Recognising GST Input Tax Deductions on Land Purchased Between Related Party
The laws governing the Goods and Services Tax (GST) in different situations frequently need to be adjusted in the dynamic world of tax regulations in order to assure fairness and solve unforeseen challenges. The input tax deduction for used products is one such area that has lately changed, particularly in transactions involving related parties. In-depth discussion of these revisions' details and their effects on GST-registered taxpayers and the larger business community are provided in this article.
Background of GST Input Tax Deductions for Used Items
The complexity and unforeseen repercussions of earlier legislative revisions made the most recent modifications necessary. Section 3A(3)(a) of the Goods and Services Tax Act 1985 underwent a remedial revision thanks to the Taxation (Annual Rates for 2021–2022, GST, and Remedial Matters) Act 2022. With this modification, input tax deductions for used goods supplied to an associated person would be equal to what would have been permitted had the provider used the products for their own taxable activity rather than participating in an associated person transaction.
Nevertheless, this well-meaning change had the unexpected result of preventing GST-registered taxpayers from deducting input taxes when they repurchased an item from an unregistered related party. This problem frequently arose in situations where a residential property business within the same group of connected individuals was unregistered and a land development firm that was GST registered. Transactions between registered and unregistered associated entities were made more difficult by the amendment, which unintentionally restricted the input tax deduction to the tax portion paid by the last non-affiliated individual.
The Amendment Explained
This problem was addressed by the most recent amendments to section 3A(3)(a). Currently, in associated person transactions, the input tax deduction is determined by the amount that the registered party last reported as output tax when a GST-registered supplier charges GST to an unregistered associated person, who then supplies the same goods to another registered associated person. By doing this, it is made possible for the registered taxpayer who is repurchasing to claim an input tax deduction equal to the output tax they paid in their prior transaction with the unregistered party.
Effective Dates and Implications
For supplies made in taxable periods beginning on or after March 30, 2022, or under agreements entered into after September 8, 2021, and paid for after the beginning of the first taxable period beginning on or after March 30, 2022, the modifications went into effect. Ensuring that the adjustments address the concerns from the precise date of the initial unintended consequences is ensured by this alignment with the preceding amendment.
The aforementioned modifications underscore the significance of rigorous parliamentary composition and the ongoing scrutiny of tax legislation to mitigate unanticipated consequences. Comprehending these subtleties is essential for accurate tax planning and compliance for businesses that are registered with the GST, particularly those engaged in property development and dealing with related parties.
Conclusion
The Inland Revenue Department's dedication to maintaining tax equality and transparency is evident in the most recent changes made to the GST input tax deduction regulations for used products. These modifications offer a more equitable framework for related transactions by resolving the unintended consequences of earlier revisions, especially in complicated situations involving both registered and unregistered parties.
Example below were provided by the IRD
Sale to unregistered associated company
2KRS Developments Ltd acquires land from an unregistered unassociated party for use in its property development business for $1.15 million. It claims a secondhand goods input tax deduction of $150,000.
A year later, 2KRS Developments Ltd sells the land for $1.265 million (current market value) to an unregistered associated company (Smitty Residential Holdings Ltd). 2KRS Developments Ltd returns output tax on the sale of $165,000. Smitty Residential Holdings Ltd subsequently realises the land is not fit for purpose for its business and sells the land back to 2KRS Developments Ltd for $1.3 million (then current market value).
The amendment ensures that when 2KRS Developments Ltd repurchases the land, it can claim a secondhand goods input tax deduction based on the amount it accounted for as output tax in the sale it made to Smitty Residential Holdings Ltd ($165,000), rather than the input tax amount being limited to the tax fraction paid by the last non-associated person ($150,000). If GST has not been charged on a supply between two associated persons, then the secondhand goods input tax deduction for a GST-registered recipient will be limited to the tax fraction of the purchase price when the goods were last acquired from the non-associated person (per the original amendment).