A Week in Review

First Reading Done & Dusted

Commented on in a pre-Xmas AWIR, the recently introduced Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration and Remedial Matters) Bill (114-1) has passed through its first reading and is now off to the Finance and Expenditure Select Committee for their tinkling once they have considered (if that’s the right word (ignored could be a better term??)) any public submissions on the Bill’s components. The Committee is due to report back in June 2019.

Bright-line Test QWBA’s released

In the week leading up to Xmas, IR released two Questions We’ve Been Asked (QWBA) to provide commentary surrounding the Commissioner’s views on the application of the bright-line rules to sales of lifestyle blocks (QB 18/17) and to the sale of a subdivided section (QB 18/16).

In relation to the sale of a lifestyle block, IR’s commentary suggests that there are two primary scenarios where the sale of a lifestyle block may be excluded from application of the bright-line rules. The first is where the land in question will satisfy the farmland definition, consequently excluded from taxation on the basis that the land is not residential land (the farmland exclusion), and second, where the lifestyle block cannot satisfy the farmland criteria to the extent it is still considered to be residential land, however the land qualifies as the main home of the seller and consequently taxation under the bright-line test is negated via application of the main home exclusion.

QB 18/17 contains a useful flowchart to guide you towards reaching a conclusion on the issue, but in essence the main points to remember are:

• You first need to consider whether any of the other land tax provisions apply to the sale of the land (e.g. section CB 6 – intention of resale) prior to considering a bright-line application, as bright-line only becomes relevant for consideration where the other land taxing provisions (with the exception of CB 13 & CB 14) will not apply to the sale.
   
• There are two components to the farmland exclusion – the lifestyle block is being worked in a farming or agricultural business carried on by the seller (which may require some analysis of the business test outlined in the leading case on the issue in Grieve v CIR (1984)), and, if not, is the lifestyle block, because of its area and nature, capable of being worked as a farming or agricultural business (and in this respect without any significant investment or modification being required to enable this use).
   
• When considering the main home exclusion, remember that there are two distinct requirements of the test – the land is used more than 50% for a dwelling that was the sellers main home (so considering the area of the land used for the dwelling, which must exceed 50%, but is not restricted to just surrounding curtilage if the seller can show other parts of the land were also used to enhance the enjoyment of the dwelling – e.g. areas for pet animals), and used for this purpose for more than 50% of the time the seller has owned the land (so no good trying to claim the exclusion by moving into the dwelling 12 months pre-selling, when you have already owned the land for 4 years).
   
• Do not forget the two exceptions to the main home exclusion – already used 2 or more times in the past two years, or where the seller has engaged in a regular pattern of acquiring/disposing of residential property that was their main home.

QB 18/16 discusses the sale of subdivided land, and whether the main home exclusion could still apply to a bare lot disposal, i.e. land that does not contain the original dwelling. The conclusion, post considering a number of technical issues (e.g. bright-line period operates from date undivided land was first acquired, not the date the new lot title was issued, and the various taxing provisions/exclusions can apply to a part of the land, the whole of the land or land disposed of together with other land – section CB 23B), is that provided the seller can satisfy the two 50% thresholds outlined above under the lifestyle block QWBA commentary, then the main home exclusion could still apply to a sale of subdivided land. Key points to remember however:

• Since we are dealing with subdivisions, and with the requirement to consider other land taxing provisions in advance of bright-line, clearly you will already need to have considered and excluded application of section CB 12 – minor subdivision rule.
   
• You will need to consider how the subdivided lot of land has been used since the new title was issued – e.g. left bare pre-sale and arguably therefore still used as part of the sellers dwelling, or developed with say a new dwelling constructed to be immediately sold, in which case the subdivided land will no longer be seen to being used with the seller’s dwelling. Under this latter scenario, the question will be answered via consideration of the total ownership period since the undivided land was acquired, and at what point in time did the subdivision occur (and therefore change the use of the land), with a view to determining whether the subdivided piece of land has still been used most of the time it has been owned (including as part of the undivided land) for the sellers main home.
• The main home exclusion exception, in that it can only be used twice in the previous two years. So for example, if three new lots have been created, and they are all sold at the same time, only two will qualify for the exclusion, with the third lot still subject to taxation under bright-line.

Draft GST QWBA release

Also released just prior to Xmas, is IR’s draft QWBA titled “GST – administration or management services provided by a collective body to its members” (PUB00325). The primary question IR looks to provide guidance on, is at what point a “collective body” may be required to register for GST?

The draft answer – simply whenever the collective body’s annual value of supplies of goods and services exceeds the $60,000 registration threshold.

So what exactly is considered to be a collective body, to which the QWBA will then apply? IR’s view – the term describes a body such as a committee, an association or a society (incorporated or unincorporated) established by a group of persons to manage or administer their shared interests. In this context, the body will not be established for profit-making purposes but rather for the members’ convenience or economic advantage.

The commentary within the QWBA, examines the term “person” for GST purposes and states that this will include both companies (any body corporate having a separate legal personality) and an unincorporated body of persons – not defined in the GST Act, but taken to mean a body that exists as a collective entity; is formed for a defined purpose; has a name; has some sort of internal structure, likely comprising rules derived from agreement among the members; and has a changeable membership.

Once the collective body has satisfied the “person” definition, the one remaining question (although with a number of components to it), is whether the collective body will be deemed to be carrying on a taxable activity. In this regard, the draft QWBA then provides commentary on the issue of whether the collective body will satisfy the “continuous or regular activity” test, whether the collective body will be seen to be making a supply of goods or services to another person, and finally, whether the goods or services will be provided for consideration.

The QWBA provides two examples to demonstrate IR’s analysis, the first considering the scenario of an established residents committee which is to help with managing the upkeep of four freestanding townhouses and to provide a forum for addressing any of the resident’s concerns, particularly with respect to the tree-lined shared driveway, and the second, which considers the potential GST implications for a shared service provider arrangement entered into between four independent medical practitioners to share practice administration costs.

Deadline for commentary on PUB00325 is 15^th February 2019.