Money: Changes to GST will widen net

By Denham Martin

Taxwise


GST Treatment of Exported Services The Government is considering making changes to the Goods and Services Tax Act 1985 as outlined in a discussion document released in early March.

One of the aims of the review is to protect New Zealand's tax base from erosion by ensuring that GST is charged on all goods and services consumed in New Zealand.

A major concern to the Government is that, in its present state, the Act enables services which are consumed in New Zealand but contracted for overseas to escape the GST net.

Progress on dealing with this issue has been swift and the recent release of the Taxation (Annual Rates and Remedial Matters) Bill 1999 proposes a legislative change in the GST treatment of exported services.

Presently, services which are supplied "for and to a person" who is not resident in New Zealand and who is "outside New Zealand" at the time the services are performed are zero-rated for GST purposes.

This is to ensure that GST is imposed only on services consumed in New Zealand and that services consumed outside of New Zealand remain outside the GST net.

However, the Court of Appeal held in Wilson & Horton Ltd v C of IR (1995) 17 NZTC 12,325 that the zero-rating provision was directed towards the contractual arrangement rather than the benefits that accrued as a result of these arrangements. The case concerned the GST treatment of a supply of advertising services to overseas clients. The taxpayer contended that contractually the supply of advertising services was zero-rated as the supply was made for and to persons not resident in New Zealand and who were outside New Zealand at the time of performance. The commissioner argued that because the benefit of the advertising services accrued in New Zealand, zero-rated status did not apply.

In determining the question of whether the services are consumed outside New Zealand the Court directed its focus to the non-resident recipient and not to how the services supplied may affect other persons in New Zealand. The effect of this decision, therefore, was that where a contract for the supply of services is with a non-resident who is outside New Zealand, then the service is considered to be "for and to" that non-resident and as such a zero-rated supply.

The Wilson & Horton case therefore exposes something of a loophole in the legislation, in that it was not contemplated that zero-rated status would apply to services consumed in New Zealand but contracted by a non-resident outside New Zealand.

The Bill, if passed in its present form will enact new provisions to deal with this issue by ensuring that zero-rated status does not apply to a supply of services under an agreement that is entered into with a non-resident if the recipient of the services is, or will be in New Zealand at the time the services are performed. For the purpose of determining whether the recipient is in or outside New Zealand, a minor presence of a person in New Zealand or a presence that is not effectively connected with the supply will not render the recipient "to be in" New Zealand and the supply of services will still be zero-rated.

The proposed changes are expressed to have retrospective effect. However, they do not appear to deal with the position where an existing contract for on-going services does not provide for GST as between the parties due to the current zero-rating. Therefore, if the changes are enacted as proposed, the service provider under such contracts may have to bear the GST impost without an ability to reclaim this from the recipient of the service.

Denham Martin is the principal of Denham Martin & Associates, lawyers specialising in advice on taxation and related matters.