case study- goods and service tax

Goods and Services Tax i

Executive summary

Goods and services tax (GST) is a type of tax in New Zealand that is charged on

supplies made by enterprises, it is a comprehensive centered tax of 15% on most services and

goods as well as other items sold and consumed in New Zealand. Businesses in New Zealand,

with a turnover of more than GST threshold of $60,000 (previously $40,000), are required to

register for GST. They are supposed to include GST in the price of supplies to customers. The

business is then supposed to claim credits for the GST included in the price of the purchases

made. Businesses do not bear the economic cost of this tax system but the cost is borne by the

end user of a product or service, the end user cannot claim GST credit. Business just collects

GST and remits it to the Inland Revenue department. This report studies and discusses two cases;

it provides discussion on issues raise in the cases concerning GST.

Goods and Services Tax 1

Question 1: LIP, RIP and LIM

At the end of April 2014 Live in Peace Ltd ("LIP") purchased a derelict commercial building

in Botany for $4.5 million. The transaction was zero-rated because LIP is registered for GST on

a monthly basis and intended to carry out a major re-fit and lease the building to commercial

tenants. LIP has a 31 March balance date and is registered on an invoice basis.

In June 2014 LIP decided that building a retirement village would provide a much higher return

on investment. LIP therefore instructed an architect in July 2014 to draw up plans to convert the

building into 500 apartments and to name it "the RIP building".

It is also envisaged that the retirement village would have landscaped gardens and a community

centre, including a lounge, nursing station, theatre, library, gym, heated swimming pool, boxing

ring and Bowling Green.

In February 2015 LIP applied for a building consent to convert the building into 400 apartments.

It is envisaged that the apartments would be identical and each of the apartments is equipped

with an emergency call system. The Council issued the building consent in July 2015.

Once the development has been completed, it is envisaged that a license would be granted to

residents to live in an apartment and to use the common areas and facilities.

Residents would be entitled to select between two care packages. If residents selected the

"independence" package they would not pay for and receive additional services such as meals

or cleaning services. A nurse would however visit residents in their apartments at least twice a

year to assess medical needs.


If from time to time they required additional services, an additional charge is payable.

However, if residents selected a "comprehensive care" package they would automatically be

entitled to additional services such as meals, cleaning, and various medical and nursing services.

It is envisaged that three quarters of residents will select the "comprehensive care" package and

that a quarter of the residents will select the "independence" package. Ultimately it is envisaged

that 90% of LIPs income will be derived from the residents which select the "comprehensive

care" package with only 10% of the income being derived from residents which select the

"independence package".

In June 2016 the building is completed and the first residents arrive. By December 2016 the

village is half full. By the end of 2015 95% of residents have selected the “independence”

package with only a handful of residents selecting the “comprehensive care” package.

On 1 March 2017 LIP enters into a conditional agreement to sell the retirement village to Less is

More Limited (“LIM”) for a price of $30,000,000 and LIM pays a $5,000,000 deposit to the real

estate agent on that date. It is envisaged that the real estate agent would only release the deposit

to LIP when the agreement becomes inconditional. The parties are not related.

The agreement is conditional upon LIM successfully obtaining bank funding for the purchase.

Subsequently on 1 April 2017 the BNZ agrees to finance the purchase and the agreement

becomes unconditional.

LIM’s plan is to operate the village established by LIP.


The Agreement for Sale and Purchase does not stipulate the price is “plus GST” (if any). LIM

has also provided to LIP a written statement that they will register for GST before settlement.

In practice LIM forgets to register for GST.

Shortly after purchasing the village, LIM embarks on an ambitious $500,000 marketing plan

involving television advertisements to market the retirement village to “able-bodied seniors” in

order to fill up the remaining unit’s.

1 Would LIP be entitled to an input tax credit in relation to the cost of converting

the RIP building into apartments? (10 marks)

2 Would LIP also be required to make a change of use adjustment in respect of the

conversion of the RIP building into apartments, and if so, when? If LIP is required to make a

change of use adjustment, how in principle will it be calculated? What difference, if any, would

it have made if LIP had acquired the building with the intention to build a rest home? (10 marks)

3 What difference, if any, does it make to LIP if 95% of residents select the “independence”

package? (5 marks)

4 How should the sale of the retirement village be treated by both LIP and LIM for GST

purposes? What is the consequence of LIM failing to register for GST? (5 marks)

5 What is the time of supply of the sale by LIP to LIM? Is it when LIP enters into a conditional

agreement to sell the retirement village to LIM? (5 marks)


6 If LIM does formally register for GST on an invoice basis, can LIM claim an input tax

deduction for marketing the village, and if so, how would it be calculated? (5 marks)


Part A: LIP, RIP and LIM

Question 1: Would LIP be entitled to an input tax credit in relation to the cost of

converting the RIP building into apartments?

Section 3A (1a & b) of GST Act defines input tax as “tax charged on a supply of

services and goods acquired by a person” also a “levied on goods for home consumption under

the customs and excise act 1996.” Whether an input tax credit is allowable on specific services

and goods depends on whether the asset produced using those goods and services are acquired

for the principal purpose of making taxable supplies. If a business pays GST in the price of

purchases, it is allowed to claim for tax credit or (GSTA s25). The GST claimed back by a

business is known as input tax credit or simply GST credit. They also provide that goods that are

imported for repair, industrial processing or alteration and then exported are non-taxable for

goods and services tax.

LIP is not entitled to credit for any goods and services tax included in the price of the

apartments or any other goods and services it purchases for sale1, the apartments are available for

use as provided in section 14 (c) of GST act. Simply, this means that the business cannot claim

input tax credit for the tax included in the price of the business inputs. Importantly, LIP is

converting the RIP building in to apartments so that it can be able to generate income. It is

adding value to the building so that it can enable to generate more income (the costs of adding

value are capital in nature). According to section 14 of Goods and Services Tax Act 1985, the

costs incurred to add value or to improve the condition of goods and services are not exempt 2

described in section 14 of GST Act. For this reason, if LIP had already paid GST for the costs

1 Understanding the New Zealand welfare state: Key documents and themes: Tertiary Press, 20002 Parist Holdings Pty Ltd v. WT Partnership New Zealand Pty Ltd, 2003 N.S.W.S.C. 365 (2003)


incurred to convert the RIP building in to apartments; it is not entitled to an input tax credit as

well.

However, it is very important for LIP to understand that it cannot claim input tax

credit for the conversion3 of the building to apartments if the price of the building did not have

GST4. To the advantage, the transaction of the purchase was zero-rated as LIP is registered for

GST. LIP is not entitled to input tax credit on the conversion costs because it acquired the

building from a seller who was making zero rated supplies. The supply of rental accommodation

is exempt and the landlords of such rental dwellings cannot claim input tax back in respect of

any costs incurred on the rental accommodations. No business can claim input tax credit on

transactions of goods and services that does not qualify5 for GST or are not subject to GST. GST

is an indirect tax; it is also broad-based consumptions tax6. It is levied on the purchase and sale

or simply supply of services, goods or activities. Broad-based means that the GST applies to all

transactions except for very few exceptions, the transactions that do not except of GST do not

attract GST credit7.

Moreover, LIP purchased the building as part of business input, it did not purchase the

building to use it as an office or warehouse8 but it purchased it to develop and increase its value

so that it can generate income. It will be partly taxed on the income it will make on selling9 the

apartments or selling the whole building to another business this is because it is only 10% of the

3 Malololailai Interval Holidays New Zealand Ltd v. CIR, 18 N.Z.T.C. 13 (1997)4 Bowers v. Hardwick, 478 U.S. 186, 106 S. Ct. 2841, 92 L. Ed. 2d 140 (1986)

5 Tamburo v. Dworkin, 601 F.3d 693 (7th Cir. 2010)

6 New Zealand Refining Co Ltd v. Attorney General, 15 N.Z.T.C. 10 (1993)7 GST v. Commissioner, 2009 W.L. 3031678 (2009)

8 Ha v. New South Wales, 189 C.L.R. 465 (1997)

9 David Securities Pty Ltd v. Commonwealth Bank of New Zealand , 175 C.L.R. 353 (1992)


apartment that qualifies as taxable supply, the other 90% is exempt supply (sections 8(4B) (b),

9(2)(h), 20(3H), 20G, 21 to 21F, and 21H). Essentially, LIP would be not entitled to input tax

credit in relation to the cost of converting the RIP building in to apartments. Although the cost of

converting is a business expense, the apartment is exempt and therefore the owner cannot claim

input tax.

http://www.legislation.govt.nz/act/public/1985/0141/latest/link.aspx?search=sw_096be8ed80e7f5f4_20_25_se&p=1&id=DLM83952







Question 2: would LIP also be required to make a change of use adjustment in respect of

the conversion of the RIP building into apartments and if so, when? If LIP is required to

make a change of use adjustment, how in principle will it be calculated? What difference, if

any, would it have made if LIP had acquired the building with the intention to build a rest

home?

LIP will be required to make change of use adjustment in respect of the conversion.

The earlier intention of the business was to carry out major re-fit and lease the building to

commercial tenants, by this intentions or plans LIP would generate revenue and hence will make

fully taxable supplies. The Inland Revenue provides that a business to make changes if the extent

to which it uses a purchase for a specific stated purpose changes over time or it becomes

different to what the business had planned (ex parte C of IR, 16 N.Z.T.C. 11 (1994). LIP makes

supplies that are partly taxable. Conversely, it needs to consider changes as well as the impacts

of the change of use provisions10. Under the current change in use provisions in section 11 of

GST Act, the business cannot claim a full GST input tax credit even if it is registered for GST

(Inland Revenue, 2011).

The Inland Revenue provides that a business entity to make changes on change of use if

the business purchases inputs for creditable purpose changes and becomes different to the initial

plans (Inland Revenue Department, 2013). For LIP, it does not use the building for creditable

purposes because it does not use the building by itself but for generating revenue. As such, it

cannot use the building or the apartments for creditable purposes to the extent they are used to

generate input taxed sales or for private domestic purposes (GST, 2011). The creditable purpose

of the purchase changed; first, there is a difference between how LIP planned to use the

10 Cornelia I. Crowell GST Trust v. POSSIS MEDICAL, 519 F.3d 778 (8th Cir. 2008)


purchased building and how it actually used it11. Second, the way LIP used the building changed

in the adjustment period. For these reasons, there was change and difference in creditable

purpose of what the building was purchased for and what it is actually used as the Inland

Revenue Department (2013) outlines. As such, LIP is subject to change of use adjustments in

respect of the conversion of the RIP building in to apartments.

LIP is supposed to make the change of use adjustment immediately after changing the

intentions12. The Inland Revenue Department provides that a business must make the tax

authority aware of the change of use in order to effect the changes. As such, LIP should make the

change in use adjustments before it starts on the changes of developing the building in to

apartments. In essence, it should make the changes before converting to the apartments.

In principle, the change of use adjustment is calculated based on the value of the

previous intention and the current intentions. As such, the value of the previous intentions that

LIM had will be determined. This value will be compared with the value of the current intention

of developing the building in to apartments. The difference gives the value of the change of use

adjustment.

The first adjustment period starts when LIP acquired the building at the end of April

2014 (adjustment period starts on the date of acquisition). The adjustment period is supposed to

take place for 12 months in line with an individual’s annual balance sheet date. These indicate

that there LIP would be required to make change of use adjustment as the changes take place

before the lapse of 12 months, on June 2014, as provided by the inland revenue. Furthermore,

adjustment for change is use is required because there is 100 percentage change of actual use of

11 MAT v. GST, 989 A.2d 11 (Pa. Super. Ct. 2010)

12 CIR v. NZ Refining Co Ltd, 18 N.Z.T.C. 13 (1997)


the apartments. The percentage actual use changes for the adjustment period and hence the need

to make change of use adjustment. There would be difference if LIP had acquired the building

with intentions to build rest homes, it would not be liable for GST if it had intentions to build rest

home and therefore no GST implications. Rest homes are for providing care services and

therefore the supplies made for such services are not taxable supplies. Likewise, LIM would not

be in a position to claim for input tax credit. The change of use adjustment is calculated as

follows

Full input tax deduction x percentage difference

The input tax deduction is the full amount of input tax on the supply

The percentage difference is the difference between the actual use and the intended use or the

previous actual use

Full input tax deduction x percentage difference

100% x 10/12 = 83.33%

15% x $4,500,000 = $675,000

Percentage difference = 100% - 83.33% = 16.67%

= 16.67% x $675,000

= $112,522.50

As such, LIP would be required to account for $112,522.50 output tax for the

apartments. However, the purchased building was zero-rated supply.


Question 3: What difference, if any, does it make to LIP if 95% of residents select the

“independence” package?

LIP envisages that three quarters of residents will opt for the “comprehensive care”

package while a quarter of the residents will prefer the “independence” package. It further

envisages that it will derive 90% of its income from residents who will select the

“comprehensive care” package while residents selecting “independence” package contributing

10% of its income. However, this does not go as planned as 95% of the residents select the

“independence” package while only a handful select the “comprehensive care” package. This

will have a huge impact on the income of LIP; it will also make a big difference to LIP

profitability. Therefore, LIP will lose 85.5% of the 90% income it had envisaged to derive from

“comprehensive care” package. This will be a big blow to the company as this package is crucial

to deriving its income as it had envisaged. It represents a very big loss of income as well.

On the other hand, the company will register an increased income from the

“independence” package. The income from this package will increase by 95%. As such, LIP will

not provide the additional services of meals, cleaning and various nursing and medical services

to 95% of the residents. This will make it to reduce running costs considerably. Although the

“independence” package will increase LIP’s income by 95%, the increase is not enough to cover

the loss from the “comprehensive care” package. This is because the price per unit of the

“comprehensive care” package is much more than that of the “independence” package. The

overall difference is that LIP income will be less than first envisaged and therefore a loss. This

will be reflected well in the company accounts. In addition, the “comprehensive care” package

that will not be occupied by residents will represent lost income for the company. The

apartments are highly “perishable” in that if they are not occupied represent lost income, this


cannot be recovered as well. Bearing in mind that this package contributes the highest income,

LIP will make a loss even if the income from the “independence” package will increase.


Question 4: How should the sale of the retirement village is treated by both LIP and LIM

for GST purposes? What is the consequence of LIM failing to register for GST?

The Inland Revenue department indicates that a ‘retirement village’ is used to define

various types of accommodation that are provided to village residents. This retirement village

falls under the category of serviced apartments, independent living units and premises as defined

Inland Revenue department. Under GST Act section 83 ‘retirement village’ has a particular

meaning. The definition of ‘retirement village’ is relevant for working out whether a supply is

free of GST as under specific GST conventional provisions. For this case of LIP and LIM, this

property is a ‘retirement village’ premises for accommodating aged persons as well as some

facilities for communal use (driveways, recreation facilities, paths) as outlined in GST 2014. For

this reason, the retirement village is an input taxed supply13 of lease and rental services. This

means that LIP and LIM will not be liable for GST on the lease of the apartments. LIP will also

not be in a position to claim GST credits for the purchases relating to making the input taxed

lease of the premises (Jamieson, 2009).

LIP is registered for GST while LIM is not registered for GST. The retirement village

is a property first owned by LIP and then it sells it to LIM. For the sale of the retirement village,

LIP will either make a capital gain or a capital loss. The retirement village is a property and

hence will capital gains or capital loss; capital gains are not taxed in New Zealand. On the other

hand, the retirement village is a commercial retirement premises. The owner of the retirement

village will derive income from the premises. For this reason, LIP will generally be liable for

goods and services tax on the sale14 price of the retirement village but not on the supply of lease

and rental. The company will also not be in apposition to claim input tax credits on the purchase

13 Dunlop v Selfridge [1915] AC 84714 Re Alex Russell (1968) VR 285


it made relating to selling of the retirement village. LIP is therefore not liable for GST on the sale

of the retirement village.

For LIM, it is actually carrying on business activities when making the transactions but is has not

registered for GST and when it is required to register. Although the purchase of the retirement

village is a one off transaction, LIM is supposed to, and required to, register for GST. This is

because the activity of carrying out this one off purchase transaction constitutes an enterprise

(New Zealand Law, 2014). Furthermore, during and after the purchase, LIM is and will be

dealing with development and lease of the premises as it is a commercial property and therefore

it is conducting an enterprise. Another reason is that its turnover from the retirement village will

be more than the GST threshold for registration (currently at $60,000); it is therefore supposed to

register for GST before the purchase of the retirement village.

In essence, the retirement village is being sold by LIP to LIM as a normal business.

This is because LIP is selling it as a continuing business. As such, although the sale of the

retirement village attracts GST, LIP will avoid it. It fulfills all the requirements set out in section

51 of GST act 1985; the supply wholly or partly consists of land, being a supply—

(i) made by a registered person to another registered person who acquires the goods with

the intention of using them for making taxable supplies; and

(ii) that is not a supply of land intended to be used as a principal place of residence of the

recipient of the supply or a person associated with them under section 2A (1)(c).

In this case, the buyer is a written statement to the supplier that at the date of settlement

they are or expect to be GST-registered (Taxation in New Zealand in 2014, p. 890). Where it is


in the law, there is no cursory glance either. And it is unclear, it is applicable, because they are

supposed to do and exempt supplies. But they were not registered on the date of settlement and

there was no reasonable ground that they are expected to be registered. That means that the

supply was supposed to be including 15% of GST. Unfortunately, they did not have time to see

the effects. As such, they can take GST included in the price and therefore the seller must pay the

GST obtained from consideration.

Section 62 of GST Act 1985 impose administrative and uniform penalty for omissions

and certain acts relating to matters arising the taxation law (Consumer Guarantees Act 1993).

LIM is liable to penalties for failing to register for GST while it is required to register for the

same as provided under section 51 of GST act 1985. LIM has a registration obligation of

registering for GST when required to do so. As such, LIM is liable to face serious consequences

including penalties as indicated above, interest and potential prosecution for failing to register for

GST when required to do so (Inland Revenue, 2014).


Question 5: What is the time of supply of the sale by LIP to LIM? Is it when LIP enters

into a conditional agreement to sell the retirement village to LIM?

The time of supply of the sale by LIP to LIM is when LIP enters in to agreement to sell

the retirement village to LIM as section 9 of Goods and Services Act 1985 provides. This is

because it gives rise to a supply that is chargeable with goods and service tax (Inland Revenue,

2003). As indicated in the case study, LIM is successful in securing funding to finance the

purchase of the retirement village. This is the time of supply15 of the sale; the time of sale was

when deposit was received, it is also the day and time that the parties entered in to an agreement.

LIM had secured means of financing the purchase and therefore it had intentions to purchase the

retirement village (section 9 of GST Act). As such, the time of sale is when LIP enters in to

agreement with LIM to sell the retirement village.

Section 9 (1) provides that “(1) Subject to this Act, for the purposes of this Act a supply of goods

and services shall be deemed to take place at the earlier of the time an invoice is issued by the

supplier or the recipient or the time any payment is received by the supplier, in respect of that

supply.”

15 Slavin v. Beckwith, 456 Mass. 1013, 924 N.E.2d 684 (2010).


Question 6: If LIM does formally register for GST on an invoice basis, can LIM claim an

input tax deduction for marketing the village, and if so, how would it be calculated?

If LIM formally registers for GST on an invoice basis, it will not be able to claim an

input tax deduction for marketing the village. The marketing expenses that LIM incurred in

marketing the retirement village in order to fill the vacant apartments is not legitimate business

expense. The marketing expenses do not add value to the retirement village. In addition, the

expenses do not add up to renovating the retirement village and therefore it is not allowable. The

expenses are revenue in nature for the reason that they are used to boost generation of revenue.

Essentially, expenses that are of revenue in nature are not deductible and hence LIM cannot

claim input tax deduction for marketing the village. The expenses that are allowable and that

LIM can claim for deduction are expenses that are capital in nature; these bare the expenses or

costs that a business incurs to renovate, add value or improve the condition of the premises. Such

costs or expenses are capitalised (GST, 2013). In essence, LIM will not be successful in claiming

input tax deduction for marketing the village.


Part B: Property Venture

STUDY CASE

Theo and Melanie are "new" to the property game. They are persuaded by their close friends

Tarzan and Jane to enter into a joint venture with them to purchase and subdivide into four lots a

block of land in Tauranga. The cost of the subdivision is minimal and involves no physical work

on the land.

Following the completion of the subdivision it is envisaged that Theo and Melanie would obtain

title to two of the subdivided lots and Tarzan and Jane would obtain title to the other two lots.

Theo and Melanie wish to build a house on each of their lots with the view to renting them out.

Tarzan and Jane have not decided what to do with their 2 lots.

Ultimately, Theo and Melanie decide to establish a trust ("Trust 1") in order to participate in the

joint venture. The trustee of the Trust 1 is a company controlled by Theo and Melanie

(Wall Investments Limited) and the sole beneficiary of Trust 1 is a second trust ("Trust 2"). The

beneficiaries of Trust 2 include Theo and Melanie and their children. Trust 1 and Tarzan and

Jane could appoint a Custodian (a company which is owned by Trust 1 and Tarzan and Jane) to

hold the land as bare trustee for the joint venture participants.

1 Are the parties carrying on a taxable activity?

2 Is the venture a joint venture or a partnership?

3 Can the venture register for GST?


Question 1: Are the parties carrying on a taxable activity?

According to section 6 (1) of GST Act, a taxable activity is “any activity carried on

regularly or continuously by an individual whether for financial profit or not. The activity

intends to involve or involves, in whole or part, the supply of services and goods to another

individual for a consideration; and it includes any such activity performed in the form of

business, profession, trade, vocation, manufacture, club or association.” Part two of the section

adds that any activity done in connection with the ending or beginning, including a premature

ending of a taxable activity is treated as being performed in furtherance of the taxable activity.

Therefore, for an activity to qualify as a taxable activity, it must be carried on regularly or

continuously, not necessarily for financial profit, and involve supply of goods and services, there

must be a consideration as well.

The activity carried on by the parties;

1. It is an activity

2. It is carried on continuously and regularly (Newman v Commissioner of inland revenue

(1995) 17 NZTC 12,097)

3. There a supply of goods and services for consideration? Theo and Melanie are going to

develop the land and build rentals. Providing accommodation in a dwelling supplied by

way of hire (rent) though it is an exempt supply as provided by section 14 of GST Act.

The conclusion is yes it was an activity, Newman v Commissioner of Inland Revenue (1995)

17 NZTC 12,097 (Court of Appeal, CA 150/94)

In this case, the Court of Appeal analysed if subdivision and further selling off of land

lots constitute taxable activity. The main question to answer was if a taxpayer that has done one-


off subdividing could be considered to be carrying on activity continuously and regularly. The

argument for it introduced by Inland Revenue Department was that the process of subdividing

can take a long time and a lot of efforts. However, the Court of Appeal turned down this

argument and held for the taxpayer.

Richardson J pointed out that:

“The activity was not repeated over time either continuously or regularly. It did not

involve repeated acts. Dissection of what was done into a series of sequential steps does not

answer the statutory test of whether the activity was carried on continuously… almost any

activity, even going shopping, could be broken down into a series of many sequential steps. But

to do so, risks detracting from the true inquiry which is whether the activity in question was itself

carried on continuously or regularly by the taxpayer.”

Thus, applying the above-mentioned decision to the case of Theo and Melanie; as they

divided the land only once, we cannot consider it as a regular and ongoing activity. Therefore,

although it is an activity, it is not a “taxable activity”; they have not sold the site and have not

even begun to lease. And even if they started, it is an exempt supply and therefore not a taxably

supply.


Question 2: Whether the Venture Is a Joint Venture or a Partnership

According to s 4 (1) of the Partnership Act 1908, partnership is the “relation which

subsists between persons carrying on a business in common with a view to profit.”

S HG 1 of the Income Tax Act defines joint venturers for income tax purposes as “two

or more people (that) derive income jointly or have deduction jointly, and they are not partners

for in the same partnership”.

Luo (2005) states that a partnership is driven by a common purpose and all the

partners work to achieve that purpose. Theo, Melanie, Tarzan and Jane came together to

purchase a block of land and thereafter subdivide in to four lots. As Beamish & Lupton (2009)

underscores, there were no intentions among them to continue working together or setting up a

business. Their only purpose was to join forces in order to be able to purchase the block of land.

This is the joint venture. It is being carried for a specific period, after acquiring the land; each

person decides what do with his or her lot.

This business activity is a passive project with the parties contributing funds to purchase a block

of land; it is a typical single business of just purchasing the land without further venturing in to

developing it (the relationship ending after the purchase of the land) as Kamminga & Meer-

Kooistra (2007) points out. The parties have their own major activities that they do besides

combining forces to purchase the land. This is not their main or major activity they are

concerned. Each of the person have their own day jobs, they have the venture as an adjunct

activity. In addition, the venture does not have a name. However, although it is a joint venture

the parties have not set the name of the venture. It is not a developed joint venture and it is not

well constituted to be a typical and formal joint venture.


Theo, Melanie, Tarzan and Jane are not motivated by making profit or income; they

have a specific purpose of acquiring the block of land. They do not make any profit or generate

income by purchase of land. After achieving their objective (acquiring the block of land) their

association comes to and end and every individual works on their own and hence a joint venture

as Luo (2007) terms. In a partnership, the partners are motivated by generating profits and

sharing the profit among themselves according to the agreed ratio. Also, a partnership has no

duration of time and hence can be run to perpetuity. This business activity is for a specific period

and the parties are not motivated by making profit as Poon, Ainuddin & Junit (2006) supports.

For these reasons, this is not a partnership but a joint venture.


Question 3: Whether the Ventures Can Register For GST

Section 51 of GST Act requires that while any person carrying on a taxable business may

register, the following persons must register;

Persons who have made sales in any period of twelve months of a tax exclusive value in

excess of $24,000

Person who can reasonably estimate that they will make supplies in excess of $24,000 in

the twelve months

If a person reasonably estimates that the value of supplies will not exceed $24,000 in the next

twelve months, they may not be required to be registered.

In this Act, other than in section 12, unless the context otherwise requires;

“A person includes a company, an unincorporated body of persons, a public authority, and a

local authority. Unincorporated body means an unincorporated body of persons, including a

partnership, a joint venture, and the trustees of a trust. It turns out that partnership and joint

venture are persons.”

Section 51 continues to assert that persons making supplies in course of taxable activity to be

registered

“(1) Subject to this Act, every person who, on or after 1 October 1986, carries on any

taxable activity and is not registered, becomes liable to be registered;

(a) at the end of any month where the total value of supplies made in New

Zealand in that month and the 11 months immediately preceding that month in the

course of carrying on all taxable activities has exceeded $60,000 (or such larger

http://www.legislation.govt.nz/act/public/1985/0141/latest/link.aspx?search=sw_096be8ed80e7f5f4_partnership_25_se&p=1&id=DLM83048


amount as the Governor-General may, from time to time, by Order in Council

declare):

provided that a person does not become liable to be registered by virtue of this

paragraph where the Commissioner is satisfied that the value of those supplies in

the period of 12 months beginning on the day after the last day of the period

referred to in the said paragraph will not exceed that amount.

(b) at the commencement of any month where there are reasonable grounds for

believing that the total value of the supplies to be made in New Zealand in that

month and the 11 months immediately following that month will exceed the

amount specified in paragraph (a).”

In this case, the parties do not disclose the amount involved in transactions. If the ventures

supplies exceed $24,000 or $60,000 as indicated above, they will be required to register for GST.

They will be under obligation to register.

The ventures can register for goods and services tax. Also, the participants to share the

outcomes of the joint venture based on their contribution to the venture in terms of capital

contribution. The parties to a joint venture must also be registered for GST as well as account for

it during the life of the venture. For the parties in this venture, the joint venture itself can register

for GST as well as the parties. Since GST is levied on purchase and sale of goods and services,

the parties to this business activity can register16 for GST even if they do not carry on taxably

activity.

16 Auckland Regional Authority v. CIR, 16 N.Z.T.C. 11 (1994)


Furthermore, Killing (2012) asserts that for participants in joint venture to be able to

register for GST, they must be utilising the land for making taxable supplies. As discussed

above, the parties are not making taxable activity. The business activity does not constitute a

taxable activity and therefore not subject to GST17 . Although they are not using the lots as their

own principal place of residence, they are not generating any taxable supplies and hence it is not

a must for them to register for GST. In this case, Theo and Melanie develop their lots and build

commercial houses and then they lease the houses, this is an exempt supply. This is because the

lease does not constitute a taxable supply and therefore not a must to register. Notably, Theo and

Melanie want to build houses for renting and hence they will be long term residential lettings.

For GST purposes, residential lettings do not constitute taxable supplies. By renting the houses

(if they build), they will not be required to register for GST (Inland Revenue, 2014).

It is very important for the parties to note that they might be dealing in transactions

that include GST even if they are one off transactions like in this case. In such a case where such

transactions or activity constitute an enterprise, the parties will be required to register for GST.

According to the provisions of the GST Act 1985 section 20, the parties may be considered to be

conducting an enterprise18 by buying and developing the land (GST and property, 2013).

Melanie, Theo, Tarzan and Jane are not involved in an enterprise because they do not make

sales; they are not involved in buying and selling of land. The one off transaction also does not

constitute an enterprise as well.

Either, they will not be liable for GST for purchase of the vacant block of land and

therefore will not be required to register19 for GST. After building houses on the lots, the houses

17 CIR v. Thomas Borthwick & Sons (Australasia) Ltd, 14 N.Z.T.C. 9 (1992)18 Accent Management Ltd v. CIR, 23 N.Z.T.C. 21, 2007 N.Z.C.A. 230 (2007)19 Slavin v. Beckwith, 456 Mass. 1013, 924 N.E.2d 684 (2010)


will constitute residential premises because they will be in a state to be occupied, will be

occupied or will be intended to be occupied as residences. To their advantage, they will not be

liable for GST. As such, there will be no need for registering for GST. Basically, all the parties

will not be required to register for GST as all the transactions or activities do not make a taxable

activity. The ventures can register for GST at they will, it is not a must for them to register. In

addition, the venture can also register for GST but it is not under obligation to register.

References

Beamish, P, W, & Lupton, N, C, (2009), managing joint ventures: The Academy of Management

Perspectives, 23(2), 75-94.

Bowers v. Hardwick, 478 U.S. 186, 106 S. Ct. 2841, 92 L. Ed. 2d 140 (1986)


Cornelia I. Crowell GST Trust v. POSSIS MEDICAL, 519 F.3d 778 (8th Cir. 2008)

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Federal Commissioner of Taxation v. Spotless Services Ltd, 186 C.L.R. 404 (1996)

GST Act (2013). GST: Time Of Supply – Payments Of Deposits, Including To A Stakeholder;

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http://www.legislation.govt.nz/act/public/1985/0141/latest/whole.html


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environment? Strategic Management Journal, 28(1), 39-60.

MAT v. GST, 989 A.2d 11 (Pa. Super. Ct. 2010)

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CIR v. NZ Refining Co Ltd, 18 N.Z.T.C. 13 (1997)

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Slavin v. Beckwith, 456 Mass. 1013, 924 N.E.2d 684 (2010).

Milburn NZ Ltd v. CIR, 20 N.Z.T.C. 17 (2001)

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Slavin v. Beckwith, 456 Mass. 1013, 924 N.E.2d 684 (2010)

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Newman v Commissioner of Inland Revenue 17 NZTC 12,097 (1995)

case study- goods and service tax

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