Dec 8, 2014

IRD offers hope on GST anomaly

Companies could recover GST incurred during capital raisings, with the Inland Revenue Department signalling it may look into the tax system anomaly that prevents them from doing so.

Businesses are now unable to claim back GST they get charged during fundraising activities including initial public offerings (IPOs) and debt security issues because the IRD considers financial services to be “exempt supplies” that are not subject to the tax. A company can only recover GST on costs if it makes supplies that are subject to GST.

But firms incur GST when raising capital through services such as investment, business and legal advice.

For example, a fast-food company that uses lawyers during the negotiation of a burger-bun supply contract – a taxable supply – can claim back GST incurred for those services.

But the same business cannot recoup the tax it gets hit with for legal services around a debt or equity issue.

Eugen Trombitas, a partner with accountancy firm PwC, said the Government could be retaining about $10 million in unclaimed GST revenue, each year, from firms conducting domestic capital raisings. GST on costs associated with an offshore capital raising can be recovered.

“GST is not intended to be a cost borne by businesses,” Trombitas said.

IPO costs generally run to several million dollars. Orion Health, the Auckland-based software developer that raised $125 million when it floated last month, flagged offer costs of $5.5 million in its prospectus.

An IRD spokeswoman said officials at the department were aware of the capital-raising issue, which may form part of a GST discussion document scheduled for publication in mid-2015.

“At this stage, no ministerial decisions have been made about this or any other issue planned for the discussion document,” she said.

Reviews of the consumer tax, introduced by the Lange Government in 1986, are understood to be very rare.

Trombitas said clarifying the law around GST recovery could be as simple as inserting a clause that excludes capital raisings from being an exempt supply.

“New Zealand could lead the way and recovery should be possible,” he said. “We welcome the fact that the Inland Revenue policy team is thinking about this area.”

BusinessNZ chief executive Phil O’Reilly said he would welcome a change to the GST regime that allowed firms to recover capital raising-related GST.

“If companies are paying GST as part of the cost of doing business then they should, as a general rule, be able to claim that GST back,” O’Reilly said.

There have been 11 New Zealand IPOs so far this year, with one more – retirement village operator Arvida Group – due before Christmas.

A rising sharemarket and investor appetite for new stocks has been encouraging many companies to raise money through going public on the stock exchange.