The Inland Revenue Department issued a draft interpretation statement, IS0092, in May 2005 signalling a change of policy by the IRD on whether or not an unconditional sale and purchase agreement constitutes an “invoice”, thereby triggering the time of supply for GST purposes. The closure date for submissions on the draft was 30 June 2005.

Generally, the time of supply for GST occurs at the earlier of an “invoice” being issued or any payment being received by the supplier. An invoice is defined for GST purposes as a document notifying of an obligation to make payment. The Inland Revenue Department’s previous policy was that for property transactions, a sale and purchase agreement that was unconditional from the date of signing constituted an “invoice”. Therefore, the time of supply was the date the agreement was signed. This view was accepted in practice, although there were concerns that it was not a correct reflection of the law.

The Inland Revenue Department has reviewed its policy in the light of comments made by Richardson J in the Court of Appeal decision of Shell New Zealand Holding Co Ltd v CIR on what constitutes an invoice for GST purposes. In particular the draft policy applies these comments to the standard Auckland District Law Society / Real Estate Institute of New Zealand sale and purchase agreement (standard agreement). The conclusion reached is that it is very unlikely that the standard agreement, even if unconditional from the outset, would constitute an invoice.

There is no change in the draft statement in relation to the Inland Revenue Department’s interpretation of when the time of supply is triggered for conditional contracts that later become unconditional. The draft confirms that these contracts can never constitute an “invoice” for GST purposes and therefore never by themselves, trigger the time of supply.

Practically, an unconditional contract will typically be accompanied by the payment of a deposit. If the supplier receives a deposit, the time of supply will be triggered regardless of whether the sale and purchase agreement constitutes an invoice.

Keep in mind the deposit does not have to be physically received by the supplier, it is sufficient for it to be applied for the benefit of the supplier, eg application of the funds to legal or real estate agent fees. Further if the deposit is held by a “stakeholder” it has not been received by the supplier and will not trigger the time of supply, eg the deposit is held in the solicitors trust account.

On a related note, the IRD has also confirmed its position on GST and cancelled land contracts previously outlined in an exposure draft.

Further, where a deposit is retained by a vendor after the cancellation of a contract, the payment is compensation and does not relate to the original supply under the contract. In these circumstances the compensation is liquidated damages, which is not a supply for GST purposes. Accordingly there is no GST returnable or claimable in relation to retained deposits arising from the cancellation of the agreement.

The proposed changes to the FBT regime currently making their way into law have already received considerable attention and analysis. The changes are scheduled to take effect from 1 April 2006, no transitional provisions have been included. A number of opportunities have been closed off although some new opportunities to provide benefits to employees have become available.

Vehicles
Employers will have the option of calculating the value of a motor vehicle benefit based on either the cost price or tax value of a vehicle. New rates apply depending on the method adopted:
   •  Where a vehicle is leased, rented or owned, jointly or otherwise, and the cost price of a vehicle to the owner is used       the rate of 5% (quarterly) or 20% (yearly) will apply.
   •  Where a vehicle is leased, rented (whether associated or not) or owned, jointly or otherwise, and a vehicles tax value       is used the rate of 9% (quarterly) or 36% (yearly) will apply. The minimum tax value of a vehicle that can be used is       $8,333.
   •  Aligning leased vehicles with owned vehicles removes the advantage currently available from using 1 by 1 leases.       Current flip leases (sometimes referred to as 9 – 5 leases) have also been rendered void for FBT, you may wish to       consider further options, as if these leases are still in place on 1 April 2006, FBT will apply on the original cost.
   •  Due to the different rates applicable to each valuation method, a higher FBT bill will be incurred under the valuation       method in the first two years compared to the cost method. Over a five year period the total cost under each method is       basically the same. In order to stop taxpayers taking advantage of the mismatch by switching from the cost method to       the tax value valuation method at year three the valuation method used in a vehicles first FBT return has to be used for       a minimum five year period.
   •  It is considered that, unless it is certain a vehicle will be owned in excess of 5 years, it would be best to start with the       cost method and switch to the valuation method after the initial five year term. That way the client will not be penalised       if he were to sell a vehicle earlier than expected.
   •  The need for a review of the definition of “work related vehicle” had been identified in the discussion document leading       up to the Bill, but no changes have eventuated.

Benefits provided by charities will no longer be exempt where they are provided by a short-term credit facility such as a credit card. However, the value of the benefit has to be more than 5% of the employee’s salary for a benefit to occur.

The FBT exemptions for unclassified benefits will be raised from $75 per employee to $200 per employee per quarter and $450 per employer per quarter to $15,000 per employer for the last four quarters including the current quarter.

For employers accounting for fringe benefit tax on an annual or income-year basis the exemptions have been raised from $300 per employee per year and $1,800 per employer per year to $800 and $15,000 respectively.

A business tool provided to an employee mainly for business use valued at under $5,000 will not give rise to a fringe benefit. This includes items such as laptops and cell phones. If the item is also used privately a fringe benefit will not arise, as long as the primary business use test is satisfied.

A fringe benefit will no longer occur where an employer secures an arrangement from a person through which goods or services are provided at a discount. The exclusion will apply where the person offers the same discount to a similar sized group of persons on an arms length basis, in these cases the goods or services are to be treated as being a supply to the public on ordinary terms.

In April 2000 Mr Bryson was seconded from Weta Workshop Limited where he was an employee, to work for Three Foot Six Limited (3F6) in its miniatures unit, which was filming special effects for the Lord of the Rings project. At the end of the two week secondment period, he was offered a permanent position with 3F6. Mr Bryson agreed to work directly for 3F6 after first agreeing on his hours of work. Mr Bryson was not given an employment contract when he began. For the first few weeks he received training. In October 2000, 3F6 supplied a written contract for all its crew which refers throughout to “contractor” and “independent contractor”, Mr Bryson signed the contract. Mr Bryson was paid weekly after submitting an invoice of hours worked. As a result of downsizing Mr Bryson was made redundant at the end of September 2001 and he alleged unjustifiable dismissal. In order to bring such a claim Mr Bryson had to have been an employee.

Section 6 of the Employment Relations Act 2000 defines “employee”. The courts have applied the following principles in applying the definition:
   •  The court must determine the real nature of the relationship.
   •  The intention of the parties is still relevant but no longer decisive.
   •  Statements by the parties, including contractual statements, are not decisive of the nature of the relationship.
   •  The real nature of the relationship can be ascertained by analysing the tests that have been historically applied such as       “control”, “integration”, and the “fundamental” test.
   •  The fundamental test examines whether a person performing the services is doing so on their own account.
   •  Another matter which may assist in the determination of the issue is industry practice although this is far from       determinative of the primary question.

Decision
| In April the Supreme Court restored the earlier decision of the Employment Court. In the Employment Court, Judge Shaw found that, despite the signed contract for services and payment being made upon invoice, the real nature of the relationship was that of a contract of service (employment). The Judge stated that there was no evidence that Mr Bryson was acting as a separate business entity which contracted independently with 3F6. He had not tendered for his position and he had accepted an offer from 3F6. Also, it was not a short term position and he had no other employment while with 3F6. Although Mr Bryson had had previous experience, as he had required six weeks training it could not be said that he had contracted his skills to 3F6. Mr Bryson was expected to work at the direction of 3F6 and his time was not his own. Elements of the contract signed by Mr Bryson reflected that of an employment agreement not a contract for services.

It remains to be seen if Mr Bryson is successful in his case for unjustifiable dismissal. The same principles apply for tax purposes. This case emphasises that employers must be extremely careful when determining whether a person is an employee or contractor.

An interpretation statement was issued by the IRD in July 2004 setting out how expenditure associated to farm conversions was to be treated. This interpretation statement was commented on in the November/December 2004 issue. The statement required grassing and fertilising expenses associated to a farm conversion to be capitalised and then amortised.

expenses will be immediately available unless the expenses have been incurred in connection with a significant capital activity such as a farm conversion and the pasture has an estimated useful life of more than one year. If grassing and fertilising expenses are required to be amortised the amortisation rate has been increased to 45%.

The original rules have survived the amendments. Where grassing expenses are incurred in preparation of land for farming or agriculture the expenditure is to be amortised at the rate of 6%.

The Taxation (Base Maintenance and Miscellaneous Provisions) Bill 2005 received Royal Assent on 21 June 2005. Among the changes included in the Amendment Act is the requirement for excess imputation credits received by individuals and unincorporated bodies to be carried forward as opposed to being converted to a net loss. As marginal tax rates can vary the current rate of conversion was resulting in benefits for some taxpayers. The change will apply from the 2005 – 2006 tax year.

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