Act 1994, has been notified in the NZ Gazette on 2nd August 2018, to come into force on 30th August 2018.
BEPS Multilateral Instrument Ratified
What is it you may ask, well essentially the MLI enables the swift modification of our numerous bilateral tax treaties, without having to separately renegotiate each one with each relevant jurisdiction, to accommodate any measures to counter base erosion and profit shifting (BEPS) which result from the OECD/G20 BEPS project.
New treaty provisions developed by the OECD on anti-abuse, dispute resolution and transfer pricing will automatically update to our existing double tax treaty agreements once the MLI enters into force from 1st October 2018.
Richard Ashby BBus, CA, CPA
PARTNER
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