Parker David: Taxation (Annual Rates Returns Filing and Remedial Matters) Bill — In Committee 
Text is incorporated into the Bound Volume 
Parker David: Taxation (Annual Rates Returns Filing and Remedial Matters) Bill — In Committee 
[Sitting date: 18 September 2012. Volume:684;Page:5338. Text is incorporated into the Bound Volume.] 
Hon DAVID PARKER (Labour) 
: 
 I want to refer to clause 137 of the Taxation (Annual Rates Returns Filing and Remedial Matters) Bill which changes the way in which the Inland Revenue Department gathers more tax in respect of late payments. Currently when someone does not pay an account on time and the person to whom the money is owed adds a late-payment charge that charge does not incur GST because it is in the nature of an interest payment. It is effectively a late-payment fee which is a little bit like interest. So the predominant view within the accounting community has been that it is not a taxable good or service; it is a financial service that is zero-rated for GST purposes. Clause 137 changes that. It says that for the first time the Inland Revenue Department is going to be pinging the late-payment fee and saying “Oh that’s a GST-able activity.” This is going to be causing all sorts of complexity for people in business. All of a sudden those— 
Paul Goldsmith 
: Not as much as GST off the fruit and vegetables. 
Hon DAVID PARKER 
: Not as much as GST off fresh fruit and vegetables? Well actually I think you might be wrong there because I think the incidence and the irregularity of this will be far more pervasive than GST off fresh fruit and vegetables which would have affected supermarkets in the main. But in any event let us return to the point here. If that was wrong two wrongs do not make a right. Mr Goldsmith saying that would introduce further complexity into the tax code is rubbish. We are increasing complexity and compliance costs here. 
You know if you have let us say a $100 account and there is a 2 percent fee for paying it late that is $2. Do you know that every one of those people who collects that extra $2 is now going to have to adjust their future tax returns and include GST on the $2 financial penalty that they are charging someone who pays their account late? Every person who pays the $2 late-payment fee in theory if they are GST-registered—and some of the people in the gallery will understand this point even if the National Party people on the other side do not—is going to be able to claim a GST input credit in respect of that $2 payment. What a nonsense! This is not a good or service; this is a charge being made for late payment which is tantamount to an interest payment. In fact the department often calls it that. 
What did we hear in submissions? We had the accounting fraternity coming along and saying that this was wrong in principle. The accountants came along and said “What’s this Government up to? This looks like a tax grab.” It is not grounded in the principle that underlies the tax Act—the Goods and Services Tax Act—which is that financial services are not GST-able. So the Government is ignoring that basic prohibition on charging GST on financial services and saying that in respect of the late-payment fee that you are effectively charged in lieu of interest for paying an account late—they call it a penalty fee but it is essentially an interest charge—it is now GST-able. Where is the principle Minister Guy? Stand up and defend that principle. Stand up and explain why it is wrong or why it is right. The accountants said it breaches the principle that underlies the Goods and Services Tax Act. Why is it that we are proceeding with clause 137 of this bill which not only breaches that principle but is going to increase the compliance costs of businesses? They will have to be accounting for that little penalty as a GST-able supply and if they are paying it they are going to have to have a separate transaction that claims back the GST in a way that they cannot do for interest. 
Dr David Clark 
: What about early-payment discounts? Do they apply to them? 
Hon DAVID PARKER 
: Well that is interesting. Early-payment discounts—I am not sure Mr Clark. I do not know the answer to that but I think we should get the Minister to address that question as well. 
New section 5(25) inserted by clause 137 which sits in Part 4 of the bill states: “For the purposes of this Act an amount charged”—I am reading out the relevant provisions—“for the late payment of an account is treated as being consideration for a supply of services in the course or furtherance of a taxable activity whether the amount is described as a fee penalty or other charge.” So it might be interest it might be called interest it might in fact be a late-payment charge that is tantamount to interest and both the supplier and the purchaser may agree that that is the reality of the transaction but this legislation says that no black is white. It says that it might be that in reality but it is going to deem it to be otherwise—deem it to be otherwise. There is no principle that lies behind this particular clause in the bill. I want the Minister in the chair to stand up and explain why it is that the accountants are wrong and the Government thinks it is right. Why is it that what is essentially an interest charge which should not attract GST is being deemed to be a supply of goods or services when in actual fact it is a late-payment penalty tantamount to interest? If it is a late-payment penalty tantamount to interest it should be either zero rated or one way or the other outside the GST consequences of this provision. 
If we look at some of the other provisions in respect of Part 4 there are some other areas that I would like clarification on in respect of the zero rating of goods. There is a new section 11(8D) inserted by clause 139B that states: “For the purposes of the zero-rating of land rules—(a) a supply that is an assignment or surrender of an interest in land is a supply chargeable with tax at 0%:” but it is not if “the supply is made periodically;”. We also had submissions about this about what this is going to do in terms of the effect on the cost of rent-to-buy options. This is going to drive up the cost of low-cost housing in examples where people are getting an option to buy under which if they exercise it they can credit towards some of their purchase price under their purchase contract some of the payments that they have made as a tenant in the meantime. 
We had property developers saying that this change in provision here is going to increase the cost of housing because irrespective of whether the option is exercised the developers are going to have to pay GST on the transaction before it is exercised. The purchasers may never exercise this option but because they have the potential to credit some of their rental payments towards the purchase price if the option is exercised the developers are being deemed to be making a supply before the option is exercised. These submitters came along and pointed out that this is going to considerably increase the cost of their subdivisions. From memory the developer who was giving us this advice was from the Minister in the chair’s electorate Otaki so he might be interested in this. They were saying that this was going to increase their effective cost despite the fact that the option might not be exercised. The effect of this is that because they have to return GST at the start they have the carrying cost of that GST payment that is returned to the Government they then have to reflect that cost on to the person who may exercise the option or may not under the rent-to-buy scheme that increases the effective cost to the developer and therefore that cost is passed on to the low-income purchaser which is therefore increasing the cost of housing in New Zealand. 
It is another unprincipled amendment as I understand it according to the submission that we had to the Finance and Expenditure Committee that I would like the Minister to explain. The more important one of them in terms of the number of people affected is this penalty payment now being deemed to be a GST-able supply rather than an interest penalty. I would like to hear from the Minister as to what justification there is for departing from the underlying philosophy of the original Goods and Services Tax Act which is that financial services are zero rated—do not attract GST.