The latest Issue Paper of Inland Revenue Department (IRD) on the criteria for registration of body corporates for GST will affect more than 20,000 companies.
IRD’s view is that a body corporate makes taxable supplies (services) to its members, and that the members provide consideration for those supplies (body corporate fees).
Accordingly, a body corporate carries on a taxable activity and must register for GST if its supplies exceed $60,000 per annum. Bodies corporate that make supplies of less than $60,000 may voluntarily register for GST.
The Issues Paper notes, however, that the above conclusions are not free from doubt as the High Court has ruled that a body corporate did not carry on a taxable activity and was therefore not required (or able) to register for GST.
IRD considers that the case was wrongly decided.
The Department is seeking comment on the analysis and the practical implications of its preliminary view. It has therefore published an interim operational statement to provide some practical guidance.
Until the position is finalised, no body corporate will be required to register for GST. However, it may choose voluntarily to register for GST, but if so (a) the effective date of registration will be from when the application is made (i.e. applications cannot be back-dated) (b) output tax will need to be returned on body corporate fees and (c) GST registered body corporates will be de-registered if IRD ultimately decides that body corporates do not carry on a taxable activity (This may give rise to an output tax liability).
KPMG comment
We welcome the release of the Issues Paper, which tackles a difficult area of GST that has a wide impact on the activities of New Zealanders, particularly in the context of dealing with leaky building issues and insurance claims arising from the Canterbury earthquakes.
As a starting point, for GST to apply, a series of questions need to be answered.
We have set these out below, along with our comments (see box)
Our view (similar to that of IRD Commissioner) is not free from doubt.
The options
However, assuming that the Issues Paper reflects the final position, a body corporate that does not wish to register for GST would have to show that the fees are not payment for a supply by the body corporate. That is, the levies are independent of the body corporate’s activities with members, or that the fees are to fund the body corporate.
In our view, this is unlikely.
Supplies made by the body corporate are not taxable supplies. This requires the body corporate to successfully argue that it supplies the common areas to members and that supply is exempt as it relates to the provision of residential accommodation. This argument would only be open for residential developments.
The Issues Paper comes to conclusions of principle that are generally applied and accepted. Tying those principles to the operations of a body corporate, and to the Unit Titles Act, would go some way to making the conclusions more convincing.
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Question |
Answer |
KPMG comment |
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Is there a person? |
Yes, the body corporate is a separate legal entity. |
Technically, a separate legal entity is not required for there to be a person for GST purposes. A body of persons can also be a GST person. |
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Is there payment to the body corporate? |
Yes – members pay fees. |
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Is there a supply to members? |
Yes – but see comment. |
Some of the body corporate activities could be characterised as ‘self-supplies,’’ as these are activities which the body corporate is obliged to do for itself (e.g. maintenance of common areas). |
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What is the nature of the supply? |
The body corporate provides maintenance, administration and management of the development and obtains insurance. |
The nature of the supply is important because not all supplies are subject to GST. IRD concludes that a body corporate’s services are not member services or the provision of the common areas. The latter might potentially be an exempt supply. |
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Are payments consideration for the supply? |
Yes, the fees are not in the nature of equity (like shares in a company) or to establish a fund. |
Case law supports the view that the presence of a payment does not mean there is consideration for a supply. The payment must be for a supply for the payment to be taxable. IRD’s analysis does not convincingly tie the payment of body corporate fees to the services it says are provided. A detailed consideration of the Unit Titles Act 2010 is required. |
Peter Scott and John Cantin are Tax Partners at KPMG based respectively in Auckland and Wellington. KPMG is the Sponsor of the ‘Business Excellence in ICT’ Category of the Indian Newslink Indian Business Awards 2013.
