Robin Oliver and Mike Shaw, a former Deputy Commissioner at IRD and former Deloitte tax partner respectively have provided a guest post on the changes to GST relating to bodies corporate announced by Revenue Minister, Todd McClay this morning.
GST and Bodies Corporate
What is proposed?
All Body Corporate supplies under section 84 Unit Titles Act 2010 (all things bodies corporate are required to do) to be deemed to be exempt supplies meaning that bodies corporate are not able to register and receive GST input credits for the GST they pay on purchases.
If the Body Corporate registered before 6 June 2014 (date of announcement) it retains registration BUT is compulsorily de-registered as of 6 June.
There is a complex look-though rule for registered unit holders. For example a commercial property owned by unit holders who lease offices – their share of Body Corporate expenses are deemed to be their own expenses so that they can claim a proportion of input credits relating to the Body Corporate.
Legislation is to be introduced, presumably after the election, which has effect from 6 June 2014.
This is justified by Minister of Revenue as fair, consistent, and reducing compliance costs.
The proposal is a stunning attempt to legislate by press statement. The proposal
- Is not fair
- Produces inconsistent tax treatment
- Increases compliance costs.
The proposed legislation by press statement is a naked revenue grab exploiting the misery of the many unit holders who have already suffered as a result of leaky home problems and the costs and misery that entails. The government helped create the leaky home problem and now they are changing the tax rules to make money out of the resulting misery.
The Proposals are Not Fair
Where a body corporate has been compensated by an out of court settlement to address remediation costs from leaky home problems, post 6 June 2014 they are unable to claim GST on the costs of remediation. This is in effect a tax grab by the government. The out of court settlement was paid with no input by the builder/developer etc. GST was in this way charged on the payment. This was offset by the payment being free of GST in the hand of the Body Corporate but with GST input tax still available on all subsequent remediation costs. This no longer applies post 6 June. The right to input credits is proposed to be removed. This is a confiscation of GST properly entitled to be refunded to Bodies Corporate and results in two levels of GST being levied (one by the payer of the compensation payment, second on the input tax credit for the Body Corporate).
Many registered bodies corporates have build-up maintenance funds by charging the unit holders levies plus GST. This will be neutral if the body corporate could recover the GST when they spend the funds to paint the building and undertake their maintenance plans. Post 6 June 2014, the body corporate cannot claim back the GST on this expenditure, this has resulted in a windfall gain by the Government of GST as GST has been collected on the levies and no GST will be able to be claimed on the subsequent expenditure.
It Results in Inconsistent Tax Treatment
Where instead of getting a compensation payment the builder repairs the building, the builder gets input credits for the costs. This is the same as current law where the Body Corporate gets the input credit; but it is proposed that these be arbitrarily denied.
Where a Body Corporate employs a cleaner/manager to provide services to unit holders the no GST on that service will now be payable since it is an exempt supply. If other people purchase cleaning services then GST is normally charged.
The Proposal Will Increase Compliance Costs
For Bodies Corporate which have primarily unit holders that conduct taxable activities, this proposal will materially increase compliance costs in that the GST portion is claimed by the unit-holder and not that body corporate, this will mean monthly reporting to unit holders of detailed financial information (i.e. each payment which has a GST content) to every unit holder.
Legislation By Press Statement Is a Mess
Legislation will not be enacted until some unknown time in the future, therefore what do registered bodies corporate do post 6 June 2014. Until we have enacted legislation, they are required to comply with requirements to charge GST that will presumably have to be refunded when legislation is enacted.
IRD issued its Issues Paper reaching the interim view that Bodies Corporate are liable to register in May last year. It has remained silent for 13 months. Then the government issues a press statement after all this time.
Robin Oliver and Mike Shaw are principles of OliverShaw. More information is available on their website.