03 GST Lecture Illustrations Continued Solutions Moodle PDF

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Lecture illustration for taxation depreciation/ Goods and services tax...

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Determine if the following are GST taxable activities, exempt or zero-rated 1. A car dealer gives a car to a church. The church uses the car for 2 years, then sells it. Donated goods are GST exempt If a non-profit body has goods or services donated to it and later sells them, it can't charge GST on the sale. 2. A charity runs an opportunity shop selling only donated clothing and incurs/pays for rates, electricity or maintenance expenses which are GST inclusive. Sale of donated clothing is GST exempt A non-profit body can't claim a GST credit for expenses involved in supplying donated goods and services 3. A charity purchases goods GST inclusive and later sells the goods GST inclusive These are taxable activities 4. During a taxable period, a charity sells donated goods $15,000 for $17,000 and purchased goods $23,000 (GST inclusive) for $34,500 (GST inclusive) and incurs utilities expenses $2990 (GST inclusive) and maintenance expenses $5,382 (GST inclusive) Total expense = 2990 + 5382 = 8372 Apportionment = 20,000/ 35,000 x 8372 = 4784 GST Collected 34500 x 3/23 = 4500 GST Paid = 4784 x 3/23 = 624 GST on purchases = 3000 GST to pay = 4500 – 3000 – 624 = 876 5. Hamilton Financial Services Limited charges financial fees in relation to investment portfolios for its investor clients. The following are the fees charged by the company: The legislation relevant to this statement is contained in sections 3 and 14. Section 14 provides a GST exemption for certain supplies, including the supply of financial services, and section 3 defines the term “financial services” for the purposes of the Act. Section 3 defines “financial services”. In terms of the issues raised by this statement concerning the treatment of financial planning fees, the relevant subparagraphs of section 3(1) are: (1) For the purposes of this Act, the term “financial services” means any one or more of the following activities: (a) the exchange of currency (whether effected by the exchange of bank notes or coin, by crediting or debiting accounts, or otherwise): (b) the issue, payment, collection, or transfer of ownership of a cheque or letter of credit: (c) the issue, allotment, drawing, acceptance, endorsement, or transfer of ownership of a debt security:

(d) the issue, allotment, or transfer of ownership of an equity security or a participatory security: (e) underwriting or sub-underwriting the issue of an equity security, debt security, or participatory security: (f) the provision of credit under a credit contract: (g) the renewal or variation of a debt security, equity security, participatory security, or credit contract: (h) the provision, taking, variation, or release of a guarantee, indemnity, security, or bond in respect of the performance of obligations under a cheque, credit contract, equity security, debt security, or participatory security, or in respect of the activities specified in paragraphs (b) to (g): (i) the provision, or transfer of ownership, of a life insurance contract or the provision of re-insurance in respect of any such contract: (j) the provision, or transfer of ownership, of an interest in a retirement scheme, or the management of a retirement scheme: (k) the provision or assignment of a futures contract through a defined market or at arm’s length if— (i) the contract does not provide for the delivery of a commodity; or (ii) the contract provides for the delivery of a commodity and the supply of the commodity is an exempt supply; or (iii) the contract provides for the delivery of money: (kaa) the provision or transfer of ownership of a financial option: (ka) the payment or collection of any amount of interest, principal, dividend, or other amount whatever in respect of any debt security, equity security, participatory security, credit contract, contract of life insurance, retirement scheme, financial option, or futures contract:

(l) agreeing to do, or arranging, any of the activities specified in paragraphs (a) to (ka), other than advising thereon: (m) the investment in an entity, if— (i) the investment is in an equity security equal to or greater than 10% of all equity securities issued by the entity or in a participatory security equal to or greater than 10% of all participatory securities issued by the entity; and (ii) the investment allows the investor, or a person acting on behalf of the investor, to influence the management of the business of the entity: (n) the evaluation by an investor of an investment referred to in paragraph (m) in an entity and the planning or acting by the investor to influence the management of an entity for the principal purpose of preserving or increasing the value of such an investment. Financial planning fees cover The various types of fees charged by financial advisers for financial planning services they provide. In order to determine whether particular services supplied are exempt, it is necessary that the supplies fall into the criteria stipulated in section 14. Section 14(1)(a) requires that there must be either a supply of a financial service or the supply of a good or a service that is “reasonably incidental and necessary” to the supply of a financial service provided by the same supplier. As in Section 3(1)(l) fees on financial services on advising are not exempt from GST but subject to GST. Only fees on financial services agreeing or arranging the activities mentioned in Section (3)(1) are GST exempt. The GST treatment of the fees will be determined having regard to the services performed in establishing, administering, and altering the investor’s portfolio, based on the seven categories of services mentioned above. It may be that in certain cases the performance fee is paid in respect of all seven categories of services, while in other instances the fee may be only for services coming within some of the categories, e.g. the administration and monitoring fee categories. In view of this, in determining the GST treatment it is not the description (label) the adviser attaches to the fee charged that is relevant, rather it is what service (s) the fee is actually paid for. Financial planning fees subject to GST Services relating to initial planning fees, monitoring fees, evaluation fees and replanning fees.

Financial planning fees not subject to GST Services relating to implementation fees, administration fees and switching fees exempt from GST. 

Initial planning fees (Subject to GST) Fees charged in relation to services provided by the adviser for the initial interview where the investor and the adviser discuss the investor’s investment goals, savings objectives, cash requirements, and life and general insurance requirements. The adviser then prepares a draft portfolio plan for the investor. Further interviews, discussions, and adjustments to the draft plan may follow until it is acceptable to the investor

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Implementation fees (GST Exempt) All fees for services associated with implementing the draft plan devised in (a). They will include any one-off up-front fees paid to or made in respect of services or charges to advisers, administrators, executors, fund managers, etc., to purchase or acquire the investments. They include payments to custodians on implementation of the plan or charges by fund managers for entry into the investments.

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Administration fees (GST Exempt) This fee category is generally described by advisers as “annual on-going” fees. They are charged by the adviser to cover the costs of maintaining records of the investor’s transactions with the adviser. This category also includes charges relating to the handling of cash for the investor, such as the withdrawal and deposit in the investor’s account with an administrator, bank charges, and other administration fees. Also included are any fees or commissions charged by the adviser for collecting income from the investments and arranging for this to be paid to or credited to the investor’s account with the adviser or to the investor’s own bank account. Monitoring fees (Subject to GST) Annual charges for monitoring and reporting to the investor on the performance of the portfolio (including the performance of the fund managers and the adviser) in terms of the investor’s goals, and relaying this information to the investor. The

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adviser will prepare these reports from time to time. 

Evaluation fees (Subject to GST) Any fees for services relating to an evaluation of an existing portfolio. Typically, these arise where an investor has an existing portfolio of investments and either seeks a financial adviser’s advice for the first time, or seeks confirmation that the portfolio’s performance is matching the goals originally set by either the investor, or with the assistance of a financial adviser at the initial planning stage. This is a more detailed examination of performance of the portfolio than simply monitoring performance and reporting to the client. It may or may not result in a recommendation from the adviser to make changes to investments within the portfolio to maintain the investor’s aims.

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Re-planning fees (Subject to GST) Fees for services relating to the re-planning of a portfolio sometimes arising from category (e) services due to changes to the investor’s objectives. This could entail minor changes, or the complete restructuring of investments and a change in investment strategy. Re-planning fees do not necessarily refer to advice supplied by the same adviser. They could be for advice by an adviser to a new client who had previously managed his or her own portfolio or had previously engaged a different adviser. Included in this category are any other fees as described in Initial planning fees at (a), when there has been a complete restructuring of investments.

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Switching fees (GST Exempt) Fees related to the costs involved in selling existing investments and/or purchasing new investments arising from a recommendation by the adviser as a result of category (e) or category (f) services. The fees will be charged by the adviser for changing investments within the portfolio. Also included are any fees relating to the withdrawal in whole or in part from an existing portfolio.

6. Financial Adviser prepares an initial portfolio plan, and charges Investor $2,000 for it. Investor decides to accept the plan, and asks Financial Adviser to arrange with Custodian for its implementation. Financial Adviser asks, on Investor’s behalf and as

Investor’s agent, for Custodian to implement the plan. Custodian’s fee is charged to Investor by an invoice sent to Financial Adviser. Financial Adviser passes the invoice on to Investor. Custodian’s fee is $1,500, additional to the $2,000 charged by Financial Adviser. The $2,000 Financial Adviser charges Investor is for a taxable supply of initial planning services. The advice falls either outside the agreeing to do or arranging requirement, or within the “advising” exclusion, in paragraph (l) of the section 3(1) definition of “financial services”. Financial Adviser must account for GST output tax on the supply. Passing on Custodian’s invoice to Investor has no GST implications for Financial Adviser, because Financial Adviser is simply the agent of Investor. Custodian’s services are exempt supplies of implementation services and no GST output tax needs to be returned by Custodian. 7. Six months after implementing the plan, Financial Adviser passes on to Investor dividend income collected on Investor’s behalf. Financial Adviser also conducts an evaluation of the investment portfolio’s performance. Financial Adviser charges a small commission of $50 for collecting the dividend income and $250 for the evaluation service. The $50 charge for collecting dividends is consideration for an exempt supply under section 3(1)(ka). Financial Adviser does not need to return GST on the amount. The $250 for the portfolio review is an evaluation service and as such is within the “advising” exclusion in section 3(1)(l) and therefore subject to GST. Financial Adviser must return GST output tax on this amount 8. Financial Adviser has prepared a portfolio plan (involving debt, equity, and participatory securities within the meaning of section 3) that Investor asks Financial Adviser as agent to arrange with Custodian to implement. Financial Adviser maintains a record of transactions between Investor, Financial Adviser and Custodian relating to investment purchases and placement, sales/withdrawals and collection, and distribution of investment income to Investor. Financial Adviser undertakes collection and distribution of investment income and operates a cash account for Investor through which movement of funds is recorded. Financial Adviser charges an annual on-going fee of $500 for the record administration and maintaining the account for Investor, plus an income collection and distribution commission of 5% of the investment income collected. The 5% commission for collecting investment income is an exempt supply, being in respect of a financial service under section 3(1)(ka). The annual ongoing fee of $500 for services in administering Investor’s records and cash account is not in respect of a financial service under any of the paragraphs of section 3(1). However, those services would be regarded as being reasonably incidental and necessary to the financial service of payment or collection of interest, dividends, principal (section 3(1)) and/or to an extent, the arranging of the investment placement portfolio implementation financial service (section 3(1)(l)), and thus would be an exempt supply under section 14(1)(a). Financial Adviser does not need to return GST on either of these fee amounts. 9. During a taxable period a landlord earns rental income (GST exclusive) and incurs dwelling expenses, such as maintenance, rates and insurance (all GST inclusive).

GST cannot be charged on the rent for a residential dwelling (GST Exempt). A landlord cannot claim any GST on dwelling expenses, such as maintenance, rates and insurance.

10. XYZ Limited sell goods on a 30, 60 or 90 day account basis and charges penalty interest on account that become overdue, Penalty interest – GST exempt 11. Hamilton City Council charges infringement fees for parking offences. Fines and penalties imposed for an offence created by statute are not subject to GST. For example, parking penalties imposed by the court as fines or by local authorities as infringement fees are punishments for offences against the Transport Act 1962. These are not liable for GST.

12. The sale of fine metal by a dealer, Fine metal is any form of: gold with a fineness of not less than 99.5% silver with a fineness of not less than 99.9% platinum with a fineness of not less than 99%.

The sale of fine metal by a dealer is exempt supply 13. The importing fine metal by a jewellery manufacturer anyone importing fine metal is an exempt supply. 14. A newly-refined fine metal is supplied by a refiner to a dealer as an investment item when newly-refined fine metal is supplied by a refiner to a dealer as an investment item, then it is a zero-rated supply 15. Charlie is registered for GST and runs a taxi business. He retired on 30 November and kept his taxi for personal use. The value of the vehicle based on current market value is $17,250. In his final GST return he included 3/23 of $17,250 ($2,250) in the total adjustments in Box 9, having transferred this amount from his IR372 calculation sheet. 16. A New Zealand publishing company has the copyright on a New Zealand author's book. The company sells the overseas copyright to another New Zealand company. Services relating to copyrights, patents and similar property, which apply outside New Zealand are zero-rated. 17. Goods sold by duty-free shops that are licensed as export warehouses and that operate within the Customs processing area at international airports Goods purchased from duty-free shops by international travellers are zero-rated when a retailer:

• sells goods to a tourist and arranges to send the items overseas to them • arranges to send the items to an overseas customer • arranges to send goods to the airport for a traveller to pick up at the time of departure. Goods sold by duty-free shops that are licensed as export warehouses and that operate within the Customs processing area at international airports are also zerorated, 18. Goods sold by foreign duty-free shops that enter New Zealand. GST payable to Customs upon entry to New Zealand. 19. Vessels purchased that are capable of being exported from New Zealand under their own power Zero rated 20. goods that are incorporated into or used up as part of servicing a boat or aircraft being exported Zero rated 21. services provided directly in connection with an exported boat or aircraft. Zero rated 22. a New Zealand architect designs a building to be constructed on an overseas property for an overseas client. Services supplied directly in connection with land or buildings located outside New Zealand are Zero rated 23. a New Zealand insurance company insures a vehicle located outside New Zealand. Services performed directly in connection with goods situated outside New Zealand at the time the service is performed are Zero rated 24. a lawyer resident in New Zealand gives legal advice to a person living in Australia. Service supplied to non-residents outside New Zealand at the time the service is performed is Zero rated 25. the results of testing machines bought into New Zealand from Germany are collected, analysed and sent back to Germany. Information services provided to overseas client directly in connection with moveable personal property is Zero rated 26. a New Zealand fruit grower exports 1,000 crates of fruit. The offshore recipient contracts a New Zealand horticultural firm to inspect the fruit and provide a report. Information services provided to overseas client directly in connection with moveable personal property is Zero rated 27. ABC Limited imports goods from overseas for use in its taxable activities. GST is charged on all imported goods, including mail order and internet purchases, and is calculated on the Customs value of the item, plus any duty, freight and insurance costs. 28. DXY Farm Limited produces apples which are 50% to be exported and the balance 50% to be sold in New Zealand. The total cost of fertilizer used for the production of apples is $18,400

Exports zero rated NZ sales subject GST 18400 x 3/23 = claimed 29. Goods that were to be exported but are destroyed Goods that were to be exported but are destroyed, die or cease to exist owing to circumstances outside the control of both the supplier and recipient, will be zero-rated. 30. a New Zealand-owned boat that normally operates in the Cook Islands is put into dry dock in New Zealand for repairs. Repairs were made on the boat. Supply of repair services is Zero rated If you use materials to repair a temporary import and those materials become an integral part of that import, those materials are zero-rated. Similarly, if the repair materials become worthless for anything else after the repair job, they are zero-rated.

31. Land that is acquired by a non-profit body in New Zealand Land that is acquired by a non-profit body in New Zealand is zero-rated if it's used for making taxable supplies. 32. A land sold by a GST-registered person. A land transaction must be zero-rated when made by a GST-registered person, if the supply wholly or partly includes land, and: Sold to another registered person Buyer acquires the land for taxable activities Buyer must not use the land as a principal place of residence or for a relative residence.  At time of settlement All these conditions must be satisfied at the time of settlement of the transaction. If any of them are not satisfied at the time of settlement, the supply must be taxed at 15%.   

33. A GST registered New Zealand-owned company sells goods or services online to people in New Zealand and to overseas customers Online sales in NZ subject to GST Online sales overseas zero rated....