Canterbury tax relief, GST loophole closed

Revenue Minister Stuart Nash has confirmed Parliament will extend tax relief for Canterbury businesses affected by issues relating to depreciation following the earthquakes.

Mr Nash has today introduced a Supplementary Order Paper (SOP) to the Taxation (Annual Rates 2018-19, Modernising Tax Administration, and Remedial Matters) Bill currently making its way through Parliament.

“The SOP extends tax relief for Canterbury businesses affected by earthquakes. It extends depreciation roll-over relief for a further five years to the end of the 2023-24 income year. I have been advised that at least 40 Canterbury businesses will be adversely affected if current depreciation provisions are not extended.

“The tax issue arises because an insurance payout on a depreciable asset can attract a tax liability which may cause consequent cash flow problems. We do not want to hinder the city’s recovery or unfairly burden these taxpayers.

“Many Canterbury businesses are experiencing problems outside their control, such as delays with insurance payouts or finding tenants for properties or making progress on building projects. This measure will provide relief to affected businesses and further assist with the Canterbury rebuild.”

Mr Nash says the SOP will also close a loophole which allows non-profit entities to potentially avoid GST on income from asset sales. The change was signalled in an issues paper released on 15 May and will apply from that date.

“The GST treatment of non-profit organisations differs from other entities,” says Mr Nash. “Non-profits can register for GST and claim GST refunds on most of their expenses, even if their turnover is below the $60,000 threshold for GST registration. In many cases non-profit bodies do not pay much GST on their activities.

“In turn, when a GST-registered body sells an asset for which it has claimed GST expenses, it must pay GST on the income from the sale. Inland Revenue has applied this rule since GST was first introduced in 1986.

“Revenue officials have recently been advised of a new legal interpretation of this rule which exposes the tax system to potential losses. For the avoidance of doubt, the SOP introduced today will clarify the GST rules.

“The new interpretation is not consistent with the way the GST rules have been applied and understood in the past. If GST expenses have been claimed by a non-profit body in relation to an asset, GST should apply to the asset when it is sold or there is an equivalent event, such as an insurance pay-out.

“The tax system is based on fairness, and being simple and efficient to operate. The new interpretation threatens those principles and the law change restores certainty," Mr Nash says.