This is law-making 'at its worst'

When I was a student, I read Geoffrey Palmer's book Unbridled Power. It highlighted that New Zealand had the "fastest law in the West" due to its unicameral parliamentary system and lack of separation between the executive and legislative branches of government.

Recently, I have seen an example of what I think is the worst law-making that I can recall in over 20 years. It relates to the application of GST to body corporates.

To fill in some background, body corporates are established under the Unit Titles Act to deal with the complexities that arise when there are multiple owners in a single building. A typical example is a large residential apartment building. A body corporate is established to insure the building and maintain common areas, among other duties. To fund those costs, unit owners are charged a levy based on their proportionate share.

Often, a body corporate will register for GST - charging GST on its levies and claiming GST on its costs. In the long term, this generally created a GST-neutral position. However, there has been concern as to whether body corporates should be registered for GST at all. Only one court case that I am aware of has considered the issue. It said that, generally, a body corporate that does nothing but pool owners' funds for the payment of common expenses isn't carrying on a taxable activity and therefore shouldn't be registered for GST.

Last year, Inland Revenue Department officials released a report stating that, in their view, body corporates that charge levies are making taxable supplies and therefore should register for GST. In their view, the case had been wrongly decided.

This paper was particularly disturbing for body corporates already grappling with the issue of what to do about GST on large insurance payouts received in respect of leaky homes and Canterbury earthquakes. Disappointingly, the IRD document was totally silent on that issue.

Then, lo and behold, last month IRD issued a new paper, stating that body corporates should generally not be registered for GST, and announced proposed legislation to ensure that any supplies made by a body corporate in respect of obligations under the Unit Titles Act would be exempt from GST. In my view this represented a total U-turn on their previously stated policy. Even worse, it is proposed that the legislation (to be passed at an as yet undetermined date) will have effect from June 6, 2014, the date of the latest announcement.

In the meantime, GST-registered body corporates are to carry on doing GST returns as at present. When the new law is passed, they will then need to recalculate their GST positions since June 6, 2014 as if GST did not apply. Inland Revenue will refund any GST that was paid in the meantime. Any GST refunds issued during this period will have to be returned to Inland Revenue - plus interest. Graciously, IRD commentary on the paper does state that applications for remission of interest are likely to be "considered favourably".

So, let's be clear on this. Inland Revenue's published view was that body corporates should be registered for GST. It then said they shouldn't be registered and the rules would be changed. In the meantime, body corporates should continue to apply the current rules. When it comes, the rule change will have effect from up to several months earlier, meaning that GST returns that were correct when filed will become incorrect and have to be recalculated. GST might have to be repaid, and applications will have to be made to remit interest charges that will inevitably be imposed in that situation.

In my view, this is law-making at its worst. Any law, including tax law, should be clear, unambiguous and prospective.

The Press