New Tax Bill Targets Revenue Loss

Revenue Minister Bill English said a bill introduced into Parliament today protected tax revenue by closing loopholes in
GST and income tax law.

"One of the key features of the Taxation (Annual Rates and Remedial Matters) Bill is a proposed change that will ensure GST continues to be charged on 'exported' services that are actually supplied and consumed here in New Zealand.

"The change is aimed at services that are contracted for overseas by non-residents, but supplied and consumed in New Zealand.

"The change has become necessary as a result of a recent Court of Appeal decision that implies that these services can be zero-rated (meaning no GST is charged). The issue has arisen in relation to school fees, travel vouchers and medical services.

"A typical example of this problem is when a New Zealand school contracts with non-resident parents to educate their children in New Zealand. The school might not have to charge GST on the fees, even though the education takes place here in New Zealand. A similar sort of thing can happen with travel vouchers for accommodation of foreign travellers in New Zealand hotels.

"Not charging GST in these cases is obviously inconsistent with the policy that services consumed in New Zealand should be subject to GST. It undermines the integrity of the whole GST base.

"Closing this loophole requires the legislation to better define what is consumed in New Zealand - and therefore subject to GST - and what is not. The proposal was set out in a discussion document that sought public submissions on this and other matters arising out of the Government's recent review of the GST legislation."

"Following consultation, we have narrowed the proposal to exclude consumption by GST-registered businesses and those making supplies of financial services or other exempt services. Submissions to the select committee that considers the bill may show that further refinements are necessary.

"Other measures in the bill correct smaller problems in the company tax rules:

• A loophole that enables companies subsumed by amalgamation to distribute their retained earnings to shareholders tax-free is being closed.
• The bill corrects a deficiency that can allow the tax-free conversion into available subscribed capital of reserves that are normally taxable on their distribution to shareholders.
• The rule on dividends from pre-acquisition profits on shares that are held on revenue account is being strengthened.

"The bill also confirms the annual income tax rates for the current tax year and proposes a number of the remedial legislative
changes that are a continuing focus of the Government's tax policy work programme," said Mr English.

More information is included in the commentary on the bill, which is available on the Inland Revenue website (at
www.ird.govt.nz) and from Bennetts Government Bookshops.