2013 amendment to the GST Act means two invoices may be issued when a tax agent makes a taxable supply for and on behalf of a principal.

Sections 26 and 60(1B) of the Goods and Services Tax Act 1985

Background

The Goods and Services Tax Act 1985 (GST Act) currently only allows one tax invoice to be issued when a tax agent makes a taxable supply for, and on behalf of, a principal.

Some large accounting systems, however, automatically issue invoices when goods and services are supplied. The principal's accounting system might therefore issue a tax invoice when goods and services are provided to the agent, and the agent's accounting system might also issue a tax invoice when goods and services are provided to the recipient.

It is also not uncommon for an agent to issue a buyer-created tax invoice to a supplier, and also issue an invoice to a buyer in relation to that supply. When a recipient of goods or services creates a buyer-created tax invoice, that invoice is deemed to be provided by the supplier.

Both these examples illustrate a technical breach of the legislation.

Key features

When a principal and agent agree, under new subsection 60(1B), the supply is treated as being two separate supplies, and therefore two invoices may be issued.

Consequentially, a new subsection has been added to the bad debt rules. It prevents a principal who uses this new agency subsection from claiming a bad debt deduction if the agent has received payment for the supply.

Detailed analysis

When a principal and an agent agree that this new subsection applies to a supply of goods or services, the standard agency rule in section 60 (1) of the GST Act is modified. The general agency rule treats a supply made by an agent to be made by the principal. When this new subsection is used, however, the supply is treated as two separate supplies.

As a result of the amendment, both the principal and the agent can issue an invoice in respect of what would otherwise be treated as the same supply. This means that the principal will be able to issue a tax invoice to the agent, and the agent will be able to issue a tax invoice to the buyer. The principal will pay output tax on the "supply" to the agent. The agent will pay output tax on the "supply" to the buyer and claim input tax on the basis of the supplier's invoice to them.

The agreement between the principal and agent must be made in writing. It may relate to either a particular supply, or a type of supply.

A new subsection has also been added to section 26 of the GST Act. Section 26 sets out the conditions under which deductions may be made in relation to amounts which are written off as bad debts. The new subsection limits the ability of a principal who uses this new agency rule to claim bad debt deductions. A principal may not claim a bad debt deduction if the agent has been paid for the supply of the goods or services to the recipient.

There are revenue risks inherent in allowing supplies made through agents to be treated as two separate supplies, and two allowing invoices to be issued. The limitation on bad debt deductions is intended to be a protection mechanism against potential phoenix fraud schemes, and agents who go out of business. Without such a limitation, there is a risk that a GST liability could be avoided through an agency transaction in which both the principal and agent claim back input tax, but the agent disappears or goes out of business without returning output tax.

Application date

The amendments apply from the date of Royal assent, being 17 July 2013.