The GST treatment of New Zealand land-related legal and other services provided to non-resident clients changed significantly from 1 April 2017.
The GST Act formerly provided that New Zealand land-related services supplied to non-residents would not be zero-rated only if they were supplied “directly in connection with” the relevant land.
The phrase “directly in connection with” was interpreted by the courts as requiring that the services have a direct, physical effect on the land. Building and construction services supplied to non-residents had a sufficiently direct connection to land to be standard-rated at 15% under the pre-1 April rule, but legal and other services involving no physical interaction with land did not.
Inland Revenue long considered this outcome ran counter to a key policy plank of a consumption tax such as GST, namely that almost by definition services relating to New Zealand land are “consumed” (and should be taxed) here. The 1 April change restores the “correct” policy position.
From 1 April, invoices issued by lawyers and other service providers to non-resident clients must have GST added at 15% to the extent that the relevant services are supplied directly in connection with, or “are intended to enable or assist a change in the physical condition, ownership or other legal status” of, a particular piece of land (including improvements) in New Zealand.
Focus of new test
The new, additional test is aimed at all services which are supplied with the intention of facilitating a change in the legal or physical nature of the land or improvement, but do not involve any actual physical interaction with the land.
Inland Revenue released a Special Report on the operation of the new rule on 31 March, 2017. From this, and on a plain reading of the new legislation, it is clear that the following legal services supplied to non-resident, offshore clients are standard-rated if invoiced on or after 1 April:
- Conveyancing and related services (vendor or purchaser);
- OIO application for a land acquisition, lease etc;
- Advice/documentation concerning a lease, easement, profit-à-prendre etc (either party);
- Due diligence services concerning a land acquisition, lease etc;
- Structuring and tax advice relating to a transaction concerning a specific piece of land or other interest in land;
- Advice/documentation concerning financing and security arrangements relating to a specific piece of land or other interest in land; and
- Litigation or advice on a contentious matter concerning the ownership or other legal status of land or an interest in land (although on the face of it this may be zero-rated if acting for the party resisting the change of ownership or other legal status).
One area not directly addressed by the Special Report is the treatment of OIO, due diligence or other services provided to a non-resident client intending to buy the shares in a company which owns the relevant New Zealand land. However, Inland Revenue has separately confirmed that such services should continue to be zero-rated. Such services are not "intended to enable or assist a change in the physical condition, ownership or other legal status" of land. Instead, they inform the process of the acquisition of the shares. That the shares may be acquired in order to secure, indirectly, the land, means the buyer owns the landowner, but the landowner had not changed.
Not only lawyers
As noted, the change does not only affect lawyers, but also other service providers and their overseas clients and customers. Engineering, accounting, surveying, architecture, planning, valuation, advertising and real estate services are obvious examples.
The only New Zealand land-related services that clearly continue to be zero-rated are services of a general nature unrelated to a particular piece of land, such as advice concerning the New Zealand regulatory environment or trends in the real estate market. As soon as a specific piece of land or interest in land is under consideration or at issue, related services will be subject to GST at 15%.
Finally, some practical points to keep in mind:
- In relation to ongoing engagements, terms of trade need to be checked to ensure there is no contractual bar to increasing post-1 April fees by the standard-rate of GST (in the absence of a specific contractual bar, a general provision of the GST Act dealing with changes to the rate of GST applying to particular supplies should permit the price to be altered);
- Affected non-resident clients or customers will be unable to recover the GST charged, so the change brings about a real, net cost increase for them; and
- Where a blend of land-related and other services are supplied in a particular billing period, there will need to be an apportionment, where part of the invoice is standard-rated at 15%, and part zero-rated.
Barney Cumberland is a partner at Simpson Grierson and a member of the NZLS Tax Committee. Luke Strom is a solicitor at Simpson Grierson.