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GST and services connected with land
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GST and services connected with land
A special report from Policy and Strategy of the Inland revenue was published recently which provides to explain changes to the Goods and Services Tax Act 1985, recently enacted in the Taxation (Annual Rates 2016-2017, Closely Held Companies and Remedial Matters) Act 2017.
The report clearly sets out the changes as per the extract below.
Scope of the new GST rules for services connected with land
From 1 April 2017, GST will apply to an expanded range of services, particularly professional services, which are closely related to land in New Zealand. These services will be zero-rated where they relate to land outside New Zealand.
The new rules supplement the existing “directly in connection” with land test by adding an additional test.
Services relating to land in New Zealand
Under the expanded rules, GST will apply to services that are supplied in connection with land in New Zealand and which are “intended to enable or assist a change in the physical condition, or ownership or other legal status” of the land.
Services relating to land outside New Zealand
Supplies of services that are directly in connection with land outside New Zealand are already zero-rated under the current GST legislation. The new test extends the zero-rating treatment to services supplied in connection with land outside New Zealand when they are intended to enable or assist a change in the physical condition, ownership or other legal status of the land.
Application of the new test
The requirement that the services be supplied in connection with land (as described in the amendments) is intended to differentiate between services that have a close connection with specific land (such as those relating to the purchase of a specific property) that can therefore be regarded as consumed in New Zealand, and services that relate to land more generally (such as seeking general advice on land law or the housing market in New Zealand).
Under the new test, the relevant services must be intended to enable or assist a change in the physical condition, ownership or other legal status of the land or improvement. The reference to “services intended to enable or assist a change in physical condition” ensures that services that form an integral part of a process of physically changing the land, but do not do so themselves (such as engineering or architectural services), are captured.
By adding to services connected with land services which are “intended to enable or assist a change in the… ownership or other legal status of the land”, a variety of professional services (such as legal or real estate agents’ services as part of a land transaction) are expected to be included because the intended outcome is to change the legal nature of the land, even though the services do not involve any physical change or connection to the land.
This will ensure that the GST treatment stems from the location of the land as a proxy for where the services are effectively consumed (consistent with the destination principle and with international practice), rather than the location or residence status of the recipient of the services. This also better aligns the treatment of services provided to non-resident purchasers of New Zealand land so that these services will be subject to GST at 15%, consistent with similar services provided to resident purchasers.