Current GST Issues

Over the past few months, Inland Revenue has been seeking and reviewing submissions in relation to  a wide-ranging officials' issues paper on current GST issues (the Paper), which is expected to inform Officials’ advice to Ministers. The Paper reflects a familiar tension: New Zealand's broad-based GST system continues to work well, but 40 years of technical and policy tweaks to the legislation have created technical anomalies, uncertain boundaries and rules that do not always align with modern commercial systems.

The Paper covers immediate practical issues including accommodation, cross-border supplies, error correction and pre-registration expenditure alongside longer-term questions about modernising the Goods and Services Tax Act 1985 (GST Act) and tax administration. Some chapters contain developed proposals, while others are testing policy options or seeking information before any proposal is advanced.

In this issue of Tax Tips, we outline the more significant changes in the Paper and provide our view.

The Paper considers targeted changes to the boundary between GST-exempt supplies of accommodation in a dwelling and taxable accommodation in a commercial dwelling. The proposals focus on areas where the existing definitions can produce uncertain or inconsistent tax outcomes. Presently the definitions found in the GST Act are differentiated as follows:

Transitional housing

The definition of “dwelling” refer to ‘quiet enjoyment’ in terms of the RTA, and depending on the terms of the transitional housing it may not be clear that the occupants have quiet enjoyment in terms of the RTA standard. This creates issues with determining whether such housing is taxable or exempt.

Officials propose adding self-contained houses, flats and apartments used for transitional housing as a specific category within the definition of “dwelling” which would override the requirement for ‘quiet enjoyment’ with reference to the RTA, similar to the specific inclusion of residential units in retirement villages / rest homes in (b)(iii) above.

The change would remove the need for occupants to satisfy the existing “quiet enjoyment” requirement. Transitional housing supplied in those premises would therefore generally be exempt, even where the provider carries out regular inspections or provides wrap-around support services. Transitional housing supplied in an existing commercial dwelling, such as a motel or boarding house, would remain taxable.

Self-contained student accommodation

Similar issues arise in relation to accommodation provided to tertiary students, as the RTA specifically excludes certain supplies of accommodation to students by tertiary education providers, and the ‘quiet enjoyment’ limb of the definition of ‘dwelling’ is incongruent with requirements under the Education (Pastoral Care of Tertiary and International Learners) Code of Practice 2021.

Officials propose specifically adding all student accommodation subject to section 5B of the Residential Tenancies Act 1986 to the definition of “commercial dwelling”.

Such a change would mean a clear taxable treatment for traditional halls of residence, hostels and large-scale managed student accommodation. However, it would also capture stand-alone houses, flats and self-contained apartments used for student accommodation, regardless of whether they resemble ordinary residential accommodation. Where the four-week rule applies, the accommodation would generally be taxed at an effective rate of 9%.

PwC view

We are supportive of a move towards more clarity and consistency in this area, and reducing the scope of the “boundary” in this area.  There is a decision to be made from a policy perspective about where to draw that line, and whether student accommodation that is stand-alone, self-contained residential accommodation should remain exempt. We are also concerned how the proposed change would impact existing long-term contractual arrangements that likely cannot be easily amended or repriced to account for a change to GST treatment. This issue of transition requires very careful management.

Other potential issues with the ‘quiet enjoyment’ requirement

The Paper also considers whether broader changes should be made to the requirement that occupants have “quiet enjoyment” before premises can qualify as a dwelling. It does not suggest removing the requirement alone for two reasons:  

1)    that could restore the pre-2011 position which was deliberately narrowed over time; and

2)    per the Paper, the quiet enjoyment requirement generally results in appropriate policy outcomes.

PwC view

PwC does not support broad removal or replacement of the quiet enjoyment requirement. The concept remains a useful part of the boundary between private residential accommodation and accommodation operated on a more commercial basis.

Boundary issues are inevitable as long as residential accommodation remains exempt. Targeted changes should therefore be preferred where the current test creates a specific anomaly or material uncertainty.

Clarifying 'commercial dwelling' definition

Two possible approaches are being considered to make the “commercial dwelling” definition easier to apply.

The first would expand the existing catch-all for “premises of a similar kind” to include accommodation where regular services are supplied as part of the accommodation. Relevant services could include cleaning, meals, care, reception services and the provision of linen or towels (but would not apply where those services are private / domestic in nature e.g. parents cooking meals or doing laundry for their children).

The alternative would add wording clarifying that accommodation in a commercial dwelling will generally involve either:

• accommodation ordinarily intended to be supplied for periods of less than 28 days; or
• regular services supplied as part of the accommodation.

PwC view

While both the physical structure and the services supplied are relevant, neither one should be solely determinative of the outcome. Detailed Inland Revenue guidance, supported by practical examples covering different accommodation models, may provide a more appropriate outcome aligned with policy intent more certainty than a rigid legislative test.

Presently, when a GST registered taxpayer receives income from the sale of surplus solar-generated electricity, this supply is treated as subject to GST even where the registration is for another taxable activity. The Paper proposes to zero-rate such supplies where the account holder is registered for GST for another taxable activity.  This is driven by a compliance concern that GST registered customers will not return GST on the supply of solar electricity to electricity retailers.

Under the proposal, the account holder would no longer return output tax on the export of surplus solar electricity and the retailer would no longer claim a corresponding input tax deduction. Supplies generated from commercial or industrial premises would remain subject to GST at 15%.

PwC view

The current treatment relies on the account holder’s GST registration status, which is relatively objective and already reflected in retailer systems. The proposal would instead require retailers to determine whether electricity is generated from a “dwelling”, a test they may not be able to verify or automate easily.  It is unclear whether the potential compliance risk outweighs the costs imposed on electricity retailers and further consultation should be undertaken with the sector.

The Paper describes two potential changes intended to reduce GST registration and compliance costs where requiring registration is unlikely to produce meaningful revenue benefit. The proposals focus on non-residents working from client premises and suppliers making predominantly zero-rated supplies.

Using client’s premises to make supplies

At present a non-resident supplier may be treated as New Zealand resident for GST purposes if its personnel work from a GST-registered client’s premises.

The Paper presents options to change this by narrowing the residence test so it generally applies only where the supplier owns, leases or rents the premises, or by introducing a specific business-to-business exclusion.

PwC view

We support narrowing the GST residence test as the current rule can generate disproportionate compliance costs. Merely using a client’s premises should not create GST residence, particularly where any GST would be recoverable by the client.

Zero-rated supplies and registration threshold

Officials are considering allowing certain zero-rated supplies, such as exported services, to be disregarded when applying the $60,000 GST registration threshold. This change could apply beyond non-resident visitors and potentially extend to New Zealand residents, although some supplies such as compulsorily zero-rated land may remain within the threshold.

PwC view

A broader exclusion would be beneficial where registration would impose compliance costs without producing meaningful GST revenue. In our view the rule should be available to both resident and non-resident suppliers, subject to targeted exclusions where registration remains necessary to protect the GST base.

The Paper proposes a clearer framework for correcting GST errors, including when corrections can be made prospectively in a later return and when the original assessment must be amended. They also propose aligning taxpayer-favourable corrections with the standard four-year time bar.

Two-track framework

The proposed framework would distinguish between:

• single-person errors, which affect only the registered person’s GST position; and
• multi-person adjustments, which affect, or could affect, another person’s GST position.

Single-person errors could generally be corrected prospectively where they fall within the applicable small-value thresholds. Officials are considering retaining the existing $1,000 minor-error threshold and replacing the current immaterial-error test with the lower of $10,000 or 5% of the taxpayer’s total supplies for the period. Larger errors would require a request to Inland Revenue to amend a previous assessment, with penalties and use of money interest potentially applying.

Multi-person adjustments could be corrected prospectively regardless of value, provided the GST consequences are fully corrected for all affected parties. This may require supply correction information, a refund or credit, or written notification to the recipient.

Prospective correction would generally not be available for certain types of errors such as omitted supplies, certain Inland Revenue-identified errors, post-deregistration corrections, or where the main purpose is to delay payment.

PwC view

We broadly support the proposed framework for error correction and distinction between single-person errors and multi-person adjustments.  This change should bring clarity to a complex area of the GST Act.

However, the current thresholds for correction of small-value errors are far too low, particularly for medium to large businesses where relatively immaterial errors can otherwise require a voluntary disclosure and/or request to amend a previous assessment.

Time limit for clear mistakes and simple oversights

Officials propose removing the extended correction period for taxpayer-favourable errors arising from a clear mistake or simple oversight.

Refunds of overpaid GST would generally become subject to the standard four-year time bar, and missed input tax deductions would only be available later where one of the remaining statutory grounds applies.

PwC view

GST should not become an unrecoverable cost for businesses making taxable supplies. Systemic errors or missed input tax claims may only be identified after four years, and removing the existing grounds could prevent recovery of GST that should not economically be borne by the business.

Officials are considering several technical amendments intended to address anomalous outcomes and improve the administration of the GST rules.

Input tax for pre-registration expenditure

The current rules can deny input tax deductions for goods and services costing $10,000 or less where they were acquired before GST registration and later used in a taxable activity.  This is confirmed in Inland Revenue’s Commissioner’s Statement 26/02 GST Treatment of low value pre-registration acquired goods and services.

The options being considered are either:

• Retaining the status quo – current law;
• Restoring the pre-2019 rules which enabled an input tax deduction for pre-registration goods and service below $10,000; or
• Introducing a new “entry into the GST base” rule which would generally allow a deduction when the goods or services first become used for taxable supplies, capped at the lower of cost or market value.

PwC view

We agree the current treatment can produce unfair outcomes and we prefer restoring the pre-2019 position.

The proposed entry rule risks over-engineering the solution and introducing unnecessary valuation and compliance requirements. Existing record-keeping obligations and the requirement to demonstrate taxable use should provide sufficient integrity protection.

Time of supply when consideration is unknown

Officials propose clarifying that, where the total consideration is not yet known, GST should be returned on the amount of consideration known at each payment or invoicing point. This is intended to prevent timing outcomes from depending on how a single supply is invoiced or structured.

PwC view

While we understand the policy concern, in our view the wider cashflow impact of the GST time-of-supply rules should also be examined. The general position of accounting for GST upfront, unless a specific rule applies, can create practical and cashflow difficulties. Any amendment should be clear and should not create additional invoicing complexity, particularly for smaller businesses.

Officials are considering targeted changes to improve the GST Act’s structure and usability without undertaking a full rewrite. Possible changes include restructuring and renumbering the Act, removing obsolete provisions, moving administrative rules into the Tax Administration Act 1994, adopting more modern drafting, and adding clearer definitions, diagrams and examples.

Officials do not favour a full rewrite because of the cost, time required and risk of unintended legislative change.

PwC view

The GST Act has become increasingly difficult to navigate, and the proposed structural and drafting improvements would be useful. Therefore, we support targeted modernisation of the GST Act to make the legislation more intuitive and easier to understand.  However, changes should be carefully managed to avoid interpretive uncertainty or unintended changes to the law.

The issues paper covers a wide range of proposals, from targeted technical fixes to broader questions about the future of the GST system in an increasingly digital and cross-border economy. Many of the changes are intended to reduce compliance costs and improve certainty, but some could upend existing systems, create new issues, and trigger contractual or boundary issues if implemented too broadly.

We generally support practical reforms that preserve GST neutrality and remove unnecessary compliance, however we must encourage officials to avoid over-engineered solutions, provide clear guidance to taxpayers and allow adequate transitional protection where changes could affect existing arrangements or entrenched business systems.

The next step will be to see which proposals officials recommend progressing into legislation and whether further consultation is undertaken on the more significant design issues.