A Week In Review
GST – Horse Racing Activities
IR has released a draft QWBA on the issue of whether a horse racing syndicate or partnership can register for GST. Registration can only be permitted where the syndicate or partnership can show the carrying on of a taxable activity and that the horse racing is not simply a private recreational pursuit or hobby which is specifically excluded from the taxable activity definition.
Consideration would therefore be given as to whether:
- the activity of the syndicate or partnership is organised to achieve a pecuniary profit, and it operates in a systematic fashion that on an objective assessment appears to materially reduce the element that luck plays in whether any prize-money is won
- a significant amount of time is involved in performing the activity undertaken by the manager of the syndicate or partnership (including acquiring and managing the horses that are assisting in meeting financial imperatives and disposing of horses that are not), and
- the syndicate or partnership is formed not for the personal interest or pleasure of the participants, but for the purpose of making a profit from the activity, and it is operated in that manner.
Where all of the above factors are present, GST registration is likely to be granted. The deadline for comment on the draft QWBA is 9th November 2016.
Deductibility of Feasibility Expenditure
Until the recent Supreme Court decision in Trustpower Limited v C of IR ([2016] NZSC 91, (2016) 27 NZTC ¶22-061), the general approach to feasibility costs was that they were deductible provided they were not incurred pre the commencement of the taxpayers income earning activity or business, the expenditure formed part of the normal business operations and the taxpayer had not definitively committed to the project the feasibility costs were incurred in respect of. In other words, the incurrence of costs to a point that simply puts the taxpayer in a position to make an informed decision about a particular proposal, was not enough to trigger the capital limitation. IR’s IS 08/02 confirmed the Commissioners views in this regard.
The decision of the Supreme Court however, has resulted in IR issuing a draft interpretation statement, PUB00280, to update the Commissioner’s view based on the judgement. The main change is with respect to the discussion re the application of the capital limitation. In this regard, where the taxpayer’s ultimate goal is intended to result in the acquisition or development of a capital asset (or other enduring benefit) that is likely to form part of the taxpayer’s profit-making structure, generally, any expenditure will be on capital account. However, some expenditure on the early stages of feasibility work may be deductible, and IR’s view is that this could occur in two, related, situations.
The first situation is where the expenditure is not directed towards a specific capital project, usually, but not always, in situations where a specific capital project has not yet been identified. However, IR’s view in this regard, is that the project need only be identified in general terms; the exact details do not need to be known; before the capital limitation may apply. Deductibility may still apply in this situation however, where the expenditure is so preliminary as not to be directed towards materially advancing that specific project. This can be contrasted with expenditure that is aimed at making tangible progress on a capital project.
It is important to note that deductibility does not turn on the success or failure of the project. When the creation of an asset fails to eventuate, the expenditure incurred cannot be re-characterised as revenue in nature – the expenditure must be considered at the time it is incurred. Deadline for comment on the draft IS is also due by 9th November 2016.
Student Loan Interest Exemption Amendment
A SOP has been released proposing amendments to the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill, to extend the present scenarios whereby a borrower who is overseas can still obtain an exemption from interest on their student loan. The current regime permits the Commissioner to still treat a borrower who is outside of NZ as NZ-based and therefore to qualify for the interest exemption in certain circumstances. The changes will apply to borrowers in receipt of NZ Government-funded scholarships who are either studying full-time overseas or who are undertaking approved internships, also on a full-time basis.
A Birthday!!
For those of you who are sentimental about historic dates in NZ taxation (not many of you I expect), Saturday saw the passing of the 30th birthday for the NZ GST regime. The date also coincided with the commencement of the new remote services rules, to which IR advised they have received some 75 registrations to date from non-resident suppliers.
Richard Ashby BBus, CA, CPA
PARTNER
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