INSIDE THIS EDITION
Emerging from Covid-19 1
GST issues paper 2
Carry back of tax losses 3
Other tax changes in response to
Can you steal GST? 4
Emerging from Covid-19
As New Zealand moves down the COVID-19 alert levels businesses face a long transition period from the unknown to the ‘new normal’. Social distancing, strict health and safety guidelines, restricted international and regional travel are amongst numerous practises that will likely continue to apply for as long as COVID-19 remains a global threat. This may mean a need to increase online presence, re-focus on the domestic market, or implement a completely new model of operation. Consideration should be given to the following areas.
Employees: Not all employees will be able to return to work as needed. Employees with underlying health vulnerabilities or family members that cannot risk exposure, may not be able to return to work. Therefore, businesses need to question whether they will have sufficient resources to commence operations and/or how can they function with a potentially smaller team. Pressuring employees deemed vulnerable could be in violation of the Health and Safety Act, potentially comprising failure to maintain a safe work environment. Early discussions with staff will enable a phased plan to be developed.
Supply Chain: Are products sold to, or suppliers based in, or product transported through a Covid-19 affected market? These are important questions to answer before resuming operation because disturbances in the supply chain will impact a businesses’ ability to trade. As more businesses recommence operations at lower alert levels how does this impact supplier’s ability to deliver on time and to requirements? In a changing business environment, certain materials will likely be in short supply and alternatives needed, competitors will pivot into different markets and customer demand and behaviour will change. For example, prices previously established based on a particular experience or demand will need to be ‘reset’ if the experience or demand has changed.
Marketing: Brick and mortar retail stores may need to establish an online presence. Physical displays and signs on the streets will be irrelevant if there is no foot-traffic to capture the target audience. Therefore, utilising social media platforms, expanding and upgrading the business website, enabling ‘click and collect’ services and/or a delivery function will be an essential. However, this may not be possible if website and app designers are overrun with demand.
Cash-flow/banking relationships: Adapting the business to the ‘new normal’ may require additional cash-flow. With on-going overheads and limited revenue this is a fundamental challenge. Levers need to be pulled. Deferred payment terms could be negotiated with suppliers to enable a cash shortfall to be bridged as revenue streams start to resume. And periodically review your customers’ circumstances to confirm they are able to pay, come time to do so. New revenue streams could be secured by offering more favourable payment terms than competitors (for a fixed period) - but care needs to be taken to ensure you are not starting a race to the bottom.
Discussions with the bank are vital. Reassessing and confirming banking arrangements, extension of overdraft limits to meet short-term cash-flow requirements, and capacity for long-term funding. Consider all avenues in assessing what resources are available to assist with cash-flow, and ultimately, plan for cash-flow requirements for the next 6-12 months to identify peak funding requirements. Create 3 models, based on worst-case, expected and best-case scenarios. If a business can quantify cash-flow requirements and timing of when this is required, this will lead a more needs focussed conversation with the bank.
These are just some of the aspects to contemplate as businesses implement a COVID-19 recovery plan. Businesses that have a clear vision and plan ahead are more likely to emerge out the other side.
GST issues paper
On 24 February, Inland Revenue released an Officials’ Issues Paper seeking feedback on various GST issues.
A long-standing rule that has proved a source of frustration for those affected applies to transfers of goods between associated persons. The issue is highlighted in the following example. Joe buys a block of land on the edge of town from a third party. Neither the vendor, nor Joe, are GST registered, i.e. GST does not apply. Joe holds the land for a number of years and due to urban expansion, the opportunity arises to subdivide the block into 6 lots for sale. Joe incorporates a company to complete the subdivision and sells the land to the company.
Because of the work required to complete the subdivision, it comprises a ‘taxable activity’ and GST applies to the sale of the 6 sections. However, under current rules, the company is not entitled to a GST deduction on the purchase of the land, i.e. GST is paid on the sale, but can’t be claimed on the purchase. The problem arises because Joe’s GST deduction is limited to the amount of GST he originally incurred, which in this case was zero as GST did not apply to that transaction.
Officials now consider it appropriate for Joe to be entitled to a GST deduction. It is proposed that Joe should be entitled to a deduction based on 3/23rds of the price paid for the land. Arguably, the GST deduction should be based on the land’s market value. By restricting it to ‘cost’, GST is effectively being levied on the increase in the value of the land when it was held ‘privately’ by Joe. Changes are also proposed to the apportionment and adjustment rules that apply when goods and services are used for both taxable and non-taxable purposes. With the increased popularity of Airbnb, these rules have increasing application. Broadly, the current rules require a person to make periodic GST adjustments for any difference in the intended taxable use of an asset and the actual taxable use. One of the issues contained within the Issues Paper is what happens when the asset is sold or deemed to be sold.
For example, if a bach, sold by a GST registered vendor, has been used 30% for Airbnb, GST is paid on the full value of the sale, but an offsetting GST deduction is allowed based on the 70% proportion of private use, i.e. GST is paid on 30% of the sale proceeds. In isolation, this would arrive at a logical outcome. However, the offsetting deduction is limited to the amount of any unclaimed GST from the original purchase. This means that for an appreciating asset, GST becomes payable on the full capital gain since acquisition, with no offsetting GST claim.
Within the issues paper it is acknowledged that the cap on the ‘wash-up’ deduction gives rise to “over taxation”. The suggested solution is to remove the cap (for non-property developers). This would ensure GST is paid in-line with the extent the property has been used to make taxable supplies (30% in the above example). However, this would be calculated on the capital gain since acquisition, which could include when the property was not used to derive income.
Changes to make the rules fair are welcomed, the question becomes whether they will go far enough.
Carry back of tax losses
Ordinarily, if a taxpayer incurs a tax loss within a particular year, they are able to carry that loss forward and offset it against income derived in a future year, thereby reducing the taxpayer’s future tax payable. As part of the Government’s Covid-19 response, on 30 April 2020 legislation was passed under urgency which allows tax losses to be offset against income derived in a previous year, thereby enabling the taxpayer to obtain a refund comprising prior year income tax paid. This temporary tax loss carry-back scheme is available to most taxpayers, e.g. trusts, companies and individuals.
A permanent scheme to replace the temporary rules is under development and will apply from the 2022 income year, however, the current scheme applies for a two-year period as follows:
A tax loss incurred in the 2020 income year is able to be carried back and offset against taxable income derived in the 2019 income year.
A tax loss incurred in the 2021 year is able to be carried back and offset against taxable income derived in the 2020 year.
A tax loss cannot be carried back multiple years, instead it applies to the “net loss year” and the immediately preceding “taxable income year”.
Taking each year in succession, most taxpayers will have already filed th