Waikato Business News August/September 2020

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WAIKATO BUSINESS NEWS August/September 2020 13 Rebuild chance to change course By RICHARD WALKER New Zealand will not return to normal and needs to build back better. That was the message from BNZ economist Paul Conway at a Waikato Chamber of Commerce lunch in August. Speaking the week before a fresh Covid-19 outbreak in Auckland, Conway said the world’s economy was changing and New Zealand’s economy was not immune. The pandemic and the associated lockdowns around the world were having a huge impact on economic behaviour and spending patterns, he told a forum at Wintec’s Atrium. “The world is rapidly changing, and the New Zealand economy will change with it, whether we like it or not, whether we’re ready for it or not.” But he also painted a picture of a national economy that had been performing poorly for decades. “There’s no going back to our old economy,” he said. “And you know what, we wouldn’t really want to, because it hasn’t really been a strong performer, especially in the space of productivity which is the basis of long-run growth. “Yes, the New Zealand economy produces lots of jobs. But because of that low productivity, many of those jobs don’t pay particularly well and there are even people with jobs who struggle to get by in this country.” Conway forecast a W-shaped pandemic economic response in New Zealand, after activity rebounded better than expected following the first lockdown. But a second downturn was inevitable, he warned, with “a whole heap of destruction” over the coming months and probably years. “This second downward prong of our W, it’s locked in, there’s no way around it.” He said it could be made easier through government support, assisted by low debt. “But we should do that in ways that don’t get in the road of this process of creative destruction, that don’t slow it down. “It’s about having a flexible and resilient economy that can absorb the shock, and adjust.” As for the final upward prong of the W, the rebuilding, he said that needed to involve dislocated economic resources finding their way into new, more productive and more lucrative opportunities. “How do we build a more productive economy that delivers for all New Zealanders? There’s obviously a policy agenda attached to that and I live in hope that our politicians will start talking about it.” Conway was part of a panel of four economists, including Westpac industry economist Paul Clark, ASB senior economist Mark Smith, and Infometrics senior economist Brad Olsen. They were joined by National leader Judith Collins during a visit to the region. Olsen ran a similar argument to Conway about building back differently, and added some Waikato figures. He said New Zealand spent $3 billion less through its first lockdown period, and spending in the Waikato from April to June was 82 percent of its normal. Within the region, he said Waipā district was doing well, while others, including Matamata-Piako with Hobbiton, were not seeing the same amount of spending. Like Conway, he said the global picture was deteriorating. Primary exports remained a key area, but products were unlikely to be bought at the same levels during the pandemic. “We need to look at our Brad Olsen (Infometrics senior economist), Don Good (Waikato Chamber of Commerce executive director) and Paul Clark (Westpac industry economist) at the event. infrastructure. What are we building? How do we get our productivity moving? How do we ensure that as we produce the fantastic goods in the Waikato - New Zealand’s breadbasket with about 16 percent of all food production coming from this area - how do we make sure we get it to the right place as quickly as possible and as cheaply as possible?” Conway said businesses had a role to play in lifting productivity by doing things better. Digital tools and technology were critical to that. “Digital and data are the infrastructure of knowledge. And knowledge is fast becoming the key driver of growth in the 21st century economy. So knowledge is the new oil.” The underlying reason for New Zealand’s low productivity was that its domestic markets were typically very small, and the vast majority of its firms were not connected into the global economy, he said. Digital technologies could expand markets and make it easier for small remote businesses to engage internationally. Rebuilding for a new economy also required innovation. “Now, innovation is not always about doing remarkable things that push out that knowledge frontier. It’s also often about learning how leading global firms in your industries operate, and leveraging that knowledge to catch up to the frontier.” Collaboration was important as many small firms lacked the resources to innovate. “You’ve got a world class university here in Hamilton - how effective are you at being across the knowledge that’s coming out of that institution and converting it into growth? “Is there potential for your businesses to work together to solve common problems and to create dynamic clusters of world’s leading firms?” Conway finished on a hopeful note. “It might not feel like it right now, but if we play this right, we could emerge from this crisis with an upgraded economy that sustains higher well being in New Zealand for generations to come.” GST on ‘private’ homes Over the past 18 months Inland Revenue (IRD) has issued a number of technical statements setting out its view on how income tax and GST applies to residential houses that are used to derive income, such as from use as an Airbnb. The most recent IRD statement raised a few eyebrows and in this article we explain why. TAXATION AND THE LAW > BY HAYDEN FARROW Hayden Farrow is a PwC Partner based in the Waikato office. Email: hayden.d.farrow@pwc.com To provide some context, at one end of the spectrum if one private individual sells their family home to another, GST is unlikely to apply. At the other end of the spectrum, if a GST registered business sells a hotel to another the transaction is likely to be subject to GST (although at 0 percent). However, as you encounter different scenarios and move along the spectrum you end up in a grey area where it can be unclear whether GST applies or not. GST applies to the sale and use of commercial dwellings - those in which the occupant does not have ’quiet enjoyment’, for example, hotels, motels, homestays, farmstays, hostels, and other short-stay accommodation providers. But, what about a private family bach that is also used to derive Airbnb income. Technically, accommodation in an Airbnb is caught for GST purposes. However, in most cases the income does not exceed the compulsory GST registration threshold of $60,000 per year, so the owners can choose not to register and stay outside the ‘GST net’. On 26 June, IRD released interpretation statement (IS) 20/05 which describes how GST applies to the sale of a dwelling that is included within a wider supply of land. A classic example is the family farm comprised of farmland and a farmhouse. For decades, the standard GST treatment applying to the sale of a farm has been to split it into two components: 1. The working farmland is treated as the sale of an asset that is subject to GST. 2. The farmhouse is treated as a separate supply that is exempt from GST, because it has been used as the farmer’s private ‘family home’ (or as the supply of an exempt residential rental property if it was used by a farm worker). The above approach is considered by IRD to be an ‘oversimplification’. Instead, IRD is of the view that GST should apply if the house has been used as part of the farming activity. IRD’s view lies in a long-standing tradition in which farmers could claim income tax deductions in relation to a portion of farmhouse expenditure. This was formalised in IS 17/02, where an automatic deduction for 20 percent of the expenditure related to the farmhouse is allowed as it effectively acts as the ’farm office’ from which the farming operation is managed. By claiming the deduction, IRD consider that the farmhouse has been used to make taxable supplies. Therefore, the sale of the farmhouse is also subject to GST. As the farmhouse is treated as a separate supply and is typically used as a residence by the purchaser it does not qualify for zero-rating and GST becomes payable at 15 percent. So to recap, IRD have asserted that GST will apply to the full value of the farmer’s home at 15 percent. Logic would suggest that even if this conclusion is correct, which we do not think it is, then GST should only apply to the portion of the house that has been used for the farming activity… but IRD’s view is that this is not how the rules currently work. To illustrate IRD’s view, consider the following scenario: • Rob is retiring after 30 years of dairy farming. • He is GST registered and has agreed to sell the family farm for $15m, including a substantial farmhouse valued at $1.5m. • When Rob purchased the farm the farmhouse was valued at $500k. In line with IRD’s guidance from IS 17/02, Rob claimed income tax deductions for 20 percent of the expenses relating to the farmhouse. As a result, IRD are of the view that the farmhouse has been used to make taxable supplies and Rob is required to pay GST on its sale. On Rob’s GST return he discloses the $1.5m sale and the applicable GST amount of $195,652 (3/23rds of $1.5m). Rob is able to claim an offsetting deduction tied to his 80 percent proportion of private use, but the amount is limited to the original cost of the house, i.e. $65,217 (3/23rd of $500k). A net GST liability of $130,435 arises, being GST on the full $1m increase in the value of the farmhouse. Not only does this approach differ markedly to current practice and could give rise to pricing disputes, but we also disagree with IRD’s view. We hope that in time, reason will prevail, but in the meantime we are left in a position of uncertainty. The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.
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Waikato Business News August/September 2020

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