Mortgagee Sales & GST
IR has released operational statement 17/01 (“OS 17/01), which sets out the Commissioner’s position with respect to the entitlement of registered persons to make GST input tax deduction claims, in relation to costs of sale incurred in association with mortgage sales.
OS 17/01 applies from 6th September 2017 and is a replacement to OS 15/01 – although in essence the only change from the previous statement is with respect to suppliers under the B2B financial services rules, who have incurred costs of sale when exercising their mortgagee powers to force a sale of the secured asset. To dust the cobwebs off for those of you who cannot quite remember, effective 1st January 2005, B2B financial supplies (usually exempt supplies) were permitted to be zero-rated instead (by supplier election) provided the registered recipient had greater than 75% taxable supplies/total supplies in the prior 12 month period. This legislative change then enabled the supplier to claim any GST input tax incurred in making that B2B supply.
OS 17/01 contains the following conclusions:
A mortgagee in a mortgagee sale cannot deduct the costs of sale before calculating the GST due under section 17 of the Goods and Services Tax Act 1985.
A mortgagee cannot claim input tax for the costs associated with a mortgagee sale.
A mortgagee who is a registered person and makes a mortgagee sale that is subject to the B2B supply of financial services rules is able to claim input tax for the costs associated with that mortgagee sale (differs from previous scenario because in these circumstances, mortgagee sale considered to be part of mortgagees money lending taxable activity).
A mortgagor cannot claim input tax for the costs, incurred by the mortgagee, associated with a mortgagee sale.
IR acknowledges, that since the position outlined in OS 17/01 reflects a change from that outlined in OS 15/01, there will be a number of taxpayers, who previously relied on what is now considered to have been an incorrect position, who will have legitimate unclaimed input tax deductions as a consequence. Usually,
because registered persons are entitled to recover missed claims in subsequent GST return periods (effective self-correction), the Commissioner’s general practice (SPS 16/01) is not to accept section 113 (TAA94) requests for amendment of previously filed positions. However in this instance, IR will be prepared to consider section 113 requests for amendments to prior taxable period returns, and will determine acceptance of such requests based on the merits of each case, but ignoring the self-correction facility already available.
Common Reporting Standard – Are You There Yet?
Unless you have been deep underground in your bunker preparing for North Korea’s pre-emptive attack on the world, you will be well aware of the Common Reporting Standard (“CRS”), which took effect in NZ from 1st July 2017.
There are three key steps for you to work through in determining whether CRS applies to either yourself or those you act for and provide advice to:
1. Is the relevant entity a Financial Institution (“FI”)?
2. If yes, is the FI then a NZFI?
3. If yes, is the NZFI then a reporting NZFI?
Having said “no” in any of the above three steps, you are still exposed to CRS, due to various disclosures you now need to make whenever you open a new bank account, to assist your local bank with determining their own reporting obligations, since they are definitely reporting NZFI’s.
It is this last aspect I have decided to provide a brief commentary on, since in the past couple of months, several clients when opening new bank accounts for their family trusts, have had to complete the section on the bank account opening form which is titled “Account Holder Type For Tax Purposes”. The detail appears relatively generic across the various banks, broken into three components:
1. Are you an exempt entity – “No” for most of us since those entities listed are essentially of a central bank, government, international organisation or publicly traded level (so go to question 2)
2. Are you a FI – most likely “No”, however for our simple discretionary family trust it may depend on the type of investments the trustees have and who manages them (if no, then go to question 3)
3. What type of other Non-Financial Entity (NFE) are you? – There is no opt out here so you actually need to make a decision – tick either Active NFE or Passive NFE (the latter obviously if you are not the former).
In the particular cases I have advised on to date, the answer was relatively simple, since the Trust’s in question were going to derive more than 50% of their income from passive sources, which in turn would be produced from greater than 50% of its total assets (essentially just being cash deposits) – so Passive NFE’s.
IR, in its September Business Tax Update (http://www.ird.govt.nz/resources/b/f/bfaec89c-fa2b-4e79-86e6-7188b32ed563/business-tax-update-september-2017.pdf), has again highlighted CRS, and referred readers to its own published guidance and support materials (www.ird.govt.nz/crs). Amongst the myriad of
documents available, is a useful guide called “Family Trust obligations under the CRS” – (http://www.ird.govt.nz/resources/f/5/f554e5b8-1925-41d7-beb5-da30b85cb334/ir1053.pdf).
As a basic memory trigger, if you are aware that your client’s Trust has “managed fund type investments”, then before you can advise them to tick the Passive NFE box (if you are satisfied they are not an Active NFE), you will need to essentially investigate the materiality of these investments – if more than 50% of the income of the Trust is derived from these funds over the relevant period (generally preceding 3 periods), then there is potential exposure for the Trust satisfying the FI definition.
There are some reasonably significant civil and criminal penalty exposures for reporting NZFI’s that fail to comply with their CRS obligations, so it certainly would be prudent to update your annual checklists to ensure appropriate CRS questions are asked and ticked off.
