The New Zealand Law Society says it does not agree that a mortgagee making zero rated supplies of financial services under the business financial services rules is not entitled to deduct input tax for costs associated with a mortgagee sale.
The Law Society has released its comments to the Inland Revenue Department on its Exposure Draft EDO164 GST and the costs of sale associated with mortgagee sales.
While it agrees with IRD's analysis and conclusion that exempt financial services are supplied by a mortgagee, it does not agree with the IRD conclusion that a mortgagee making zero rated supplies of financial services under the "business to business financial services rules" (sections 11A(1)(q) or 11A(1)(r) of the Goods and Services Tax Act 1985 which apply as a consequence of an election being made under section 20F) cannot deduct input tax for mortgagee sale-associated costs.
The Law Society says IRD appears to have focused solely on the effect of section 5(2) of the Act, which deems the supply of the property to be a taxable supply made by the mortgagor, subject to limited exceptions.
"While the Law Society agrees that section 5(2) does not in itself provide a basis for a mortgagee to recover input tax on costs associated with a mortgagee sale, the Law Society disagrees with the Commissioner's statement that no input tax deduction is available on account of there being no scope to say that the same goods are contemporaneously supplied in the course or furtherance of a taxable activity carried on by the morgagee," it says.
The comments say the courts have clearly recognised that a single activity may give rise to more than one taxable supply for GST purposes, made to more than one person.
"Accordingly, the fact that the sale of the property is deemed to be a supply made by the mortgagor in the course of any taxable activity the mortgagor may have, is not in the Law Society's view determinative of whether that same sale can give rise to a taxable supply made by the mortgagee in the course of the mortgagee's taxable activity."
The Law Society recommends that IRD amend the Exposure Draft, to provide that input tax credits are available for costs associated with a mortgagee sale where a mortgagee makes zero rated supplies of financial services under the business to business financial services rules.