Waikato Business News August/September 2020

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.