Money: Conflict in GST compliance plan

By DENHAM MARTIN

The Government provided more bedtime reading for tax lawyers this week in the form of the Taxation (Annual Rates, GST and Miscellaneous Provisions) Bill. This bill contains more than 100 amendments to the existing tax legislation, not all of which had been foreshadowed by earlier press releases.

The majority of the proposed changes can be classified under the following headings:

Those designed to be anti-avoidance measures.

The introduction of a personal services attribution rule, which is to stop people interposing an entity (which pays tax at a lower rate than themselves) between themselves and the recipient of their personal services.

Clarification of the point that foreign tax credits can be considered as part of the reconstruction of arrangements under the anti-avoidance rules.

Those designed to ameliorate the tax burdens placed on taxpayers.

Increasing the GST registration threshold from $30,000 to $40,000.

Reduction of the incremental penalty for late payment of tax from 2 per cent to 1 per cent of the overdue tax (although, the initial late payment penalty of 5 per cent remains).

Widening some of the relief provisions, in particular extending the relief provisions for serious hardship or financial difficulty to cover GST, PAYE, student loan repayments and various other obligations.

Those designed to fix up deficiencies where experience has shown the drafting of the legislation to be inadequate to achieve the Government's original goal.

Many of the proposed changes relate to GST and many have been awaiting implementation for some time, having been proposed by the previous Government.

The bill proposes that the current anti-avoidance rule be repealed and replaced by a provision that corresponds to income tax's general anti-avoidance rule. However, subsections (5) to (7) of the proposed provision represent a curious addition, in that they provide a specific anti-avoidance rule.

In short, this addition is aimed at stopping manipulation in calculating a taxpayer's turnover. Turnover is important as various turnover thresholds dictate whether taxpayers must register for GST, the frequency (i.e. one, two or six-monthly returns) at which they must account for GST, and the basis (i.e. invoice or payments) on which they must account for GST.

The proposed legislation aims to limit the ability to manipulate turnover in the situation where all or part of a taxable activity formerly carried by one taxpayer is carried on by a person (or persons) associated with that taxpayer.

In these situations, the value of the supplies will be the aggregate of the supplies made relating to that taxable activity, whether made by the disposer or the acquirer of the taxable activity. That aggregate value will be included in both the disposer's and the acquirer's turnover calculations.

There are a number of points that arise from the way this provision is drafted. First, it applies to any arrangement entered into after August 22, 1985 and therefore has retrospective application. Secondly, it is open-ended - it does not just apply to the 12-month period from the date of transfer of the taxable activity. Thirdly, it applies unless the Commissioner determines that it should not apply. These combine to mean that the provision is of very wide effect.

For example, assume that: the "Mum and Dad partnership" sold their entire taxable activity, a farming business, to their son in 1987. Mum and Dad are retired. The son is still operating the same activity and consistently making supplies of $300,000 per year. The value of the Mum and Dad partnership's supplies in the 12 months from, say, June 1, 1999 to May 31, 2000, will be the aggregate of its own supplies in that period (nil) and the son's supplies ($300,000).

As the Mum and Dad partnership is over the registration threshold, it would be required to be registered for GST, and would need to file returns on a two-monthly basis, unless the Commissioner had determined otherwise. Failing to file these returns would mean an exposure to late filing penalties and so forth.

If passed in its present form, this amendment would place taxpayers under an enormous burden to ascertain what has happened to taxable activities taken over by associates. Trying to determine whether it is equitable in all the circumstances to disapply the provision is likely to also place pressure on the Commissioner.

The provision as currently drafted may achieve the anti-avoidance goal of the Government, but would impose a compliance cost which is in conflict with the Government's goal of minimising taxpayers' compliance costs.

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