GST on director or board member fees – IRD rulings

Inland Revenue recently issued three GST rulings (BR Pub 23/01-03) and a further guideline PUB 00424 (issued in draft), a total 46 pages of discussions on how director or board member fees should be treated for GST. 

These rulings were intended to replace an old ruling issued in 2015, with a surprise addition that some directors may not be entitled to be registered for GST and they may need to de-register in a matter of weeks from 30 June 2023.  But why does it need to be this complicated, and more importantly what do you need to do to minimise nasty GST surprises?

Why so complicated?

The GST issues regarding director fees are essentially a boundary issue between what’s a “taxable activity” and what’s not.  

The concept of “taxable activity” is fundamental to the imposition of GST because the liability to register for GST purposes is determined by whether a person conducted a “taxable activity”. This term was intended to embrace a wider range of activities than those usually envisaged by the use of the term “business”.  This was done to ensure that organisations such as non-profit and government bodies would be included in the scope of tax.

But the engagement of a person as a director is specifically excluded from the scope of the definition of taxable activity.  In this way, the director fees are treated the same way as services provided by an employee which are also specifically excluded from the definition of taxable activity.   However, where the directors hold the office outside of their employment duties or they provide services through their own personal service company (PSC), the GST treatment could be murky.  A set of complex rules will apply to determine if the director’s services are within the scope of “taxable activity”.   

What is clear

Although the GST rules may be complex, the Inland Revenue rulings are clear in relation to the following situations:

• If you are engaged to provide directorship services under your own name, not through your PSC (if any), the director fees are generally not subject to GST. This is unless those services are connected with an associated activity for which you are registered.  For example, if you are GST registered for providing consultancy services, and the occupation of a director is connected with your broader activity of providing consultancy services, your director fees would be subject to GST.  If you don’t have any associated activity, then you are not entitled to be registered for GST solely for the directorship services.
• If you have a PSC and a formal contract is entered into between your PSC and the entity seeking your directorship services, then the director fees charged by your PSC should be subject to GST even if the PSC does not supply any other goods or services assuming the GST registration threshold is met. 
  
  

What is unclear and when to seek advice  

The GST treatment remains unclear if:

• You have a PSC, but there is no formal contract in place with the entity seeking director services , or
• The associated activity for which you are registered is yet to commerce on a regular basis, or the activity is winding down.

Where the contractual arrangement is not documented, Inland Revenue will need to make a determination based on the surrounding circumstances, including whether the director is providing the services as an employee of the PSC, and whether there is fiduciary duty on them to account for the director fees to the PSC.  The employment duties may not be so clearly defined or documented when the director is the sole shareholder employee of their PSC.

When you provide directorship services under your own name, you can only charge GST if the services are connected with an associated activity for which you are registered. To remain GST registered that associated activity must be carried on regularly and continuously, which is the test that could catch some directors unguarded.  For example, the activity may not be “continuous or regular” if you are a start-up or you are considering retirement and may be winding down the activity progressively over time. 

If you think the IR ruling could adversely impact you, there is still an opportunity to make submissions on the latest guideline (PUB 00424 – issued in draft). The deadline for submission is 6 July 2023.

Board member fees

The GST treatment of board member fees broadly follows the same GST principles as detailed above.  The main exception is where the appointment is made by the Governor-General or the Governor-General in Council.  Such an appointment is always personal in nature and will always be excluded from the scope of a taxable activity and not subject to GST.    

What happens if you got it wrong?

According to Inland Revenue’s operational position issued on 15 February 2023 (OP 23/01), if you are GST registered when you are not entitled to, then you are expected to de-register for GST from 30 June 2023.  Inland Revenue will not require you to retrospectively de-register.  On de-registration, you may need to return GST on the market value of any assets you still hold on which you claimed GST under the GST registration.  

While this 30 June deadline does not give you a lot of time to sort out your GST, there is no need to panic.  What is required is careful, considered and up to date tax advice from your tax advisers. 

About the authors:

Peter Scott is a tax partner who leads the Indirect Tax team at KPMG.  Peter has over 30 years advising clients on a wide range of tax matters including tax governance; best practice for GST processes and controls; and providing advice on complex GST matters.

Geng Zheng is a tax director based in the indirect tax team at KPMG.   Geng is a GST specialist and provides advice and compliance services on all GST related matters, including advising on business transactions or structures. She also assists with Inland Revenue disputes or investigations concerning GST matters, or unusual GST refund claims.