In 2017 Inland Revenue released an Interpretation Statement, IS 17/02, which formalised the long-standing practice of allowing a farmer to claim a portion of their farmhouse expenditure on the basis it is the “headquarters” of the farm.
But then in 2020 Interpretation Statement IS 20/05 was released by Inland Revenue which overthrew the common practice of treating the farmhouse as not subject to GST. It concluded that, where a person has claimed a portion of house expenditure for income tax purposes, this demonstrates that the house has been used to make taxable supplies, and therefore a sale of that house would be subject to GST. Because the farmhouse is technically deemed to be a separate supply from the farmland meant that most farmhouses do not qualify for zero-rating, and hence GST becomes payable at 15%. This outcome has given rise to uncertainty and confusion.
The Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Bill (“the Bill”) first introduced on 30 August 2022 includes a welcome proposal to resolve the issue. The legislation is to be amended to enable registered persons to elect to treat the sale or disposal of goods (including land) as an exempt supply where the goods have a minor amount of use in making taxable supplies. The exemption is limited to tangible assets (e.g. land, dwellings, vehicles).
From a practical perspective, the amendment will also enable assets such as a high-value Air BnB, or a residential house with a home office or workshop to be excluded from the GST net.
To qualify as an exempt supply under the proposed rule, the asset would have to satisfy the following requirements:
- No previous GST deductions have been claimed on the asset by the person.
- The asset was not acquired or used for the principal purpose of making taxable supplies.
- The asset was not acquired as a zero-rated supply under the compulsory zero-rating of land rules.
These requirements are all quite reasonable in a farmhouse, home office and bach scenario. The proposal would generally apply retrospectively, from 1 April 2011, and the commentary to the Bill confirms that:
- If a registered person had previously taken a tax position consistent with the requirements of the proposed new section, this tax position would become correct once the Bill is enacted.
- In cases where an assessment has already been made for a taxable supply before the date of introduction of the Bill, that is, the registered person has returned output tax on goods they sold or disposed of before that date, the supply of those goods would remain a taxable supply.
Hence, there is no relief for taxpayers who have followed the conclusions in IS 20/05 and returned GST on their mainly private asset.