AX INFORMATION BULLETIN...Website expenditure – deductibility 21 Section BD 2, Income Tax Act 1994...

ISSN 0114-7161

This is an Inland Revenue service to people with an interest in New Zealand taxation.

AX INFORMATION BULLETINTVolume 12, No 8 August 2000

Contents

Binding rulings

Advertising space and advertising time 3supplied to non-residents – GST treatmentPublic Ruling – BR Pub 00/06

Debt factoring arrangements and GST 9Public Ruling – BR Pub 00/07

Product Ruling – BR Prd 00/06 16

Questions we’ve been asked

Website expenditure – deductibility 21Section BD 2, Income Tax Act 1994 – Allowable deductions

Real estate sale and purchase – GST 23apportionments of income and expenditureSection 2(1), Goods and Services Tax Act 1985 –definition of “consideration”

Legal decisions – case notes

GST treatment of sums received by taxpayer 24from parent company under warrantyagreementCIR v Suzuki New Zealand Limited

Regular features

Due dates reminder 27

Your chance to comment on draft taxation items 29before they are finalised

This TIB has no appendix

Inland Revenue Department Tax Information Bulletin: Vol 12, No 8 (August 2000)

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BINDING RULINGS

This section of the TIB contains binding rulings that the Commissioner of Inland Revenue has issued recently.

The Commissioner can issue binding rulings in certain situations. Inland Revenue is bound to follow such aruling if a taxpayer to whom the ruling applies calculates tax liability based on it.

For full details of how binding rulings work, see our information booklet Adjudication & Rulings, a guideto Binding Rulings (IR 715) or the article on page 1 of Tax Information Bulletin Vol 6, No 12 (May 1995) orVol 7, No 2 (August 1995).

You can download these publications free of charge from our website at www.ird.govt.nz

ADVERTISING SPACE AND ADVERTISING TIMESUPPLIED TO NON-RESIDENTS – GST TREATMENT

PUBLIC RULING – BR Pub 00/06

How the Taxation Laws apply tothe ArrangementThe Taxation Laws apply to the Arrangement asfollows:

• The contractually supplied service of providingadvertising space in a publication oradvertising time on radio or television (or otherbroadcasting service), for and to a non-residentwho is outside New Zealand at the time theservice is performed, is not supplied “directly inconnection with” any land (or improvementthereto) or moveable personal property situatedin New Zealand. Section 11(2)(e) will apply tozero-rate the supply of services, provided thatall the other requirements of section 11(2)(e) aresatisfied.

The period for which thisRuling appliesThis Ruling will apply for the period from 1 December1999 to 30 November 2004.

This Ruling is signed by me on the 17th day of July2000.

John Mora

Assistant General Manager (Adjudication & Rulings)

Note (not part of ruling): This ruling is essentially thesame as public ruling BR Pub 96/10, published in TaxInformation Bulletin Vol 8, No 8 (November 1996), butits period of application is from 1 December 1999 to30 November 2004. Some formatting changes havealso been made. BR Pub 96/10 applied up until30 November 1999.

This is a public ruling made under section 91D of theTax Administration Act 1994.

Taxation LawsAll legislative references are to the Goods andServices Tax Act 1985 unless otherwise stated.

This Ruling applies in respect of section 11(2)(e).

The Arrangement to which thisRuling appliesThe Arrangement is the contractual supply ofadvertising space in a publication, or the supply ofadvertising time on radio or television (or otherbroadcasting service), by a GST registered person forand to a non-resident person who is outside NewZealand at the time the services are performed.

For the purposes of this Ruling the supply ofadvertising space or advertising time means theservice of communicating an advertising message, andincludes all steps involved in providing this service bythe supplier of the advertising space or time.


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COMMENTARY ON PUBLIC RULING BR PUB 00/06

(2A) Subsection (2)(e) does not apply to a supply of servicesunder an agreement that is entered into, whether directly orindirectly, with a person (person A) who is not resident inNew Zealand if-

(a) The performance of the services is, or it is reasonablyforeseeable at the time the agreement is entered intothat the performance of the services will be, receivedin New Zealand by another person (person B),including-

(i) An employee of person A; or

(ii) If person A is a company, a director of thecompany; and

(b) It is reasonably foreseeable, at the time the agreementis entered into, that person B will not receive theperformance of the services in the course of makingtaxable or exempt supplies.

(2B) For the purpose of subsection (2)(e) and (2fa), ‘outsideNew Zealand’, for a company or an unincorporated body thatis not resident, includes a minor presence in New Zealand, ora presence that is not effectively connected with the supply.

Section 60 sets out the GST agency provisions.Section 60(2) states:

Subject to this section, for the purposes of this Act, whereany registered person makes a taxable supply of goods andservices to an agent who is acting on behalf of anotherperson who is the principal for the purposes of that supply,that supply shall be deemed to be made to that principal andnot to that agent:…

Court of Appeal decisionThe Court of Appeal held that the supply of thepublication of advertisements by Wilson & Horton tonon-resident clients qualified for zero-rating undersection 11(2)(e), irrespective of whether a New Zealandresident obtains a benefit from the supply.

“For and to”The Court of Appeal rejected the High Court’sinterpretation of “for” in section 11(2)(e), as meaning“beneficially for”. The Court of Appeal questionedwhether this “benefit” test was workable. The Courtnoted that many parties may potentially benefit froman advertisement placed by a non-resident, and that itwas unlikely that the legislature would have intended awide group of possible beneficiaries of a service todetermine the GST treatment of the service.

In discussing the “for and to” wording in section11(2)(e), the Court of Appeal examined the possiblemeanings of “for” that may have been intended by thelegislature and rejected the Commissioner’sinterpretation of “for” as meaning “beneficially for”.

This commentary is not a legally binding statement,but is intended to provide assistance in understandingand applying the conclusions reached in Public RulingBR Pub 00/06 (“this Ruling”).

The subject matter covered in this Ruling waspreviously dealt with by BR Pub 96/10 that appeared inTIB Vol 8, No 8 (November 1996), at page 13. ThisRuling applies for the period from 1 December 1999 to30 November 2004.

BackgroundIn July 1994, the High Court delivered its judgment inWilson & Horton v CIR (1994) 16 NZTC 11,221. Thecase dealt with the circumstances in which anewspaper publisher should account for GST on theservices of placing advertisements for non-residentclients. The High Court held that:

• to qualify for zero-rating under section 11(2)(e),services must be provided “contractually to”and “beneficially for” a non-resident person. Ifa New Zealand resident receives the benefit ofthe advertising services, the services are notzero-rated; and

• the provision of advertising space and relatedservices is not supplied directly in connectionwith the subject matter of the advertisements.

Wilson & Horton appealed this decision to the Courtof Appeal (Wilson & Horton v CIR (1995) 17 NZTC12,325). The Court of Appeal held in favour of thetaxpayer, and concluded that the supply of advertisingspace in New Zealand by Wilson & Horton to non-resident clients is zero-rated under section 11(2)(e),irrespective of whether a New Zealand resident alsobenefits from the supply. The Commissioner did notappeal this decision.

LegislationSection 11(2)(e) zero-rates a supply of services when:

The services are supplied for and to a person who is notresident in New Zealand and who is outside New Zealand atthe time the services are performed, not being services whichare supplied directly in connection with -

(i) Land or any improvement thereto situated inside NewZealand; or

(ii) Moveable personal property (other than choses inaction, and other than goods to which paragraph (ca)of this subsection applies) situated inside New Zealandat the time the services are performed; -

Sections 11(2A) and 11(2B) deal with services that aresupplied to non-residents but are received by personsin New Zealand. The sections state:


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The Court concluded that “for” in section 11(2)(e) wasused for emphasis only. Justice Richardson noted thatlegislative drafters often convey emphasis through theuse of a combination of words and said that (at12,330):

I am inclined to think that the framers of s11(2)(e) em-ployed both expressions to convey emphasis and perhaps tobring out the intent that the contract must be genuine and sothe services must be supplied under that contract to and forthe other contracting party.

As a matter of statutory interpretation, the Court saidthat section 11(2)(e) would have been worded quitedifferently if the intent had been to preclude zero-rating, unless a non-resident recipient of a supply wasthe only person who could benefit from the servicessupplied.

Justice Penlington considered that this result wasconsistent with one of the underlying themes of zero-rating—the preservation of New Zealand’scompetitiveness in world trade. It was also recognisedthat if advertised merchandise is sold in New Zealand,GST will be imposed on the sale at that time.

“Directly in connection with”The Court of Appeal did not discuss whether thesupply was made directly in connection with land ormoveable personal property in New Zealand for thepurposes of section 11(2)(e). The High Court hadaccepted that the supply of advertising space in anewspaper was not “directly in connection with” thesubject matter of the advertising. During the Court ofAppeal hearing, the potential argument that theservices are supplied directly in connection with thenewspapers themselves was also raised.

However, the Court of Appeal did not allow theCommissioner to introduce this new line of reasoning,as it would have changed the basis upon which theassessment was made and objected to. Thepublishing industry has asked the Commissioner toclarify the application of the “directly in connectionwith” exclusion in section 11(2)(e) in this context.

Application of the LegislationThe key features of section 11(2)(e) are the phrases“for and to” and “directly in connection with”.

“For and to”The Commissioner accepts the Court of Appeal’sinterpretation of “for and to” in Wilson & Horton forthe purposes of section 11(2)(e). In this context, “forand to” is a composite phrase. “For” simplyemphasises “to” and does not connote anyrequirement that services must be provided for theexclusive benefit of the recipient of the supply. Ifservices are supplied pursuant to a contract with anon-resident and are for that non-resident, section11(2)(e) will apply to zero-rate the supply regardless of

any other benefits also arising to a New Zealandresident (provided that the other requirements of thesection are satisfied).

The Court of Appeal’s interpretation of “for and to” isnot restricted to the supply of advertising space in anewspaper. It also applies to the supply of advertisingspace in all forms of publication and to the supply ofadvertising time on radio or television (or otherbroadcasting service).

This Ruling discusses the application of section11(2)(e) to the supply of advertising space inpublications, such as newspapers and magazines.The Ruling also covers the supply of advertising timeon radio and television, or by way of any otherbroadcasting service, eg the internet. For thepurposes of the Ruling, the supply of advertisingspace or advertising time means the service ofcommunicating an advertising message, and includesall steps involved in providing this service by thesupplier of the advertising space or time.

“Directly in connection with”A supply of services to a non-resident will not be zero-rated under section 11(2)(e) if the services are supplied“directly in connection with” any land (orimprovement to the land) or moveable personalproperty (other than choses in action and goodswhich are referred to in section 11(2)(ca)) situated inNew Zealand at the time the services are performed.The Court of Appeal in Wilson & Horton did notdiscuss the meaning of “directly in connection with”in section 11(2)(e), nor resolve whether advertisingspace is supplied directly in connection with thenewspapers in which advertisements are placed.

Case lawThe determination of whether or not services aresupplied “directly in connection with” land ormoveable personal property depends on thecircumstances in which the services are supplied. InCase E84 (1982) 5 NZTC 59,441, Bathgate DJconsidered the meaning of the phrase “in connectionwith” (note that the word “directly” was not used) inthe context of section 165 of the Income Tax Act 1976(section DJ 5 of the Income Tax Act 1994) and noted(at 59,444 and 59,446):

It may be that only an empirical and common sense ap-proach to the interpretation of the words can be applied ineach particular case to determine where, if at all, the lineshould be drawn to allow or not allow expenditure ‘inconnection with’ an assessment. However I believe that anarrow interpretation of the words ‘… any expenditure … inconnection with … the assessment …’ is the correct interpre-tation …

…


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It is a matter of degree whether, on the interpretation of aparticular statute, there is a sufficient relationship betweensubject and object to come within the words “in connectionwith” or not. It is clear that no hard and fast rule can be orshould be applied to the interpretation of the words “inconnection with”. Each case depends on its own facts andthe particular statute under consideration.

In the context of GST, the meaning of “directly inconnection with” for the purposes of section 11(2)(a),prior to its amendment in 1988, has been judiciallyconsidered by the High Court in Auckland RegionalAuthority v CIR (1994) 16 NZTC 11,080 and theTaxation Review Authority (TRA) in Case P78 (1992)14 NZTC 4,532. Before amendment, section 11(2)(a)provided for zero-rating of services supplied “directlyin connection with” transportation. The High Courtand TRA cases concerned the application of section11(2)(a) to various charges (landing dues, internationalterminal charges, and rubbish disposal charges) leviedon overseas airlines.

The High Court and the TRA adopted similarinterpretations of the words “directly in connectionwith” under section 11(2)(a). The Auckland RegionalAuthority case summarises the reasoning of the TRAin Case P78 (at 11,084):

There, the Taxation Review Authority, Judge Barber, heldthat “airport dues” were zero-rated for GST because passen-gers cannot realistically be transported to New Zealand by airunless a plane lands and parks on the tarmac; that charges forthose services can be regarded as provided for internationalpassengers who are in a sense “outside New Zealand” untilthey pass through customs. The services are fundamental toand directly connected with the transportation of passengers;

The High Court and the TRA focus on whether a supplyof services is fundamental or integral to transportation todetermine whether the “directly in connection with” testin section 11(2)(a) is satisfied. This reasoning is notstrictly relevant for the purposes of interpreting “directlyin connection with” in section 11(2)(e). This is becausethe focus of section 11(2)(a) was on services directlyconnected with transportation services, and theidentification of a direct connection between a serviceand another service, and a service and an item ofproperty, involves different considerations.

However, the TRA has recently applied the proviso tosection 11(2)(e) and considered the words “directly inconnection with” in Case S88 (1996) 17 NZTC 7,551.The objector in Case S88 purchased motor vehicles fromits non-resident parent company and then sold thevehicles to independent dealers, who onsold them to thepublic. The parent company provided a contractualwarranty to the objector. The objector agreed with thedealers that if a vehicle was repaired under warranty theobjector would reimburse the dealer. The objector wouldthen register a claim with the parent company under thewarranty and receive payment pursuant to that claim.

The TRA was required to consider whether the repairservices provided by the objector pursuant to its

contract with the non-resident parent were zero-ratedunder section 11(2)(e). The TRA concluded that section11(2)(e) could not apply to zero-rate this supply as theservices were supplied “directly in connection with”moveable personal property (the vehicles) situated inNew Zealand at the time the services were provided.Although the TRA did not examine the meaning of“directly in connection with” in great detail, it did state(at 7,558):

The moveable personal property in question is the repairedvehicle. There is a direct relationship or connection betweenthe service of the repairs and the vehicle. Accordingly, thesaid “proviso” to s 11(2)(e) must apply to the facts of thiscase and prevent the objectors from relying on the zero-ratingprovisions of s 11(2)(e). The repair service could not beperformed but for the existence of the vehicle.

[Please note that Case S88 is currently under appeal bythe taxpayer.]

The High Court in Malololailai Interval Holidays NewZealand Ltd v CIR (1997) 18 NZTC 13,137 alsoconsidered the words “directly in connection with” inthe context of section 11(2)(b).

In Case T54 (1998) 18 NZTC 8,410, the TRA consideredwhether the supply of video services for Japanesehoneymoon couples to a Japanese company was zero-rated under section 11(2)(e).

The decisions in both of these cases are consistent withthe cases mentioned above.

Therefore, the case law discussing “in connection with”and “directly in connection with” indicates that theinterpretation of the test will be dictated by the particularcontext involved. The Commissioner considers that the“directly in connection with” proviso in section 11(2)(e)should be interpreted narrowly (Judge Bathgate’s wordsfrom Case E84 quoted above support this), and thatthere must be a clear and direct relationship withmoveable personal property or land in New Zealandbefore a supply will be standard-rated. This isconsistent with the approach of the TRA in Case S88 inidentifying on the facts of that particular case, a “directrelationship or connection” between the repair servicesand the vehicles under repair.

Advertising space and advertising timeThe supply of advertising space in a publication is thesupply of the service of communicating an advertisingmessage, involving all the steps required to achievecommunication of the advertisement. This service isnot supplied directly in connection with the subjectmatter of the advertisement. In the words of the HighCourt in Wilson & Horton v CIR (1994) 16 NZTC11,221 (at 11,224):

The supply of space and services rendered by Wilson &Horton are directly connected with the advertising but notwith the goods advertised. The goods are, as it were, at leastone step removed from the services supplied by the newspa-per proprietor.


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The Commissioner agrees with this view. There is nodirect relationship or connection between theprovision of advertising space and the subject matterof the advertisement. The same reasoning also appliesto the supply of advertising space in all types ofpublication as well as advertising time on radio ortelevision (or other broadcasting service). The supplyof advertising space or time in these media cannot bedescribed as “directly in connection with” theadvertised commodity.

Similarly, when advertising space is supplied in apublication, the services are not supplied directly inconnection with the publication in which theadvertisements are published. The High Courtjudgment in Wilson & Horton concluded that theprovision of advertising space was supplied directly inconnection with (if anything) the advertising itself.The advertised goods were considered to be at leastone step removed from the services. TheCommissioner considers the same logic applies inrespect of a newspaper or other publication. Theservice of communicating an advertising message isdirectly connected with that message and not thepublication. The publication is at least one stepremoved from the service and is merely the medium inwhich the advertising message is publicised.Accordingly, the service is not supplied directly inconnection with the publication produced by thepublishers.

Consequently, the supply of advertising space ineither a publication or by way of broadcast will betreated in the same way for GST purposes. The supplywill qualify for zero-rating, provided that the servicesare supplied for and to a non-resident who is outsideNew Zealand at the time the services are performed.

Supplies through agentsThe application of section 60(2) may also need to beconsidered to determine whether a supply is zero-ratedunder section 11(2)(e). Section 60(2) deems a taxablesupply of goods and services made by a registeredperson to an agent who is acting on behalf of aprincipal, to be a supply made to the principal.

Therefore, if a supply of advertising space or time ismade to a New Zealand resident person who is actingas an agent for a non-resident principal, section 60(2)deems the supply to be made to the non-residentprincipal and not the resident agent. Section 11(2)(e)will apply to zero-rate the supply of services, providedthat all the other requirements of section 11(2)(e) aresatisfied. A common example of this is where a

resident advertising agency acts as an agent for a non-resident person in purchasing advertising space ortime in New Zealand.

Conversely, if a supply is made to a non-residentperson who is acting as an agent for a New Zealandresident in relation to the supply, section 11(2)(e) willnot apply to zero-rate the supply even if the criteria insection 11(2)(e) are otherwise satisfied. The supplywill be deemed to be made to the resident principal andit will not be for and to a non-resident person.

Section 11(2A)Section 11(2A) was introduced to deal with situationswhere services are provided to non-residents andpersons in New Zealand receive the performance ofthese services. An example is where New Zealandeducational institutions contract with non-residents toprovide education for the non-resident’s children inNew Zealand. The section operates to ensure suppliesof this type are standard rated for GST purposes.

Section 11(2A) will not affect the provision ofadvertising services to non-residents in thecircumstances covered by the arrangement describedin this Ruling. The performance of these services is notreceived in New Zealand by other persons.

ExamplesFor the purposes of these examples, it is assumed that:

– a person referred to as a resident is a “resident”as defined in section 2 of the Goods andServices Tax Act 1985. The converse applies tonon-residents, and

– if the services are supplied to a non-resident,the non-resident is outside New Zealand at thetime of performance of the services.

Example 1A UK resident manufacturing company contacts aNew Zealand magazine publisher and booksadvertising space for a newly developed product. TheUK company has a GST-registered subsidiary in NewZealand that sells the advertised product.

The supply of advertising space by the magazinepublisher to the UK manufacturer is zero-rated undersection 11(2)(e). This is because:

• The publisher supplies the servicescontractually for and to a non-resident. Thefact that the New Zealand resident subsidiarypotentially may benefit from the supply throughincreased sales does not preclude zero-rating.

• The services are not supplied directly inconnection with either the products for sale inNew Zealand, or the magazines in which theadvertisements are shown.


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Example 2A US resident distributor of soft drinks contracts forthe supply of radio time on a national radio station inNew Zealand. The soft drinks are available from allchains of supermarkets throughout New Zealand.

The supply of radio time by the New Zealand radiostation to the US distributor is zero-rated undersection 11(2)(e). This is because:

• The radio station supplies its servicescontractually for and to a non-resident. The factthat New Zealand resident retailers throughoutNew Zealand may potentially benefit from thesupply through increased sales does notpreclude zero-rating.

• The services are not supplied directly inconnection with the products for sale in NewZealand.

Example 3An Australian computer distributor plans to advertiseits product range in New Zealand. The computers willbe available through all major computer distributors inNew Zealand. The Australian company contacts aNew Zealand resident advertising agency to arrangean advertising campaign. The agency, acting in thecapacity as agent for the Australian company,purchases air time on a New Zealand residenttelevision channel.

The supply of air time by the television station to theAustralian company is zero-rated under section11(2)(e). This is because:

• The television channel supplies the air timeservices contractually for and to a non-resident.Section 60(2) deems the supply to be made tothe Australian company, as principal. The NewZealand resident advertising agency receivesthe supply as agent only.

• The fact that New Zealand resident distributorsmay potentially benefit from the supply throughincreased sales does not preclude zero-rating.

The services are not supplied directly in connectionwith the products for sale in New Zealand.


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DEBT FACTORING ARRANGEMENTS AND GST

PUBLIC RULING - BR Pub 00/07

The period for which thisRuling appliesThis Ruling will apply to taxable periods commencingon or after 1 August 2000 to 31 July 2005.

This Ruling is signed by me on the 19th day of July2000.

Martin Smith

General Manager (Adjudication & Rulings)

This is a Public Ruling made under section 91D of theTax Administration Act 1994.

Taxation LawsAll legislative references are to the Goods andServices Tax Act 1985 unless otherwise stated.

This Ruling applies in respect of sections 8(1), 20(3),and 26(1).

The Arrangement to which thisRuling appliesThe Arrangement is the sale, by a GST registeredperson (the “Assignor”) on an invoice basis, to a thirdparty (“the Factor”), on a recourse or non-recoursebasis, of an outstanding debt at a price less than thedebt’s face value.

Debt factoring on a non-recourse basis means that theFactor has no claim back to the Assignor if the debtssold to him or her become doubtful or uncollectable(that is, the Factor assumes all of the risk). In contrast,debt factoring on a recourse basis means that theFactor has some form of claim back to the Assignor ifthe debts sold to him or her prove to be doubtful oruncollectable, for example under a put option at thetransfer price.

How the Taxation Laws apply tothe ArrangementThe Taxation Laws apply to the Arrangement asfollows:

• The difference between the face value of thedebt and the price received from the Factor isnot a bad debt for the purposes of section 26.Accordingly, section 26 has no application andthe registered person cannot claim an outputtax deduction under section 20(3)(a)(iii); and

• If a portion of a debt is written-off before it issold to the Factor, then whether this write-offmeets the requirements of section 26(1)depends on whether the amount written off was“bad” according to the conventional tests(outlined in public ruling BR Pub 00/03, entitled“Bad debts – writing off debts as bad for GSTand income tax purposes”).


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COMMENTARY ON PUBLIC RULING BR PUB 00/07

This issue only arises in respect of taxpayersregistered for GST on an invoice basis, becausetaxpayers registered for GST on a payments basis areonly required to return, as output tax, any paymentreceived. However, it is noted that the Taxation(Annual Rates, GST and Miscellaneous Provisions)Bill includes an amendment to section 26 which, ifenacted, will establish parity between the two GSTaccounting bases. Under the amendment, a registeredperson who sells a debt to a third party must pay taxon the remaining book value of the debt on the datethat the debt is sold if the registered person accountsfor tax payable on a payments basis.

LegislationSection 8(1) states:

Subject to this Act, a tax, to be known as goods and servicestax, shall be charged in accordance with the provisions of thisAct at the rate of 12.5 percent on the supply (but notincluding an exempt supply) in New Zealand of goods andservices, on or after the 1st day of October 1986, by aregistered person in the course or furtherance of a taxableactivity carried on by that person, by reference to the valueof that supply.

Section 9(1) states:

Subject to this Act, for the purposes of this Act a supply ofgoods and services shall be deemed to take place at the earlierof the time an invoice is issued by the supplier or therecipient or the time any payment is received by the supplier,in respect of that supply.

Section 20 states:

(1) In respect of each taxable period every registered personshall calculate the amount of tax payable by that registeredperson in accordance with the provisions of this section.

…

(3) Subject to this section, in calculating the amount of taxpayable in respect of each taxable period, there shall bededucted from the amount of output tax of a registeredperson attributable to the taxable period-

(a) In the case of a registered person who is required toaccount for tax payable on an invoice basis pursuant tosection 19 of this Act, the amount of input tax-

(i) In relation to the supply of goods and services (notbeing a supply of secondhand goods to whichparagraph (c) of the definition of the term “inputtax” in section 2(1) of this Act applies), made tothat registered person during that taxable period:

(ia) In relation to the supply of secondhand goods towhich paragraph (c) of the definition of the term“input tax” in section 2(1) of this Act applies, tothe extent that a payment in respect of thatsupply has been made during that taxable period:

(ii) Invoiced or paid, whichever is the earlier, pursuantto section 12 of this Act during that taxableperiod:

This commentary is not a legally binding statement,but is intended to provide assistance in understandingand applying the conclusions reached in Public RulingBR Pub 00/07 (“the Ruling”).

BackgroundSections 20(3)(a)(iii) and 26 of the Goods and ServicesTax Act 1985 (“the Act”) allow a registered person tomake a deduction from output tax if the registeredperson has made a taxable supply, returned output taxin respect of that taxable supply, and subsequentlywritten off as a bad debt all or part of the debt.

If a registered person factors (sells) a debt owing forless than its face value to a third party (“the Factor”),the issue arises whether the difference between theface value of the debt and the amount received fromthe Factor can be an amount written off as a bad debt.

This issue was previously dealt with in PIB No 164(August 1987) at page 27 under the heading “GST anddebt collection agencies – debt factoring” and inTechnical Rulings paragraph 104.9.4 under an identicalheading. Those statements concluded that if aregistered person accounting for GST on an invoicebasis subsequently sold a debt for less than its facevalue, the Commissioner would allow the registeredperson a bad debt deduction under section 26 for thedifference between the debt’s face value and the saleproceeds. The inference being that the differencebetween the two amounts was a bad debt.

Barber DJ in Case T27 (1997) 18 NZTC 8,188 reached adifferent conclusion from that set out in PIB No 164and Technical Rulings paragraph 104.9.4. In particular,the Taxation Review Authority (“TRA”) concludedthat if a registered person factors a debt owing for lessthan its face value, the difference between the facevalue of the debt and the amount received from theFactor is not a bad debt.

The Ruling confirms that the Commissioner acceptsthe view of Barber DJ in Case T27. In particular, it isnow the Commissioner’s view that if a registeredperson factors a debt owing for less than its facevalue, the difference between the face value of thedebt and the amount received from the Factor is not abad debt. Accordingly, section 26 has no application,and a registered person cannot claim a deduction fromoutput tax under section 20(3)(a)(iii).

The Ruling changes and supersedes the earlier policyset out in PIB No 164 and Technical Rulings paragraph104.9.4.


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(iii) Calculated in accordance with section 25(2)(b) orsection 25(5) or section 26 of this Act; and

(b) In the case of a registered person who is required toaccount for tax payable on a payments basis or ahybrid basis pursuant to section 19 of this Act, theamount of input tax-

(i) In relation to the supply of goods and servicesmade to that registered person, being a supply ofgoods and services which is deemed to take placepursuant to section 9(1) or section 9(3)(a) orsection 9(3)(aa) or section 9(6) of this Act, to theextent that a payment in respect of that supplyhas been made during the taxable period:

(ii) Paid pursuant to section 12 of this Act during thattaxable period:

(iii) In relation to the supply of goods and servicesmade during that taxable period to that registeredperson, not being a supply of goods and services towhich subparagraph (i) of this paragraph applies:

(iv) Calculated in accordance with section 25(2)(b) orsection 25(5) of this Act, to the extent that apayment has been made in respect of that amount,or section 26 of this Act; …

The provision relating to bad debts is in section 26,which states:

(1) Where a registered person-

(a) Has made a taxable supply for consideration in money;and

(b) Has furnished a return in relation to the taxable periodduring which the output tax on the supply wasattributable and has properly accounted for the outputtax on that supply as required under this Act; and

(c) Has written off as a bad debt the whole or part of theconsideration not paid to that person,-

that registered person shall make a deduction under section20(3) of this Act of that portion of the amount of taxcharged in relation to that supply as the amount written offas a bad debt bears to the total consideration for the supply:

…

Section 3(1) defines “financial services” as follows:

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 theexchange of bank notes or coin, by crediting ordebiting accounts, or otherwise):

(b) The issue, payment, collection, or transfer ofownership of a cheque or letter of credit:

(c) The issue, allotment, drawing, acceptance, endorse-ment, or transfer of ownership of a debt security:

(d) The issue, allotment, or transfer of ownership of anequity security or a participatory security:

(e) Underwriting or sub-underwriting the issue of an equitysecurity, debt security, or participatory security:

(f) The provision of credit under a credit contract:

(g) The renewal or variation of a debt security, equitysecurity, participatory security, or credit contract:

(h) The provision, taking, variation, or release of aguarantee, indemnity, security, or bond in respect ofthe performance of obligations under a cheque, creditcontract, equity security, debt security, or participatorysecurity, or in respect of the activities specified inparagraphs (b) to (g) of this subsection:

(i) The provision, or transfer of ownership, of a lifeinsurance contract or the provision of re-insurance inrespect of any such contract:

(j) The provision, or transfer of ownership, of an interestin a superannuation scheme, or the management of asuperannuation scheme:

(k) The provision or assignment of a futures contractthrough a futures exchange:

(ka) The payment or collection of any amount of interest,principal, dividend, or other amount whatever inrespect of any debt security, equity security, participa-tory security, credit contract, contract of life insur-ance, superannuation scheme, or futures contract:

(l) Agreeing to do, or arranging, any of the activitiesspecified in paragraphs (a) to (ka) of this subsection,other than advising thereon.

Application of the LegislationUnder section 26, a registered person can make adeduction under section 20(3)(a)(iii) if that person has:

• made a taxable supply for consideration, and

• furnished a return in relation to the taxableperiod during which the output tax on thesupply was attributable and has properlyaccounted for the output tax on that supply asrequired under the Act, and

• written off as a bad debt the whole or part ofthe consideration not paid to that person.

The amount that may be deducted is that portion ofthe amount of GST charged as the amount written offbears to the total consideration for the supply. If thesupply is the supply of goods under a hire purchaseagreement, the first proviso to section 26 limits thededuction to the portion of the amount written off asthe cash price bears to the total amount payable underthe hire purchase agreement.

Further, section 26 does not apply to a registeredperson accounting on a payments basis under section19 or 19A, unless either section 9(2)(b) (door to doorsales) or section 9(3)(b) (hire purchase agreements)applies to the supply.

Section 26 only applies when the registered personhas already accounted for GST on a supply andsubsequently “Has written off as a bad debt the wholeor part of the consideration not paid to that person”.

If a registered person factors a debt owing for lessthan its face value, the issue arises whether thedifference between the face value of the debt and theamount received from the Factor can be an amount“written off as a bad debt”.


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The Commissioner believes that the differencebetween the face value of the debt and the amountreceived from the Factor cannot be an amount writtenoff as a bad debt under section 26. Rather than beinga bad debt, the discount from face value is simply aresult of the process of agreeing the consideration forthe debts that is acceptable to both the Assignor andthe Factor. The reasons for this view are:

1. Cases considering the meaning of bad debtfocus on whether the creditor can recover theoutstanding amounts owing. That is, a baddebt arises when the creditor is unable orunlikely to recover the debt owing. If thecreditor could recover the full amount owingbut chooses not to (as in a debt factoringsituation), any “loss” suffered by the creditor isnot due to a bad debt.

2. Cases also indicate that for an amount to bewritten off as a bad debt, a debt must exist atthe time the debt is written off. If a registeredperson factors a debt, no further debt existsbetween the registered person and debtor, andno amount can be written off as a bad debt.

In considering the second of these factors, with regardto recourse debt factoring arrangements (where theFactor has some form of claim back to the Assignor ifhe or she is unable to collect some of the debtspurchased), it is the Commissioner’s view that when adebt is sold by the Assignor on a recourse basis, thetitle to the debt passes to the Factor unless the Factorexercises a recourse option or right. Therefore, untilthe recourse is exercised and the debt is transferredback, a bad debt deduction is not available undersection 26(1), as after the sale there is no debt owed tothe Assignor.

However, if the Factor exercises an option or right totransfer some portion of the debt back to the Assignorafter the sale then, once this has occurred, a debtexists that is owed to the Assignor that may be able tobe written off by the Assignor. Whether it can bewritten off depends on the application of the ordinarytests for determining whether a debt is bad as notedbelow, under the heading “Whether the creditor canrecover the amount owing”.

Whether the creditor can recover theamount owingThe term “bad debt” is not defined in the Act.However, in Budget Rent A Car Ltd v CIR (1995) 17NZTC 12,263 Tompkins J discussed the meaning ofbad debt in the context of the Income Tax Act. Hestated at page 12,269:

When did the debt become bad? The term “bad debt” is notdefined in the Act. It, therefore, should be given its normalcommercial meaning. It is a question of fact to be deter-mined objectively. A debt becomes a bad debt when a

reasonably prudent commercial person would conclude thatthere is no reasonable likelihood that the debt will be paid inwhole or in part by the debtor or by someone else either onbehalf of the debtor or otherwise.

Case N69 (1991) 13 NZTC 3,541 also discusses themeaning of bad debt. In that case the taxpayer was aprivate limited liability company carrying on thebusiness as a timber merchant. Following the receiptof a letter from one of the company’s debtors, themanaging director realised that there was no likelihoodof recovery of a debt owing and that the debt shouldbe written off. The taxpayer physically wrote theappropriate entries into the journal and books of thecompany in May 1988 to write off the debt as at31 March 1988. The taxpayer claimed a bad debtdeduction for the income year ending 31 March 1988,but this was disallowed by the TRA on the basis thatthe relevant journal entries had not been made by31 March 1988. The TRA (Barber DJ) discussed themeaning of bad debt and at page 3,548 stated:

Naturally, the debts in question must be “bad” to be writtenoff as bad in terms of sec 106(1)(b). This is a question offact. Generally, an application of that criterion will not bedifficult as the debtor will be insolvent. However, the debtordoes not need to be insolvent for the debt to be bad. It isonly necessary that there be a bona fide assessment that thedebtor is unlikely to make payment of the debt. If there is aclear understanding or arrangement that there be long termcredit, and if the taxpayer believes that the terms of thecredit will be met, then the debt cannot be treated as badbecause it is merely a situation of deferred payment. In myview, as well as the need for the writing off to be made bonafide, the circumstances must indicate to a reasonable andprudent business person, that, on the balance of probability,the debt is unlikely to be recovered. This is an objective test.

As is evident from the quotations above, differentwording is used by the High Court in Budget Rent ACar and the TRA in Case N69 to describe the test ofwhen a debt can be written off as bad. To summarisethese differences, in Budget Rent A Car the wordsused were “no reasonable likelihood” that the debt (orpart of the debt) would be recovered, whereas inCase N69 the words used were that “on the balance ofprobability, the debt is unlikely to be repaid”.

The wording used in Case N69 may appear to includetwo standards into the test. That is, that the debt willnot be repaid “on the balance of probabilities” andthat the debt is “unlikely” to be repaid. Thesestandards are potentially conflicting as the first ofthem provides a lower standard than the second.

However, the Commissioner considers that the testprovided by Barber DJ in Case N69 requires that for adebt to be written off as bad it must be unlikely to berepaid. This is clear from his Honour’s statement atpage 3,548 of the judgment:

Even if the executives had come to a formal business decisionor assessment by 31 March 1988 that the debts were unlikelyto be recovered and therefore should be written off as baddebts… [Emphasis added]


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Furthermore, the Commissioner considers that thewords “no reasonable likelihood” and “unlikely” havethe same meaning. Therefore, on this basis theCommissioner regards the decisions in Budget Rent ACar and Case N69 as applying the same test, and bothcases as authority for the conclusion that a reasonablyprudent commercial person must determine that thereis no reasonable likelihood of recovering a debt beforeit can be written off as bad.

The Commissioner prefers the wording used in BudgetRent A Car as this is the higher authority and thiswording is supported by the way in which the HighCourt applied the test in Graham v Commissioner ofInland Revenue (1995) 17 NZTC 12,107. Alsoadopting this wording removes the risk ofmisinterpreting the wording of the test in Case N69 asmeaning that a debt can be written off as bad if, on thebalance of probabilities, it will not be repaid.

The emphasis of the discussion above is on theinability of the debtor to pay due to the debtor’sfinancial position. To reiterate, in order for a debt to bebad, the creditor must have sufficient information toenable a reasonably prudent business person to formthe view that there is no reasonable likelihood that thedebt will be paid.

Case T27 specifically considered the issue in respectof section 26 and debt factoring arrangements.

In Case T27 the taxpayer sought a bad debt deductionfor the difference between the amount invoiced andamount received from a debt factor, on the basis thatthe difference was a bad debt. The TRA determinedthat the debt was not a bad debt, but in actual fact a“good debt”. At page 8,192 the TRA stated:

A pivotal submission for the objector is that the discounts itallows the franchiser are bad debts which it may write off assuch and, hence, claim an input tax refund for GST purposesunder s 26(1) and s 20(3) of the Act. It is also pivotal to theobjector’s case that it has been factoring the hireage debts toits franchiser and that such process has constituted thewriting off of bad debts regarding the discount.

It seems to me that the provision of such a discount couldnot possibly constitute the incurring of a bad debt by theobjector. The essence of the arrangement between theobjector and the franchiser is that the hireage debt from thecustomer is a good debt, but that the objector prefers earlypayment of that debt and to avoid the administration processand normal risks of its recovery.

Moreover, at page 8,194 the TRA reaffirmed its viewthat such a debt could not be bad. The TRA stated:

There were submissions by counsel as to whether a bad debtexists for the purposes of s 26(1) including references to caselaw. Counsel particularly referred to my decision in Case N69(1991) 13 NZTC 3,541 where I considered the wording of s106(1)(b)(iii) of the Income Tax Act 1976 relating to thedeductibility of bad debts for income tax purposes. There, Iemphasised that a bad debt deduction was only available if thedebt was in fact “bad” and had been actually written off. Thepresent case is not a situation where there could be any

sensible assessment that the debts (assigned by the objector tothe franchiser) were, in any particular sense, bad or uncollect-able or unlikely to be paid. Accordingly, the provisions of s26(1)(c) of the Act are irrelevant to the issues before me. Iappreciate that, in terms of my views in Case N69, theobjector in the present case had made appropriate journalentries to write off the discounts as bad debts and had, nodoubt, done so in good faith, but that was a quite erroneousprocedure because, on any objective test, the debts were notbad.

Consistent with Budget Rent A Car and Case N69, theTRA appears to take the view that, where a creditorchooses to sell a perfectly collectable debt for belowits face value, no bad debt can arise. In no way cansuch a debt be regarded as bad or uncollectable orunlikely to be paid. Accordingly, any differencebetween the face value of the debt and amountactually received is due to factors other than the debtbeing a bad debt.

In summary, when assessing whether a bad debtexists, the cases indicate that a debt is bad when areasonably prudent business person would haveconcluded, based on the information available aboutthe debtor’s ability to repay the debt, that there is noreasonable likelihood that the debt will be paid. In theabsence of such a circumstance, if a registered personchooses to sell a debt for below its face value, no baddebt exists and no deduction is available under section20(3)(a)(iii).

Finally in this regard, in response to submissionsreceived on the first draft of the Ruling, it is useful toclarify that, in the Commissioner’s view, when aportion of debt is written-off on the basis of experienceof the collectability of similar types of debts, withoutinvestigating the likelihood of each debtor repayingthe debt, the requirements of section 26(1) have notbeen met. This is because case law establishes that, towrite-off a debt as bad under section 26(1), reasonablesteps must be taken to determine whether thatparticular debt owed by that particular debtor is likelyto be paid (Case P53 (1992) 14 NZTC 4370 and BudgetRent A Car v C of IR (1995) 17 NZTC 12263).

Writing-off a portion of debt on this basis involvesseeking a deduction for the provision for doubtfuldebts. As noted in BR Pub 00/03, the GST Act doesnot allow a deduction for the provision for doubtfuldebts.

Must a debt be in existence at the timeit is written off?Case law also indicates that before an amount can bewritten off as a bad debt, a bad debt must be inexistence at the time the amount is written off.


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In Budget Rent A Car the taxpayer company carried onbusiness in New Zealand as a motor vehicle rentalcompany. A sum of money ($2,767,695.48) was owedto it by an Australian company (BRACS). In May1989, BRACS developed financial problems and waspurchased by a consortium. In July 1990, Budget RentA Car (“Budget”) entered a deed of covenant withBRACS and covenanted that it would not bring anyproceedings against or prove in the liquidation ofBRACS for any claim Budget might have. The debt,however, remained outstanding.

In November 1990, Budget’s directors wrote off thedebt owing by BRACS and claimed a bad debtdeduction for the amount. The Commissioner arguedthat there was no bad debt and no bad debt deductionwas allowed. In particular, the Commissioner arguedthat for there to be a bad debt, there must at the time ofthe write-off be a debt in existence. As any debt dueby BRACS to Budget had been remitted orextinguished by the deed of covenant, no debtthereafter existed and none could be written off.Accepting the Commissioner’s argument in thisrespect Tompkins J stated at page 12,267:

I accept Mr Wood’s submission that for a taxpayer to beentitled to deduct from its assessable income the amount of abad debt written off, there must at the time of the write offbe a debt in existence. If a debt has been effectively released,the effect is to extinguish it or put an end to its existence.Thereafter there cannot be a write off of that debt for taxpurposes. This accords with the view expressed by Owen J inPoint v FC of T 70 ACT 4021; (1970) 1 ATR 577 at ATC p4023; ATR p 580. …

The issue therefore becomes whether the parties, when theyentered into the deed of covenant and in particular cl 2.1,intended to extinguish the debt. In accordance with thenormal canons of contractual interpretation, this is to bedetermined having regard to the words the parties used,viewed in the light of the surrounding circumstances.

However, on the facts Tompkins J found that a debtdid exist, and allowed Budget a bad debt deduction.The following Australian case illustrates a similarpoint.

In GE Crane Sales Pty Ltd v FC of T 71 ATC 4268 theHigh Court of Australia considered a claim by thetaxpayer to write off certain bad debts. The Court heldthat it could not do so because the taxpayer was not acreditor in respect of these debts. Whereas somepayment had been accepted in full satisfaction of adebt owing, the taxpayer’s rights to recover thebalance had been extinguished and it could not claimto write off as a bad debt the balance of the amount.Menzies J at page 4,272 expressed the opinion that ataxpayer cannot write off as a bad debt an amount thatis no longer a debt. Moreover, at page 4,272 he stated:

I have therefore come to the conclusion, both as to thefactored debts which were extinguished and those in which theappellant gave up any beneficial interest which it had to thereceiver and manager under the scheme of arrangement, thatsec. 63 does not apply because at the time the writing offoccurred there did not exist, in any sense, debts owing to theappellant. To write off as bad debts amounts which are owingbut which cannot be recovered is a sensible commercialexercise and one to which taxation significance is naturallyenough given, but to write off a non-existent debt as a baddebt is hardly sensible commercially and, in my opinion, todo so has no significance for the purposes of sec. 63 …

Section 26 requires that the registered person “Haswritten off as a bad debt the whole or part of theconsideration not paid to that person”. Both BudgetRent A Car and G E Crane Sales Pty Ltd indicate thatbefore a debt can be written off a debt must be inexistence at the time the debt is written off. Althoughthese cases were determined in an income tax context,the wording of section 26 makes them no lessapplicable for GST purposes. Accordingly, for section26 to apply, the registered person must be able toshow that at the time of writing off the debt, a debtwas then in existence.

In terms of non-recourse debt factoring, at the time thedebt is sold, the debt between the registered personand debtor is extinguished and replaced with aseparate and distinct debt between the Factor anddebtor. In such situations no debt exists at the timethe amount is written off, which will be after sale of thedebt. Therefore, after the sale of the debt to theFactor, no further debt exists and according to bothBudget Rent A Car Ltd and G E Crane Sales Pty Ltdno amount can be written off as a bad debt.

In terms of recourse debt factoring arrangements(where the Factor has some form of claim back to theAssignor if he or she is unable to collect some of thedebts purchased) when a debt is sold by the Assignoron a recourse basis, the title to the debt passes to theFactor unless the Factor exercises a recourse option orright by which the debt can be transferred back to theAssignor. Therefore, after the sale of the debt to theFactor (until the recourse is exercised and the debt istransferred back) no further debt exists, and accordingto both Budget Rent A Car Ltd and G E Crane SalesPty Ltd no amount can be written off as a bad debt.

However, if the Factor exercises an option or right totransfer some portion of the debt back to the Assignorafter the sale then, once this has occurred, a debtexists that is owed to the Assignor that may be able tobe written off by the Assignor. Whether it can bewritten off depends on the application of the ordinarytests for determining whether a debt is bad as notedabove, under the heading “Whether the creditor canrecover the amount owing”.


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Writing off the debt before saleto the FactorSeveral submissions received on the first draft of theRuling noted that the issue of whether the discount tothe Factor might be written off as a bad debt undersection 26(1) would not arise if this amount werewritten off prior to the sale of the debt to the Factor.

The Commissioner agrees that this is the case. If aportion of a debt is written off before it is sold to theFactor, then whether the debt is written off as badaccording to the requirements in section 26(1) dependson the application of the tests outlined in PublicRuling BR Pub 00/03 entitled “Bad debts – writing offdebts as bad for GST and income tax purposes”, seeTax Information Bulletin Vol 12, No 5 (May 2000) atpage 5.


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PRODUCT RULING - BR PRD 00/06

This is a product ruling made under section 91F of theTax Administration Act 1994.

Name of the Person whoapplied for the RulingThis Ruling has been applied for by The Royal NewZealand College of General Practitioners (“theCollege”).

Taxation LawsAll legislative references are to the Income Tax Act 1994unless otherwise stated.

This Ruling applies in respect of sections CD 5 andCB 9(d) of the Act.

The Arrangement to which thisRuling appliesThe Arrangement is the monthly payments made bythe College to individual doctors (“Registrars”), for theRegistrars’ participation in an annual 40 weekIntensive Clinical Training Course (“the Course”), onterms and conditions that are materially the same asthose contained in the following three documents:

• Terms and Conditions of Registrars 1998: theterms and conditions to be agreed between theCollege and all Registrars enrolled in theIntensive Clinical Training Course of theGeneral Practice Vocational TrainingProgramme.

• Letter of Appointment of Registrar: The lettersupplied to the Registrar, by the College, as anagreement of the respective obligations of eachparty.

• Intensive Clinical Training Year Handbook 1998:The detailed handbook of terms, conditions,obligations and syllabus of the IntensiveClinical Training Course.

Further details of the Arrangement are set out in theparagraphs below.

1. The College was formed in 1974, and obtained aRoyal Charter in 1979. The mission of theCollege is to improve the health of all NewZealanders through the provision of high-quality general practice care.

2. The Constitutional Objectives of the Collegeare:

(a) To promote in all ways the higheststandards in general practice in NewZealand;

(b) To take a caring interest in the welfare ofits members and their families;

(c) To sustain and improve the professionalcompetence of members of the medicalprofession who are engaged in generalpractice in New Zealand;

(d) To inform the general public in NewZealand in relation to general practice;

(e) To encourage and assist in the provisionof a high standard of teaching andtraining for all undergraduate medicalstudents in the field of general practicein New Zealand.

(f) To encourage, strengthen, and engagein vocational training for generalpractice;

(g) To encourage and provide for thetraining of future teachers of generalpractice;

(h) To conduct, direct, encourage, supportor provide for continuing education ofgeneral practitioners;

(i) To conduct, direct, encourage, supportor provide for research in mattersrelating to general practice;

(j) To publish and encourage publication ofjournals, reports and treatises on mattersrelating to general practice and alliedsubjects;

(k) To study environmental damage andadvise on its effect on human health.

3. The College runs a General Practice VocationalTraining Programme (“GPVTP”) created fromthe objectives of the College and based on theCollege’s commitment to maintaining andsupporting standards of excellence amonggeneral practitioners. It is viewed as asignificant part of a comprehensive cycle ofvocational and professional education providedby the College and results in a Member of theRoyal New Zealand College of GeneralPractitioners (“MRNZCGP”) qualification.


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4. The Course is a 40 week practice-based trainingcourse established by the College as one partof its GPVTP. This Course is placed at ‘yearnine’ of a doctor’s standard educational path togaining the MRNZCGP qualification. TheGPVTP is regarded as encompassing years’seven to eleven of this ‘path’.

5. It is stated by the College (page 8 of theIntensive Clinical Training Year Handbook1998) the general aims of the Course are to:

• Improve the health of New Zealandersthrough the provision of a GPVTP whichachieves a level of competence sufficient tomaintain independent general practice;

• Promote high standards of general practicein New Zealand by ensuring those enteringgeneral practice are vocationally trained;

• Ensure registrars understand the principlesof general practice;

• Develop and foster a group of generalpractice teachers and teaching practices;and

• Foster an understanding of general practicewithin the medical profession and primarycare purchasers.

6. The Course involves various aspects oftraining that a Registrar is to complete.Essentially, a Registrar is assigned to a‘teaching practice’. Each teaching practice is ageneral practice medical centre for which theCollege has contracted with a generalpractitioner to be the Registrar’s teacher. Thegeneral practitioner teacher holds vocationalregistration and is paid by the College underthe separate contract.

7. The standard Course week for a Registrar underthe Course is broken up as follows:

• 8 half days per week attendance at theteaching practice to which they areassigned, consisting of:

• Patient contact. The conditions inrespect of this are that a Registrar is toparticipate in between 5 and 13 patientconsultations per half day. In the earlyweeks of the attachment, to relievepossible pressure on a Registrar, eachconsultation is to be for a generousperiod of 20-30 minutes.

• The Registrar having at least three hoursof direct contact time with the teacherper week, to include discussion,observation, review and feedback. It isessential that there be a minimum of aone hour and 30 minute uninterruptedblock between the teacher and theRegistrar per week.

• 2 half days attending seminars andworkshops that are provided and organisedby the College.

• Registrars are required to ‘satisfactorily’attend and participate in these seminarsand workshops.

• Registrars are responsible fororganising/presenting part of theprogramme within these seminars andworkshops.

8. A Registrar does not receive any payment fromthe teacher, but receives monthly paymentsfrom the College allocated from the funding theCollege receives from the Clinical TrainingAgency (“CTA”). The 1998 level of thepayments is as follows, being paid monthlyduring the period of the Course:

For the Forty Week Annualised (before tax)Course

1. $27,551.53 $35,817

2. $29,027.69 $37,736

9. The level of payment is dependent on the levelof prior medical experience of a Registrar.However these amounts are set at a level toprovide for the Registrar’s maintenance of theirstandard of living and not at the level for adoctor with similar experience in appropriateemployment.

10. A doctor who wishes to attend the Course as aRegistrar applies to the College at theappropriate time. From the total number ofapplicants, the College undertakes a selectionprocess to accept only the number of Registrarsfor which it has funding for.

11. The criteria by which Registrars are selected aremerit-based; the College taking the perspectiveof selecting Registrars who will benefit thecommunity in the long term. These criteriainclude:


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• The intention to enter general practice;

• Experience in various areas of medicine;

• A demonstrated commitment to generalpractice addressing priority health areas;

• A demonstrated commitment to generalpractice addressing rural health issues;

• A demonstrated commitment to generalpractice addressing Maori health issues;and

• A demonstrated commitment to teachingmedical students and colleagues.

12. The College initiates an agreement with eachindividual doctor that is to be agreed before thedoctor becomes a Registrar in the Course.

13. The letter of appointment that the Collegeoffers to the Registrar refers to the “Terms andConditions of Employment” and also theobligations contained in the “RegistrarHandbook”, which are to form part of theiragreement and be met by the Registrar.

14. The obligations contained in this Handbookinclude (among others):

• That the Registrar satisfactorily attend, andparticipate in, 80% of the seminars andworkshops,

• That the Registrar complete the‘attachment’ to teaching practices, and theassessments thereon;

• That the Registrar be involved in patientcontact, by having 5 to 13 consultationswith patients per half day.

• That the Registrar has review sessions withthe attachment teacher each day.

15. In exchange for agreeing to undertake theabove and undertaking it, the Registrars receivefrom the College the monthly payments whichare intended to maintain the Registrars whilstattending the Course.

16. The College Council is responsible for settingthe educational philosophy and missionstatement for its general practice educationprogramme.

17. With regards to the Course content, the Collegehas developed a curriculum for general practicetraining in consultation with College Membersand Fellows and with the CTA to ensure thatGovernment health priority areas are reflected inthe educational programmes.

18. The College determines, in consultation with itsRegistrars, the methods of delivery for itsprogramme for Stage I. The content ofseminars and workshops is based on thesyllabus for the Course and the specificlearning needs of Registrars. The Collegedetermines the structure of the programme also.Materials for the programme are provided bythe College and are purchased from the fundingprovided by the CTA. Seminars and workshopsare held on premises hired by the College forthat purpose.

19. The College is responsible for setting thePrimex examination (sat at the end of theCourse) and, in doing so, sets the standards forentry into Stage II and ultimately for vocationalregistration. The College also determines thestructure and timing of the teaching programme.Furthermore the College determines the outputsof Registrars in terms of assignments, researchprojects, presentations and other learningactivities.

20. The College selects teachers to the programmewho meet a number of specific criteria. Theseinclude holding general registration with theMedical Council, being a Fellow of the College,and being assessed by the Regional Director asbeing competent and able to provide excellenteducation to a trainee. These teachers areemployed by the College to provide teachingwithin the calendar year of the programme. Allteachers must undertake ongoing professionaldevelopment activities whilst they remain ateacher.

21. Regional directors (employed by the College)are responsible for maintaining contact withteachers during the programme and resolvingany difficulties that may arise. They do soprimarily through teacher meetings and practicevisits. The regional directors are kept informedby teachers on the progress of Registrars.

22. The College devotes the majority of itsresources (staff, funding and other assets) tothe administration and running of the GPVTPand the continuing education of doctors ingeneral practice. Over 50% of the College’stotal income and expenditure for the year endedMarch 1998 were directly attributable to theGPVTP alone.


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Condition stipulated by theCommissionerThis Ruling is made subject to the following condition:

• The monthly payments made to the Registrarsunder the Arrangement are not grants madeunder regulations made under section 193 ofthe Education Act 1964, section 303 of theEducation Act 1989, or any enactment insubstitution for those sections.

How the Taxation Laws apply tothe ArrangementSubject in all respects to the condition stated above,the Taxation Laws apply to the Arrangement asfollows:

• The monthly payments made to the Registrarsunder the Arrangement are exempt incomeunder section CB 9(d).

The period or income year forwhich this Ruling appliesThis Ruling will apply for the period 1 January 1998 to31 December 2003.

This Ruling is signed by me on the 29th day of May2000.

John Mora

Assistant General Manager (Adjudication & Rulings)

This Product Ruling has considered the income taxstatus of payments made under the IntensiveClinical Training Programme only. Registrars whoare, or have been, receiving family assistance areadvised that any payments received under theProgramme may affect the level of family assistanceentitlement. Registrars are advised to contact theirtax agents if they require further advice on thisissue.

Registrars should also note that this ProductRuling is applicable from 1 January 1998 and areadvised to contact their agents to determine theimpact on their 1998 and/or 1999 tax returns.


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QUESTIONS WE’VE BEEN ASKEDThis section of the TIB sets out the answers to some day-to-day questions that people have asked.We have published these as they may be of general interest to readers.

These items are based on letters we’ve received. A general similarity to items in this package will notnecessarily lead to the same tax result. Each case will depend on its own facts.

WEBSITE EXPENDITURE - DEDUCTIBILITY

Section BD 2, Income Tax Act 1994 – Allowable deductions

A taxpayer has asked how he should treat expenditureincurred in creating a website to be used by him inderiving gross income. (The same considerationscould also apply if the taxpayer had contractedanother person to create the website for him.)

A website is a collection of web pages or web files.“Web” is an abbreviation for the “World Wide Web”,the graphical part of the Internet. A web page iscreated using different programming languages (suchas hypertext markup programming language(“HTML”)). The use of programming code such asHTML enables web pages to have a number offeatures, such as video files, sound files, and links toother sites. A web browser interprets the code forgraphical interface with a user’s computer. A webpage is transferred to a user’s computer via thehypertext transfer protocol (“HTTP”). A websiteresides on an HTTP server.

A website’s development has a number of steps (thatcan be undertaken in any order), including acquiring adomain name—the site’s Internet address. The siteneeds to be designed and programmed. A websiteowner may wish to register the site with differentInternet search engines, and to embed search stringsin the site. The owner will also need to rent space on aweb server.

The domain name of the website is generally acquiredfor a modest sum (less than $200). However, in somecases acquiring the domain name may requiresubstantial expenditure. Expenditure incurred inacquiring a domain name is capital expenditure andnon-deductible. In terms of the applicable capital/revenue tests established by the courts, suchexpenditure is of a one-off nature, gives rise to anenduring benefit, gives rise to an identifiable asset,and is part of the business structure of a taxpayer. Adomain name is not “depreciable intangible property”as defined in section OB 1, and listed in Schedule 17,of the Act. As such, the expenditure incurred inacquiring the domain name is also not depreciable.

The HTML or other programming that makes up thewebsite is an asset, being a computer softwareprogram. The costs incurred in creating the websiteare appropriately categorised as capital expenditure.In terms of the applicable capital/revenue testsestablished by the courts, such expenditure:

• is of a one-off nature

• gives rise to an enduring benefit

• is part of the business structure of a taxpayer.

As a capital asset, the costs of creating the websitemust be capitalised and may be depreciated. To bedepreciable, the software must be used in derivinggross income. Consistent with other computersoftware, it may be depreciated at a rate of 40%diminishing value or 30% straight line.

This approach (of capitalising expenditure anddepreciating it) is consistent with the views expressedby a number of commentators. In an accountingcontext the view that capitalisation and amortisation isappropriate has been expressed by Dr RachelBaskerville in “Web Sites – Lame Ducks or GoldenGeese” Chartered Accountants Journal (March 2000,page 62) and by Craig Fisher in “Accounting for Web-sites” Accounting, Corporate and Tax Alert (Issue 93,5 June 2000, paragraph 200). The approach ofcapitalising and depreciating is also consistent withthe draft Australian Tax Office ruling TR2000/D6.

Ongoing costs of updating or adding to theinformation on a website are of a revenue nature, andare deductible when incurred if they meet the generaltest of deductibility in section BD 2(1). It is a matter ofdegree as to whether expenditure is updating andmaintaining a website, and hence revenue, or areconstruction or functional improvement to a website,which would be capital. It is difficult to give generalguidance on the distinction, as was noted (in adifferent context) by the Privy Council in AucklandGas Co Ltd v CIR (unreported, PC Appeal 32 of 1999,judgment 14 June 2000).


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However, some examples can be given as to thedistinction between the two categories in the contextof websites.

Maintenance of a website would include the following:

• updating the content of a web page

• adding content to a web page

• correcting minor errors or bugs in a website,and

• minor style or format changes relating tomatters such as font types, font sizes, coloursand so on.

An upgrade of a website would include the following:

• adding new features to a website, such asadding a sales capability with credit cardprocessing features

• adding extra pages to the website

• upgrading the version of the software used inthe website, and

• completely changing the layout and functionsof the website sufficient to be a reconstruction.

These examples are consistent with the distinctionbetween maintenance and upgrade in theCommissioner’s existing computer software policystatement (“Income Tax Treatment of ComputerSoftware” in Tax Information Bulletin Vol 4, No 10(May 1993)). The examples also reflect the fact that awebsite may start out as a very simple website withfew features, and yet may be upgraded over time to bea complex e-commerce site with advanced featuressuch as the ability to purchase goods and servicesonline, with online credit card processing capability.Just as the general capital/revenue principles apply tothe original website (and the capital classification ofthat), any upgrade which adds new functions is alsosubject to those general principles and will also be oncapital account.

The cost of renting space on an HTTP server isdeductible, assuming the general test of deductibilityis met. The annual renewal fee for registration of adomain name is also deductible. Such costs are of arevenue nature, because they are ongoing in thenature of a servicing charge, and are analogous toexpenditure incurred in renting space in a building orin hiring goods.


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REAL ESTATE SALE AND PURCHASE – GSTAPPORTIONMENTS OF INCOME AND EXPENDITURE

Section 2(1), Goods and Services Tax Act 1985 – definition of“consideration”

We have been asked if the Goods and Services Tax (GST) treatment of local authority rates apportionments on thesale and purchase of real estate, outlined in Public Ruling BR Pub 99/8, also applies to other income orexpenditure that is similarly apportioned.

Public Ruling BR Pub 99/8 published in TIB Vol 11, No 11 (December 1999), with a minor correction in TIB Vol 12,No 2 (February 2000), sets out the GST treatment of local authority rates apportioned at the time of settlement onthe sale and purchase of real estate. The Commissioner’s view is that rates apportionments form part of theconsideration for the supply of real estate and, where the transaction is subject to GST, should be taken intoaccount in calculating the applicable GST.

If other expenditure (such as insurance) or income (such as commercial rental) is apportioned at settlement, theseapportionments should be treated in a manner consistent with Public Ruling BR Pub 99/8. Provided theapportionment is determined on a contractual basis between the vendor and purchaser at the time of settlement,the apportionment will form part of the “consideration” of the supply of the real estate. For the reasons set out inPublic Ruling BR Pub 99/8, the GST consequences will depend on whether the vendor and/or purchaser areGST-registered persons and whether the transaction forms part of a taxable activity.


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LEGAL DECISIONS – CASE NOTESThis section of the TIB sets out brief notes of recent tax decisions made by the Taxation ReviewAuthority, the High Court, the Court of Appeal and the Privy Council.

We’ve given full references to each case, including the citation details where it has already been reported.Details of the relevant Act and section will help you to quickly identify the legislation at issue. Short casesummaries and keywords deliver the bare essentials for busy readers. The notes also outline the principalfacts and grounds for the decision. Where possible, we have indicated if an appeal will be forthcoming.

These case reviews do not set out Inland Revenue policy, nor do they represent our attitude to thedecision. These are purely brief factual reviews of decisions for the general interest of our readers.

GST TREATMENT OF SUMS RECEIVED BY TAXPAYERFROM PARENT COMPANY UNDER WARRANTYAGREEMENT

Case: CIR v Suzuki New Zealand Limited

Decision date: 18 July 2000

Act: Goods and Services Tax Act 1985

SummaryMcGechan J held both TRA findings were correct. Inthe result, the assessments stand.

FactsSuzuki New Zealand (“SNZ”) purchases Suzuki motorvehicles from Suzuki Motor Corporation (“SMC”)which is the Japanese parent company. The terms ofthe sale and purchase agreement include a provisionunder which SMC warrants the goods to SNZ. Thewarranty is in respect of parts and labour for up to oneyear from the date the vehicle is sold to any particularcustomer. The beneficiary of the warranty is SNZ.

Once the Suzuki products arrive in NZ, they are sold toindependent dealers. The dealers then sell to thepublic. Each vehicle is sold with a warranty providedby SNZ. This warranty is separate from the warrantyagreement between SMC and SNZ. SNZ has anagreement with each dealer that if the dealer repairs avehicle covered by the warranty provided by SNZ thedealer will be paid by SNZ at standard rates for thework. The warranty provided by SNZ covers anyrepairs specified in the agreement which are necessarywithin a period of three years after the purchase of theSuzuki product. The work is generally done by thesame dealer who sold the vehicle to the customer.

SNZ contracts with the eventual purchaser of vehiclesto provide the retail warranty. The dealers areauthorised to offer the warranty to the purchasers.

When a customer has a problem with a vehicle, thecustomer normally returns it to a dealer, who assessesthe vehicle to determine whether it is covered by thewarranty. If they consider the repairs will cost morethan $250, authority from SNZ to begin work isneeded. The dealer repairs the vehicle free of chargeto the customer. The dealer seeks payment from SNZ,who pays according to their agreement. The dealeraccounts for output tax on the payment from SNZ andSNZ claims an input tax credit. SNZ may only then,after the repairs have been completed, approach SMCunder the warranty between SMC and SNZ. If SMC issatisfied it is liable, it pays SNZ under the terms of theagreement between them.

The dispute is focused on the GST treatment of sumsreceived by SNZ from SMC Japan. No issues arise inrespect of the warranty payments from SNZ to dealers.

Decision

Whether SNZ supplied repair servicesto SMC JapanOn the first issue, concerning whether SNZ made asupply of repair services to SMC, the taxpayer arguedthe payments were not for repair services and theparticular documentation should be interpreted as amere obligation by SMC to pay compensation fordefects.


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McGechan J held that on the facts, including thedocumentation and the established practice, the trueposition was that payments were not necessarily eitherpayments under the warranty, as the taxpayercontended, nor payments for repair services as the CIRcontended, but were a mixture of both. The Court saidthe supply of repair services was an integralcomponent of the situation which brought about theSMC payments, bringing the supply within thedefinition of consideration. There was a clear nexus.The payment if not “in respect of” was certainly in“response to” those repair services.

Whether repair services zero-ratedunder s 11(2(c)The second leg of the first issue concerned whetherthe repair services were zero-rated or standard-rated.Quite simply the Court had no doubt repair serviceswere carried out on cars in New Zealand, so the supplycould not be zero-rated.

Whether payments by SMC Japan toSNZ were consideration for repairs bySNZ to customersThe second issue concerned whether payments bySMC Japan were “consideration” for repairs by SNZ tothe customers. The CIR relied on this as an alternativeargument, which had already failed before the TRA.

McGechan J accepted SNZ did carry out repairs viadealer agents for customers, but noted that was not allSNZ did. It also carried out repairs for SMC under theSMC warranty arrangements. Although SMC wouldwant to see customers satisfied, the Court was unableto accept SMC was paying SNZ to supply repairs.

It paid SNZ because that was required under itswarranty agreement, not for the repair work itself. Itwas not “in respect of” or “in response to” or as “aninducement for” the repair work carried out for thecustomer. Thus the payments by SMC were not inconsideration of repair services by SNZ to customers.They were repairs carried out by SNZ for SMC itself.


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REGULAR FEATURES

DUE DATES REMINDER

These dates are taken from Inland Revenue’s Smart business tax due date calendar 2000–2001

September 2000

5 Employer monthly schedule: large employers($100,000 or more PAYE and SSCWTdeductions per annum)

• Employer monthly schedule (IR 348) due

Employer deductions: large employers($100,000 or more PAYE and SSCWTdeductions per annum)

• Employer deductions (IR 345) or (IR 346)form and payment due

20 Employer deductions: large employers($100,000 or more PAYE and SSCWTdeductions per annum)


Employer deductions and Employer monthlyschedule: small employers (less than $100,000PAYE and SSCWT deductions per annum)



29 GST return and payment due

October 2000

5 Employer monthly schedule: large employers($100,000 or more PAYE and SSCWTdeductions per annum)


Employer deductions: large employers($100,000 or more PAYE and SSCWTdeductions per annum)


20 Employer deductions: large employers($100,000 or more PAYE and SSCWTdeductions per annum)


Employer deductions and Employer monthlyschedule: small employers (less than $100,000PAYE and SSCWT deductions per annum)



FBT return and payment due

31 GST return and payment due


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