Chapter 20 – Goods and Services Tax
20.1 Overview
For most New Zealand businesses, dealing with GST is relatively straightforward. The key issues are:
Do I register for GST? Businesses that have had or are expecting a turnover to exceed the registration threshold ($60,000) in a twelve month period must register for GST (See 20.3.2).
Businesses whose turnover remains less than the registration threshold in every twelve month period, need not register but have the option to register. These businesses would only be expected to register for GST if they had purchased significant assets that would entitle them to a net refund from the IRD.
Most business receipts are subject to 15% GST. To calculate the GST component of a GST-inclusive amount, multiply the amount by 3 and then divide by 23.
Businesses can claim an input tax deduction for most purchases (main exceptions being zero-rated goods and services and exempt supplies, including remuneration paid to employees, interest, and certain financial services fees)
Timing of GST payment obligations and input obligations is also critical (see below)
Accordingly, the application of GST to the majority of New Zealand business transactions is straightforward. GST can however give rise to difficult issues, especially in the area of “non standard” transactions. This would include the sale and purchase of real estate, financial services based transactions, GST on fringe benefits provided and GST adjustments for entertainment tax.
20.1 Overview
20.2 Application
20.3 Practical Issues
20.3.1 Taxable Activity
20.3.2 GST Registration
20.3.3 GST Periods
20.3.4 GST Method
20.3.5 GST Returns
20.3.6 Input and Output Tax
20.3.7 Valid Tax Invoice
20.3.8 Payment Dates
20.3.9 Deregistration
20.3.10 Time of Supply
20.3.11 Businesses Registered On A Payments Basis
20.3.12 Business Registered on an Invoice Basis
20.3.13 Debt Collection Services
20.3.14 GST Claim on Second-hand Goods
20.3.15 Online Transactions and Imported Goods
20.3.16 Zero-rated Land Transactions
20.3.17 GST Adjustments for Change in Use of an Asset
20.4.1 Claiming an Expense for GST
20.4.2 GST Adjustments
20.4.3 Correcting your GST Returns
20.4.4 Builders Changing Use of Property
20.4.5 Sales of Private Assets
20.4.6 Sale and Purchase of a Business
20.4.7 Time of Supply - Non-Cash Payments
20.4.8 Prices Inclusive or Exclusive of GST?
20.4.9 Documentation
20.4.10 Starting a Taxable Activity
20.4.11 Sale of Commercial Building to an Existing Tenant
20.2 Application
A business is liable to register for GST if:
• Its turnover in the current and 11 preceding months exceeds the registration threshold; or
• Its turnover for the current and next 11 months is expected to exceed the threshold.
Before a business is required to register, it must be conducting a taxable activity.
A Body Corp. under the Unit Titles Act, is only required to register when the total value of its supplies to third parties (other than its members) exceeds the $60,000 threshold.
Example
If you simply sell the family home (assuming you do not have a history of similar transactions) the sale is not subject to GST. While the total value of turnover may exceed $60,000, the sale would not ordinarily be part of your taxable activity).
When a GST registered entity sells goods and services as part of its taxable activity it is required to charge GST. This GST is then paid over to the IRD. When a GST registered entity purchases goods or services as part of its taxable activity it is entitled to claim back the GST on its purchases. The GST is claimed back from the IRD.
A limited number of supplies of goods and services are not subject to GST. These are known as exempt supplies. They include:
Supplies of financial services (other than those which are zero-rated). For example, interest charges on debts, loans and sale of shares
Supplies of residential accommodation, and rental and lease charges for residential property
Supplies of fine metal (except for those which are zero rated)
Certain supplies are taxed at the rate of 0%, rather than 15%. These supplies are known as zero-rated supplies and principal types include:
Exported goods
Transactions involving the sale of land (See 20.3.16)
Businesses sold as a “going concern”
Services provided to non-residents and their associated parties, provided they are not in New Zealand and the services do not relate directly to moveable property situated in New Zealand.
Land transactions
Example
Dave Rainey paints a rental property owned by a Singaporean resident. Dave will charge GST because his services relate to land situated in New Zealand.
Note the zero rating provisions can be difficult to apply (especially in the area of exported services and zero-rating sale of taxable activity). Ensure you take professional advice to avoid subsequent penalty problems.
20.3 Practical Issues
20.3.1 Taxable Activity
Whether you are conducting a taxable activity is a pivotal question for GST, as it can determine whether you have to register for GST or whether you are making a taxable supply.
A taxable activity means:
any activity which is carried on continuously or regularly by any person (whether or not for a pecuniary profit) and
involves or intended to involve the supply of goods and services to any other person for an exchange of money or goods and
includes any such activity carried on in form of a business, trade, manufacture, profession, vocation, association, or club.
It does not, however, include working for salaries and wages, hobbies or private recreational pursuits, private sales of personal or domestic items, to the making of exempt supplies.
Example
Ken Romney had a dozen sheep grazing on his land to keep the grass down. Ken is offered a flock of sheep by a local farmer and decides to start sheep farming. The scale of operation means that Sam is now conducting a taxable activity.
Charitable trusts, clubs and associations are also liable to register for GST if they are conducting taxable activities. For example, if the turnover of your tennis club (membership fees etc…) exceeds the registration threshold in any 12-month period, then it will be required to register.
Non-profits may claim GST on expenses related to income that’s either liable or not liable for GST, but not from income that is GST exempt like residential rental property. GST is payable by non-profits on the disposal of assets for which they have claimed a GST expense.
In addition, certain “one-off” schemes can constitute a taxable activity.
Example
Sam Cash owns a 2.4 hectare block of land on which the family home is located. Over a period of years, the taxpayer subdivides the land into six lots and sells them off. The Courts have held that an activity of this scale constitutes a GST registerable taxable activity as it is considered continuous or regular and the turnover exceeds the registration threshold. As a result, the vendor would be liable to account to the IRD for GST.
Note, however: Transactions involving the sale of land are now subject to zero-rating provisions. (See 20.3.16).
In contrast, a simple one off private transaction is unlikely to comprise a taxable activity. This assumes that the taxpayer concerned has not established a regular pattern of similar transactions and that the level of work involved is minimal.
20.3.2 GST Registration
If you conduct a taxable activity and your turnover, based on your gross taxable supplies in any twelve-month period, exceeds or is expected to exceed the registration threshold of $60,000, you will be required to register for GST. If you conduct a taxable activity, but your total supplies are below the threshold, you can choose to voluntarily register for GST. However, if you charge GST for goods or services, you will also be required to register.
20.3.3 GST Periods
The standard frequency for filing GST returns is two-monthly. If you are a provisional taxpayer, then your GST taxable period must be aligned to your balance date. If your turnover has exceeded $24 million in a twelve month period or is likely to do so, then you must change to filing on a monthly basis.
If your annual supplies are below $1 million, you may apply to file GST 6-monthly. The Commissioner will generally consider the person’s tax filing and payment history, record keeping practices, the nature and volume of the taxable supplies and whether the person has been on a six-monthly GST period before.
20.3.4 GST Method
Three methods are used to account for GST - invoice basis, payments basis (if 12-month taxable supplies have not and remain unlikely to exceed $2 million) and the hybrid basis (if IRD approval is obtained). Many smaller businesses account for GST on a payments basis as this corresponds to their method of accounting for day-to-day transactions in their business cashbook.
If you are on the payments basis and make a single supply with a value over $225,000 (including GST), you must use the invoice basis for that sale unless the supply is for the sale and purchase of property and settlement is under oneyear. Thereareexceptionsfornon-profitorganisations.
The amendment was introduced to prevent the timing advantage, which resulted under the previous legislation. That is, a purchaser on an invoice basis could claim an immediate input tax credit, but a vendor on a payments basis could defer the payment of GST until payment was received.
20.3.5 GST Returns
GST returns record the total GST output tax payable and the GST input tax claimable in respect of all taxable supplies of goods and services and all purchases of goods and services that are used to make the supply. The GST return records this information for the GST return period.
20.3.6 Input and Output Tax
When a registered person buys goods or services to use in a taxable activity, the GST portion of the price is called input tax. This is the legal term. It is the amount claimable from the IRD and applies not only to transactions where GST has been charged but also to imported goods and second-hand goods (See 20.3.14) that are acquired for the taxable activity.
Output tax is the legal term for GST charged by a registered person on goods and services supplied in a taxable activity. It is the GST collected when goods or services are supplied and is payable to the IRD.
20.3.7 Valid Tax Invoice
A tax invoice is required to be held at the time the GST return is filed to support any input claims being made. The GST Act requires certain information to be set out in order to be a valid “tax invoice”. This includes:
the words “tax invoice” in a prominent place
the name (or trade names) and registration number of the supplier
the name and address of the recipient of the supply
the date the invoice was issued
a description of the goods or services supplied
the quantity or volume of the goods and services supplied
a confirmation that GST is included in the final price or an exclusive price, the GST component and the total amount payable for the supply
for zero-rated supplies, the consideration excluding the tax, and the amount of the tax as nil
For Supplies of Between $50 and $1,000
For supplies between $50 and $1,000 a simplified invoice is available. This simplified invoice must still show:
The words “tax invoice” in a prominent place
Name and registration number of the supplier
Date of issue
Description of goods or services provided
The total amount payable for the supply and a statement that GST is included
For Supplies of $50 or Less
A tax invoice is not required for claims of $50 or less. However, some documentation must be held to support the GST claim. The IRD recommend the date, description, cost and name of supplier be retained in all cases.
20.3.8 Payment Dates
GST payments must be made to the IRD by the same date that the GST return is due. In practice, you would file and pay GST online by due date, or attach a cheque to the posted GST return.
The GST return must be provided to the IRD by the 28th of the month following the end of your return period. For example, if you are registered on a one month basis, your return for the period that commences 1 May and ends 31 May is due on 28 June. There are two exceptions for the periods ending:
30 November - your due date remains 15 January; and
31 March - your due date is now 7 May.
If the 28th falls on a weekend or holiday, the return is due on the next business day. Due dates are printed at the top of your GST return.
GST and Provisional tax payments dates are aligned.
20.3.9 Deregistration
Don’t rush out to deregister from GST before considering the cost. It may come as a shock. GST must be repaid on assets removed from the taxable activity.
Assets previously used in a taxable activity by a GST registered entity are treated as though sold when the entity deregisters for GST.
For purposes of calculating GST, the current market value of assets is generally used. You will need a recent valuation for any real estate or other high-dollar items.
When the business is sold, GST is also payable unless it is sold as a going concern (See 20.4.6).
20.3.10 Time of Supply
The time of supply determines the taxable period in which GST on supply must be accounted for.
Understanding the “time of supply rule” is crucial as time of supply determines when GST on sales must be returned and when input credits for purchases and other expenses can be claimed. It is no surprise that the error most frequently identified by Inland Revenue Auditors relates to “time of supply” and GST. These errors account for a high proportion of tax shortfall penalties assessed. Read the comments below and also comments in 20.4.7.
20.3.11 Businesses Registered On A Payments Basis
For businesses registered on a payments basis, the time of supply rules provide that an output liability on sales occurs for the month that payment is received.
Example
Water Blasters Unlimited (WBU) is registered on a payments basis. In the period ended 30 Nov, WBU receive a 30% deposit ($345) for a water-blasting job of $1,000+GST booked for December. The remaining price is paid in December when the job is completed.
For the November period, WBU have an output liability in respect of the deposit of $45. For the period December, WBU has a GST output liability of $105 being GST on the balance received.
Likewise, for businesses registered on a payments basis, GST input tax deductions for purchases can be made to the extent that payment for the purchase has occurred within the relevant month.
20.3.12 Business Registered on an Invoice Basis
The rules relating to time of supply for businesses registered on an invoice basis are different. The general rule is that a supply will occur at the earlier of the issue of an invoice or the receipt of any payment in respect of that supply.
Example
Water Blasters Unlimited (WBU) is registered on an invoice basis. In the period ended 30 November a number of transactions occur including:
WBU receives a deposit of $345 being 30% of a $1,000+GST job to be started and completed in December. WBU will record a GST output liability on the total sale value in the November period. The GST liability is $150.
WBU water blast the driveway of a private home and a cheque for $300.00 is received on the day. A GST output liability is recorded in November for the amount of $39.13.
WBU purchase a new water-blasting machine from their trader supplier. The purchase is made in November but the tax invoice is received in December. Payment for the water blaster is made in January. WBU will claim a GST input tax deduction for this purchase in the period ended 31 December. (That is, time of supply occurs on the earlier of any payment being made or a tax invoice being received. The invoice is received in December.)
The general rule is modified for certain supplies, which includes supplies between associated persons.
Where the supply is between associated parties, e.g. trusts associated with a family company, the time of supply can often be when the goods are removed, made available to the recipient or at the time the services are performed. Examples of other supplies not subject to the general rule include fringe benefits, entertainment expenditure (See 20.1, 20.4.2), hire purchase agreement, etc.
Note that it is illegal to write out cheques and hold them in your top drawer in order to claim GST for purchases. If you are on cash basis such cheques are not deemed “paid” until posted.
20.3.13 Debt Collection Services
Debt collection agencies charging a collection fee must levy GST on services performed. This means that input tax can be claimed on debt collection fees paid to a debt collection agency.
20.3.14 GST Claim on Second-hand Goods
For the most part, second-hand goods are subject to the same rules as other goods for GST and tax invoices but there are some specific rules that apply.
A GST-registered person who purchases second-hand goods for a taxable activity can claim a GST credit but only once the goods have been paid for no matter what basis is used to account for GST. The input credit is available even if the seller is not registered or if the goods are private and not part of a taxable activity. In such cases there will be no GST charged or tax invoice issued. As a minimum, the purchaser must record:
the name and address of the supplier
the date of the purchase
a description of the goods
the quantity of the goods
the price paid.
If the purchaser subsequently exports the goods, the credit claimed at time of purchase must be added back (reversed) at the time of exporting.
If the sale is to an associated person who claims the input credit, a GST-registered seller must account for GST on the amount received even if the goods were not part of a taxable activity. If the associated purchaser is not registered and cannot claim a deduction, the registered seller must account for GST in the return on the greater of the market value, or the amount charged for the goods.
Where a GST registered person buys second-hand goods from an associated person (registered or not), the GST expense claim is the lesser of:
The GST component (if any) included in the original cost of the goods to the associated supplier; or
3/23 x the purchase price; or
3/23 x the open market value
Note: For GST purposes, land is treated as second-hand goods.
20.3.15 Online Transactions and Imported Goods
From 1 October 2016, online transactions have been brought into the GST net, thereby creating a level playing field in which both local and overseas suppliers are now liable for GST.
Dubbed the “Netflix tax” sellers are not only taxed on physical goods, but also e-books, music and video downloads, as well as streaming services like Netflix.
From 1 October 2019, offshore suppliers of low-value goods (up to $1,000) with at least $60,000 of NZ sales, will need to register and charge GST on those goods.
20.3.16 Zero-rated Land Transactions
Buyers and sellers must declare their GST status for each transaction involving the sale of land. A sale is zero rated where:
both the seller and purchaser are both GST-registered; and
the land will be used for making taxable supplies; and
it will not be used as a principal place of residence.
GST is charged at 0% on the whole transaction even if the sale of land forms only a part of it.
The seller can rely on a written statement from the buyer for GST treatment. Even without a written statement, the law provides that the transaction is zero-rated if the conditions are met. However, the IRD recommends that sellers treat the sale as standard rated if they do not get a written statement from the buyer.
In Holdaway v Ellwood (High Court 2019), land with no house was sold ‘inclusive of GST (if any)’. The seller declared that they were not GST registered, although they were. The purchaser also warranted they were not GST registered when the agreement was signed, but then registered and claimed a GST second hand goods credit. The purchaser was awarded compensation equivalent to the denied second hand goods credit that would have been granted had the vendor not been registered for GST.
20.3.17 GST Adjustments for Change in Use of an Asset
Assets acquired prior to 1 April 2011: GST was claimed in full if the principal purpose was for making taxable supplies and otherwise no GST was claimed at the time of acquisition.
Annual adjustments were then made for the taxable/non- taxable portion up to 31 March 2016, after which no more adjustments could be made for those assets.
Assets acquired since 1 April 2011: GST is claimed at the time of acquisition based on an estimate of the taxable / non-taxable portion. Thereafter, adjustments are made at the end of each period to reflect the actual usage. So, if the purpose when you acquire an asset is to use it 40% to make taxable supplies, you can claim GST on 40% of the cost of the asset at the time of acquisition and then make an adjustment at the end of each period based on actual usage.
Adjustments are required if the intended use differs from the actual use by 10% or more or if the dollar value of the adjustment is over $1,000.
You can choose if the first adjustment period is on your next balance date after acquisition, or the balance date after that.
Other than for land, the number of adjustment periods is limited based on the GST-exclusive cost as follows:
$5,000 - $10,000: Two adjustments
$10,001 - $500,000: Five adjustments
$500,001 or more: Ten adjustments
No further adjustments are required at the end of the adjustment periods if the asset is still being used.
The IRD has an online calculator on its website to help you work out your adjustments.
20.4 Practical Hints
20.4.1 Claiming an Expense for GST
To validly claim an input tax deduction (or refund) for a business expense:
The invoice must be a valid tax invoice
The invoice date must relate to the period for which the claim is made
You must actually have the invoice in your possession at the date the return is filed
Many taxpayers have been penalised (20% to 40% penalties) by claiming legitimate expenditure innocently for the period at a time when they did not actually have the invoice in their possession.
20.4.2 GST Adjustments
Many taxpayers forget to include GST adjustments. The most common forgotten adjustments are GST on FBT (refer to Chapter 19) and non-deductible entertainment expense.
Sole traders also need to make adjustments for split use between personal and business activities.
20.4.3 Correcting your GST Returns
If you have made an error in an earlier GST return of up to $1,000 GST, you can correct it by making an adjustment in the subsequent return following the discovery of the error. See also 22.2.2
You do not have to show the correction separately and may adjust the sales and purchase figures in the later return by the under or over payments from the previous return. Ensure that the adjustments are identifiable in your working papers. For errors above the thresholds, amended returns should be filed with Inland Revenue.
20.4.4 Builders Changing Use of Property
It is not uncommon for builders to build units or houses to on-sell but if they do not sell, they often rent out the property to assist cash flow until the property is sold. Where this occurs the GST input tax previously claimed is effectively clawed back by way of a GST output tax liability.
A High Court case (CIR v Morris (1997) 18 NZTC 13385) considered this point. The builder concerned had built the property for resale and accordingly claimed back all GST on purchase costs. During a tax investigation, the IRD asserted that the property was now being used for “residential rental”, a GST exempt activity. Accordingly, GST was payable in respect of the change of use. This could be very costly where high value assets are deemed to be sold as a result of change of use.
20.4.5 Sales of Private Assets
Why is the sale of a family home or family motor vehicle not subject to GST?
GST only applies to supplies of goods and services made in the course of a taxable activity. A one off transaction involving the sale of private or domestic assets is unlikely to constitute a taxable activity. You should not charge GST on these supplies.
However, in some cases where private or domestic assets are developed and sold, the activity may constitute a taxable activity. See example on subdivisions (20.3.1).
20.4.6 Sale and Purchase of a Business
Should the vendor of a business activity charge GST on the sale of that activity? Does a purchaser have to pay GST on the purchase of the business activity?
When a business activity is sold as a “going concern” GST need not be charged on the sale. The sale can be zero-rated. This GST concession relieves the vendor of the obligation to collect GST from the purchaser. This is of considerable benefit to the purchaser’s cash flow.
When can the sale of a business activity be zero-rated? A number of requirements must be satisfied at the time of supply. First, both parties must be registered for GST. Second, the business activity must be capable of operating as an ongoing business activity before, during and after the sale process. Third, the parties must agree in writing, preferably in the sale and purchase agreement, that the supply of the business is as a going concern. Finally, there must be common intention between the parties that the supply is capable of being carried on as a going concern.
In general terms, the mere transfer of individual capital assets cannot be zero-rated. A capital asset is generally not a going concern in itself. In contrast, the transfer of a functioning business activity comprising say, assets, customer contacts, continuing revenue and expenses goodwill and business records will generally represent the transfer of a business activity as a going concern.
20.4.6.1 GST Pitfalls
Tax cases have highlighted the need to “do it right” when selling commercial property or a business as a “going concern”. The first involved the sale of a central retail site partially occupied by several shops. The sale and purchase agreement was a standard form approved by the Auckland District Law Society. However, the tenancy clause on the front page was left blank. The vendors maintained that the transaction was a GST supply of a going concern; the purchaser claimed the supply was a taxable supply and was successful in obtaining an input credit.
The second case involved the sale of a restaurant property and a residential cottage. Again the standard form sale and purchase agreement had been completed. However, the price was specified as being “inclusive of GST” (if any) and the front page contained vague details of a tenancy, but it was not clear if it related to the restaurant or the cottage. The Judge decided that the transaction was not a sale of a going concern.
The GST on these sales can involve substantial money. The GST Act makes it clear that to qualify as a going concern:
the purchaser and the vendor must agree in writing that the transaction is a supply of a going concern; and
the purchaser and the vendor must have the same intention that the transaction is a supply of a going concern.
Intention alone is not enough to zero rate.
20.4.7 Time of Supply - Non-Cash Payments
The IRD have issued a public binding ruling regarding the time of supply when payments are made by cheque, credit card or irrevocable letter of credit. The ruling applies to the supply of goods and services where no invoice is issued before payment. Therefore, if you are on a payments basis, the time of supply occurs when:
Time of Supply
When the cheque is delivered or received
Date transaction takes place
Date letter is accepted
Payment
Cheque
Credit Card
Irrevocable Letter of credit
20.4.8 Prices Inclusive or Exclusive of GST?
Unless a contract, invoice or price sticker makes a statement to the contrary, all prices are deemed to be GST inclusive. For this reason, it is essential to consider the GST implications of every transaction.
Example
If you sell unwanted plant and equipment for $25,000 and forget to make reference to GST, you can only charge $25,000 on the sale. You will be liable to pay 3/23 of the sale price to the IRD as GST output tax and net only $21,739. (In some cases you may be able to argue application of the Contractual Remedies Act; seek specialist legal advice if relevant).
20.4.9 Documentation
The IRD frequently conduct GST investigations on businesses. It is essential that you maintain a complete and sequential record of all GST related documents. For example, all purchases should be evidenced by GST invoices or bank statements recording automatic payments. All sales of goods and services should be evidenced by copies of tax invoices sent to customers, till receipts and bank statements.
20.4.10 Starting a Taxable Activity
If you commence a taxable activity using assets already owned by you that were used previously for private or domestic purposes, it is likely that you will be able to claim a GST input deduction for these assets. The GST claimed back would be based on the lower of the actual sale price or the market value of those goods at the date they were applied to your business. You will require documentation supporting that valuation.
In some instances, these private goods subsequently applied to your taxable activity may have been purchased prior to the introduction of GST. In this case, an input tax deduction for these goods will not be available. If you intend to apply pre- GST assets to your business we would recommend you seek professional assistance.
20.4.11 Sale of Commercial Building to an Existing Tenant
If you are contemplating the sale of a building to an existing tenant, you should seek professional assistance. In certain situations, it may not be possible to zero rate the transaction as a going concern. This has important GST implications, and the sale and purchase contract should clearly state whether the sale price of the building is inclusive or exclusive of GST. As standard practice, vendors should include a “plus GST if any” clause.