Commercial leases and CZR
IR has released PUB00383, a draft ‘Questions We’ve Been Asked’ (QWBA) on how the Compulsory Zero Rating (CZR) of land rules apply to transactions involving commercial leases.
The commentary considers the following three scenarios:
- A supply by a lessor to a lessee under a lease,
- The assignment, surrender or procurement of a lease (including a reverse surrender), and
- The sale of a business that includes a lease.
Firstly, let us recap the general CZR rule contained in section 11(1)(mb) for those that may have forgotten. If all of the following apply, then in essence, the parties to the transaction have no choice but to zero-rate the supply, i.e., charge GST at the rate of 0%:
- The supply is a supply of goods that wholly or partly consists of land,
- The vendor is GST registered (or will be GST registered or will be treated as GST registered) at the time of settlement,
- The supply is being made by the vendor in the course or furtherance of their taxable activity,
- The purchaser is a GST-registered purchaser (or will be GST registered or treated as GST registered) at the time of settlement,
- The purchaser acquires the goods (including the land) with the intention of using them (in whole or part) for making taxable supplies,
- None of the land included in the supply is intended to be used as the purchaser’s principal place of residence or the principal place of residence of a relative of the purchaser.
Now note for the last requirement, if your purchaser is a company or a family trust, the question loses relevance, as neither can have a principal place of residence.
So, with that little refresher now at the forefront of one’s mind, generally CZR will not apply to commercial lease transactions.
However, if the commercial lease contains certain characteristics that arguably makes it substitutable for a land sale supply, then sections 11(8d) (a), (ab) and (c) of the GST Act may apply to still require CZR.
The first thing to look out for, is whether the terms of the lease will require any non-regular payment to be made, which is more than 25% of the ‘term consideration’ – the total amount of consideration calculated under the lease agreement during a period that is longer of one year and the shortest possible fixed term under the lease agreement; that is not including any renewal period (s 11(8D)(b)(iv)). If the answer is yes, then CZR are likely to apply if the usual section 11(1)(mb) criteria are also satisfied. Note that in this case, CZR applies from that payment onwards, with no requirement to retrospectively zero-rate payments made earlier.
Secondly, assignment and surrenders of commercial leases are likely to trigger CZR requirements (again assuming usual s.11(1)(mb) criteria also satisfied). This will also be the case where there is a single composite supply of both the lease assignment and other business assets, and even when no consideration has been allocated to the lease assignment.
Finally, in various scenarios where the vendor of a business sale, arranges as part of the sale process the grant of a new lease by the landlord to the purchaser, then CZR is likely to apply to the sale transaction.
The draft QWBA provides an adequate number of examples to explain the Commissioners views. Should you wish to provide your feedback on the draft views, you should do so no later than 25th May 2021.
To deduct or not to deduct – is that the question?
Well actually, you have no choice if you happen to be the third party that IR has issued a deduction notice to, which is explained in recently released SPS 21/01 – Deduction notices.
It is certainly not a new process (in fact the latest SPS simply replaces the earlier version – SPS 11/04 – Compulsory deductions from bank accounts), and no doubt at one time or another you have experienced the grumblings of an unhappy client who has had monies ‘stolen’ from their bank account by IR.
The legislative powers are fairly broad, IR are able to issue deduction notices for most tax types, and unfortunately there is little that can be done about them, as the notices are neither able to be disputed via the disputes process nor challenged under the objection’s sections of Part 8 of the TAA.
A compulsory deduction notice will not be issued however, in the following circumstances:
- Where a taxpayer has a tax liability and is keeping to an instalment arrangement.
- Where the taxpayer or the Commissioner has initiated the disputes process under Part 4A of the TAA for period(s) under dispute.
- Where a taxpayer is challenging an assessment through the Courts and the tax is deferred. Tax is deferred after the taxpayer files a Statement of Claim / Notice of Claim with the Court.
So, some take-outs from SPS 21/01 –
- It is usually a tool of last resort – communication is key therefore if you wish to prevent it from happening.
- Trustees of a trust can have a deduction notice issued against payments due to them personally for the tax liabilities of the trust – they are after all personally jointly and severally liable for the income tax liability of the trust.
- With working for families tax credit debt, deduction notices can be issued against a bank account in the name of the primary caregiver, the spouse or any joint bank account – as both parties are jointly and severally liable for any WFF overpayment.
- In relation to GST, deductions can only be made from payments made or payable to the ‘registered person’ – and not to say a partner in the partnership or a trustee of a trust.
- Amounts can be deducted from any joint bank account where the defaulting taxpayer can withdraw from the account without requiring a signature or other authorisation from other joint account holders.
- The type of currency the funds in the bank account are held in is irrelevant.
Now when it comes to salaries and wages of the taxpayer, there is a limit on the deduction amount which is the greater of:
- The lesser of 10% of the tax liability per week or 20% of the gross salary/wages payable to the taxpayer on each pay day; or
Ten dollars per week.
Note however, that when it comes to Child Support, the required deduction can be up to 40% of the liable parents net of PAYE payment. Additionally, Child Support deduction notices always take priority over any other deduction notice and will act to ensure the liable parent still receives at least 60% of their net of PAYE payment – so where a 40% deduction requirement applies, the debt for other tax types will be dealt with separately.
Finally, where a third party for whatever reason fails to comply with a deduction notice, the third party can be made directly liable for the non-deducted amount, with associated UOMI and penalty exposures.
This article from the ‘A Week in Review’ newsletter was originally published Monday 19th April 2021. If you have any questions or would like a second opinion on any national or international tax issues, please contact me firstname.lastname@example.org.
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