Body corps and GST a festering issue

03:23, Jun 16 2014
Taxing Times is a weekly column that looks at various aspects of tax and money management.

I thought I would take a break from pointing out gaffes between the Minister of Revenue and his department and instead give him a little bit of credit for tackling an issue that was festering away below the surface and was always going to raise its head sooner or later.

The issue is the ability of body corporates to register for GST.

In this context we are talking about the statutory body corporate that operates as a matter of law and is established under the Unit Titles Act 1972 or Unit Titles Act 2010. Most, if not all multi-story apartment-commercial premises not freehold will be unit titled.

Under the Unit Titles Acts, all unitised apartments or commercial premises have a statutorily created body corporate responsible for paying rates, insurance and undertaking maintenance, and generally builds up a maintenance reserve. Owners of the unit titled apartments pay a levy to the body corporate to cover outgoings and the maintenance reserve.

The issue that has arisen has come about because some body corporates have had issues with leaky building syndrome. In many cases large sums of money are involved. Naturally the question of whether GST can be claimed has been asked, and thus the question of whether the body corporate should register for GST.

A High Court decision some years ago, that was not appealed and has not been overturned, says body corporates are not supplying a service to the unit title owners for consideration, and thus there is no taxable activity and no ability to GST register. Despite that, Inland Revenue started allowing body corporates to register for GST and in a statement in October 2013 advised it would continue to allow registration, but recommended apartment owners seek advice before doing so.


The question the Minister of Revenue is grappling with is whether this should be allowed - not because as some commentators have said, as a tax grab - but to put owners of apartments on a par with private freehold ownership. In other words, the question is whether it is the right outcome as a matter of policy that owners of apartments can get the benefit of claiming input tax credits on their expenses (such as leaky building outgoings, for example) by registering for GST, when owners of private freehold dwellings cannot register and claim GST input tax credits.

So in recent time we have seen overly-emotive headlines in other newspapers such as "Arbitrary GST confiscation to cost body corporates millions" and "GST law change slammed as tax grab".

While there is a little more to this issue than meets they eye, such as the GST treatment of out- of-court settlements, which, when paid, cannot be claimed for GST purposes by the payer, and thus raises issues of whether our current GST rules are actually overtaxing body corporates. All the Government has done to date is to release a discussion paper on the merits of a law change. No law has been changed and IRD (if true to its October 2013 statement) is still permitting body corporates to register for GST.

In my view, the GST outcome should follow the nature of the use of dwelling: if residential, then there is a fair case that the body corporate should be treated consistently with other private home owners. But, if commercial premises are involved, the Government needs to find a way to allow them GST inputs. It's a bit of "watch this space", I'm afraid.

Craig Macalister is tax principal at accounting firm Crowe Horwath. He can be contacted on 03 211 3355.

The Southland Times