Significant GST changes on the way for Not for Profit organisations

About the Authors:

Brent Kennerley

Partner and Auditor at Grant Thornton New Zealand
Brent leads our national NFP service line. He is responsible for a large audit portfolio comprising trade associations, not for profit (NFP) organisations and both local and offshore companies.

Hayley Willis

Senior Manager - Tax at Grant Thornton New Zealand

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Registered New Zealand Not for Profit organisations can access a range of tax concessions compared to their for Profit counterparts. GST registered New Zealand Not for Profit organisations can claim GST credits on all of their assets and on related ongoing costs even if those assets are not used in their GST taxable activity.

This concession is available to Not for Profits. However, it comes with a future downside, via a full GST liability when assets that are not part of the GST activity are eventually sold or when the GST activity ends. Put simply, if a Not for Profit organisation has claimed GST credits for the maintenance or purchase of an asset that does not form part of its GST activity and then sells that asset in the future, the sale proceeds will be subject to GST even though the asset has not been used in the GST taxable activity unless zero-rating rules apply to the sale.

A concession has been introduced to allow GST registered Not for Profits to remove assets not forming part of their GST activity from the GST tax net. However, the concession requires an election to be made by 31 March 2021. The benefit of taking the concession is to eliminate a larger GST liability in the future, especially for land assets that have appreciated substantially in value. The concession is also available on a limited retrospective basis and can be applied to asset sales completed on or after 15 May 2018. This could result in the recovery of GST output tax already paid on disposals of assets that were not part of the GST activity, or the removal of audit risk, if GST has not been correctly accounted for.

The new rules could also apply to many other instances of asset disposal including insurance claims paid on an asset, as this is treated as a sale for GST purposes.

There is a limited opportunity for organisations to act prior to 31 March 2021 to ensure that GST is not payable on any future sale of the assets that are not part of GST activity.

Non Profit: CASE STUDY

For example, a church historically purchased a hall next to its premises for the use of parishioners as well as the public for a small fee; fees collected have never exceeded the $60,000 compulsory GST registration threshold. The GST input credit for the purchase, ongoing maintenance, and operating costs of both the hall and the church have been claimed under the voluntary GST registration of the church. The GST taxable activity is the hall hire, and the GST registration was historically made on a voluntary registration basis as the hall hire fees are well under the $60,000 compulsory GST registration threshold. The church building is used for worship and this generates no revenue (donations are excluded) and the church building does not form part of the organisation’s GST activity, but GST claims are available for this building and have been taken by the organisation. If the church is sold, then long-standing GST rules mean that GST will be payable. The church asset has increased in value over the years, and the organisation has chosen to make an election by 31 March 2021 to remove the church building from the GST net. Their rationale for the election is that the GST claims for the church building and land were made when the church asset had a much lower value, whereas the value today is much higher due to the significant increases in land values in the area. The election is a chance to repay the relatively low GST refunds on this asset, and avoid a significantly larger GST liability that would be payable in the future if the asset was sold or the GST activity (hall hire) ended. The church therefore makes an election to the IRD (prior to 31 March 2021). As part of this election, the church has calculated the GST repayable which is:

• the GST input tax claimed for the initial purchase of the church

• the GST input tax claimed relating to the operating costs to maintain the church over the past seven-year period.The IRD accepts this election and the GST repayable under the calculation is included in the next GST return filed by the church. GST will not be payable on the eventual sale of the church.

Next steps

There’s still time for Not for Profit organisations to protect their existing assets which are not part of their GST activity from future GST output liabilities, but they will need to act quickly. Prior to 31 March 2021, NFPs will need to ensure they won’t be charged GST output at the time of future asset disposal by determining:

• the extent of their taxable activity

• the applicable assets that do not form part of their GST taxable activity and determining the merit of making an election now to isolate their non GST activity assets from the GST net by repaying previous GST input deductions, versus the longer term and potentially much larger GST output tax liability that will arise in the future if an election is not made.

The amount of repayable GST if an election is made on or before 31 March 2021, is the amount equal to all input tax claimed for the capital cost of the asset (or an estimate thereof if records are not held), plus all input tax claimed relating to the operating costs of the asset in the past seven-year period. Again, it’s critical that Not for Profit organisations act quickly, so contact your advisors if you wish to expedite a high level GST review to determine if an election by 31 March 2021 is of merit.

Brent Kennerley

Partner

Audit and Head of Not for Profit Services

Hayley Willis

Senior Manager – Tax

Grant Thornton New Zealand

+64 9 308 2570

www.grantthornton.co.nz

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