Decision date: 20 November 2014
Case: TRA 008/14  NZTRA 15
Act(s): Goods and Services Tax Act 1985, Tax Administration Act 1994
Keywords: Associated persons rules, commercial dwelling, input tax credit
The issue for the Taxation Review Authority ("TRA") was whether the input tax credit claimed by the disputant under s 21HB of the Goods and Services Tax Act 1985 ("GSTA") for the purchase of the house before 1 April 2011 is limited to zero, pursuant to s 3A(3) of the GSTA definition of "input tax", where the supply is from an associated person.
The TRA found that the Commissioner of Inland Revenue's ("the Commissioner's") decision to disallow the input tax credit claimed was correct. The TRA found that s 21HB of the GSTA is intended to have retrospective effect. It is the original acquisition of the goods or services with all of their attaching circumstances that is referred to in s 21HB(3) of the GSTA. Further, the purpose of the transitional rules contained in s 21HB was to put a registered person affected by the 2010 amendments in the same position that they would have been in had they carried on a taxable activity at the time they purchased the particular goods or services.
There is now authority that provides s 3A(3)(a) of the GSTA limits input tax deductions claimed under s 21HB where the supplier and the recipient are associated persons.
This proceeding involved a challenge to the Commissioner's decision to disallow the input tax credit claimed for the purchase price of a property claimed in the disputant's goods and services tax ("GST") return for the period ended 30 September 2011. The property was used for the provision of short-term rental accommodation. The input tax credit claimed was disallowed on the basis it was limited to zero due to the associated person rules.
On 18 February 2005, Mr X purchased a residential property ("the Property") from an unregistered person for $635,000. No GST was included in the transaction as the property was a private residence. Mr X was not registered for GST in his personal capacity. From the date of the purchase until early 2007, Mr X spent in excess of $300,000 and many weekends making capital improvements to the Property.
During 2007, Mr X who then owned 99% of the shares in the disputant transferred the Property to the disputant, an associated person, for $1,100,000. The disputant treated the Property as a "dwelling" for GST purposes and considered the supply to be GST-exempt based on advice received from a tax specialist. An independent valuation of the Property and chattels as at 20 February 2007 showed the total value of the Property as being $1,100,000 (GST inclusive).
In 2010, the definition of "commercial dwelling" in s 2 of the GSTA was amended to include accommodation in homestays, farmstays, bed and breakfast establishments, and serviced apartments with effect from 1 April 2011. The definition of "dwelling" was also amended.
With effect from 1 April 2011, persons or businesses who supply short-term accommodation and whose total supplies in any 12-month period exceed the $60,000 threshold, were required to register for GST and charge GST on their supplies under s 51 of the GSTA. They were also entitled to claim GST input tax based on the various provisions of the GSTA.
Section 21HB of the GSTA was introduced in 2010 to allow taxpayers now falling under the new definition of "commercial dwelling" to apply for input tax credits on goods or services originally not acquired for the principal purpose of making taxable supplies.
On 28 June 2012, the disputant registered for GST with effect from 1 April 2011. The first GST return for the six-month period ending 30 September 2011 was filed on 14 September 2012.
This GST return included an input tax credit claim for the value of the property and for the extensive renovations/refurbishments carried out by Mr X during his period of ownership and also by the disputant. The portion of the input tax credit claim which relates solely to the acquisition of the Property is $119,622.87.
The disputant's claim for input tax for the period ended 30 September 2011 was allowed in part by the Commissioner but disallowed in relation to the purchase price of the Property on the basis the associated person rules in s 3A(3)(a) of the GSTA limited the GST claimed to zero. The calculation contained in s 3A(3)(a) of the GSTA relating to associated persons is the lesser of the following three amounts:
The disputant argued that the correct interpretation of s 21HB(3) of the GSTA was that the only attribute of the original supply attached to the acquisition was that of cost. The disputant submitted that the acquisition, being the purchase of the property, claimed under s 21HB(3) is a statutory fiction by which the goods or services are deemed to have been acquired on 1 April 2011 at the original cost of supply but with no other attaching attributes of the original supply.
The disputant argued that the Commissioner's interpretation of s 21HB (that the disputant is not eligible for a 15% input tax credit and on any future sale of the property the disputant will only be able to retain 85% of the sale proceeds) effectively deprives the disputant of part of its assets. The disputant argued that this results in unfairness that Parliament could not have intended.
The Commissioner submitted that it is the original acquisition of the goods or services with all of their attaching circumstances that is referred to in s 21HB(3) of the GSTA. The Commissioner argued this interpretation is supported by s 21HB(2) which provides that the disputant is entitled to an input tax deduction under s 20(3C) to the extent to which a deduction has not been made under the old apportionment rules. Such a deduction could only have been made on the original supply of the goods, not a fictional supply.
Further, the Commissioner submitted that in considering s 21HB of the GSTA, it is necessary to consider s 3A(3)(a) and the amended definition of "associated persons" which was intended to remove the incentive for persons to enter into transactions primarily to gain a significant tax advantage. Its specific purpose was to limit the input tax credit available in relation to supplies of secondhand goods between associated parties to remove the tax advantages. While the associated persons limitation in s 3A(3)(a) can be unfair where a taxpayer acquires goods or services from an associated person for legitimate reasons, this unfairness was acknowledged and a conscious choice by Parliament.
In addition, the Commissioner submitted that Parliament was aware when it implemented the associated persons regime that it would create inequity between transactions entered into between associated persons and non-associated persons. However, this inequity was outweighed by the potential revenue consequences of the provisions. The purpose of s 21HB of the GSTA was to put a registered person affected by the 2010 amendments in the same position they would have been in had they carried on a taxable activity at the time they purchased the particular goods or services. To provide an associated person with an input credit deduction in the case of s 21HB of the GSTA would place associated persons in a more advantageous position than if the rules had not been put in place and would be inconsistent with the associated persons regime.
Judge Sinclair found the meaning of ss 21HB(2) and (3) of the GSTA plain and unambiguous. Further, Judge Sinclair was satisfied that on the wording of s 21HB(1) it is clear that s 21HB is intended to have retrospective effect. She accepted the purpose of the transitional rules contained in s 21HB were to put a registered person affected by the 2010 amendments in the same position they would have been in had they carried on a taxable activity at the time they purchased the particular goods or services. She found Parliament has done this by retaining the general input tax definition contained in s 3A(3)(a) which limits input tax deductions where the supplier and the recipient are associated persons.