September 2013... A New Zealand business that manufactured and supplied goods to an overseas purchaser has been found to have made a costly mistake in its treatment of GST. The manufacturer was investigated by the Inland Revenue Department for its zero-rating of GST on the supply of goods to a company based in the United Kingdom and was found to be non-compliant. The New Zealand manufacturer unsuccessfully challenged the IRDS’s assessment in the Taxation Review Authority (TRA). Critically for the manufacturer, the TRA agreed with the IRD’s finding that the goods had not been “exported” as that term is defined in the Goods and Services Tax Act. As a consequence the manufacturer was required to return GST on the purchase price at the (then current) rate of 12.5%.
The manufacturer had entered into discussions with the United Kingdom based company in 2007 for the supply of stainless steel spheres of a very high mirror polished surface. The spheres were to be used in a large sculpture, which was to be exhibited in the United Kingdom. The manufacturer provided samples and a quote for an initial order for 60 spheres. The quoted price did not include GST.
Had the manufacturer exported the spheres directly to the United Kingdom, as originally intended by both parties, the manufacturer’s assessment that GST could be zero-rated would likely have been correct. However, in 2009 it was agreed that for practical reasons the sculpture would be constructed in New Zealand. The UK purchaser engaged an agent in New Zealand to undertake technical design work and have the sculpture assembled in New Zealand. An engineering company was contracted by the purchaser to fabricate a structural skeleton and to attach the spheres to the skeleton. The sculpture was to be shipped in one piece to the purchaser in the United Kingdom, but for practical reasons it was ultimately partially disassembled and the outer spheres were shipped in a separate container. The engineering company was described in the shipping documentation as the consignor (the sender) and the goods being shipped were described as “a sculpture”.
From the manufacturer’s point of view it believed it had exported the spheres to the purchaser in the United Kingdom and accordingly the transaction qualified for zero-rating under the Goods and Services Tax Act. In other words, the manufacturer thought it did not have to return GST on the price paid by the purchaser.
The TRA disagreed with this treatment of GST. The TRA considered that the spheres had been “finally” consumed in New Zealand, losing their separate existence in the construction of the sculpture. In addition, the TRA considered that the manufacturer had lost its legal and beneficial ownership in the spheres and as a result could not have been the exporter. Instead the TRA took the view that the ownership of the spheres had passed from the manufacturer to the purchaser in New Zealand and accordingly, the manufacturer should have returned GST on the price paid by the purchaser.
The IRD accepted that the situation had come about because of a change in the terms of the contract between the manufacturer and the purchaser (namely the decision to construct the sculpture in New Zealand) and was not a deliberate attempt by the manufacturer to avoid its tax obligations. However, IRD had no discretion under the Tax Administration Act to zero-rate the transaction and the TRA agreed.
As a result of the TRA’s decision, the manufacturer was required to return GST on the purchase price in the sum of $66,793.49. It was not addressed in the TRA’s decision, but it is unlikely that that the manufacturer would be contractually entitled to recover this amount from the purchaser.
New Zealand businesses selling goods overseas should take this expensive lesson for the manufacturer as a reminder to carefully consider how they treat GST and to seek professional advice where necessary.
Facebook
LinkedIn