Issued
01 Feb 1986

Goods and Services Tax Act 1985

Archived legislative commentary on the Goods and Services Tax Act 1985 from PIB vol 143 Feb 1986.

This commentary item was published in Public Information Bulletin Volume 143, February 1986

More information about Public Information Bulletins.

The Goods and Services Tax Act 1985 was passed into law on 3 December 1985.

In September 1985 a Public Information Bulletin (No 139) was issued to assist people to make representations to a Parliamentary Select Committee and to assist those people with an interest in the detail of the proposed application of the tax.

As noted at that time, the Bill before Parliament was subject to change as a result of the consideration given by the Select Committee.

This Bulletin is issued as a commentary on the GST Act 1985 as it was finally passed by Parliament.

The Bulletin is intended to fill the information gap until other information becomes available during the implementation phase of GST.

Section I - Background

Introduction

The Goods and Services Tax Act 1985 was originally introduced to Parliament on 22 August 1985. This Act gives effect to the Government's proposal to implement a Goods and Services Tax (GST) from 1 October 1986. This commentary outlines the main features of GST and explains the manner in which GST will operate. The Bill had no legal effect and changes were made during the Parliamentary process. The Department must apply the law in the form that it is ultimately enacted so the earlier commentary on the Bill contained in Public Information Bulletin No 139 (September 1985) should no longer be used as a reference.

This commentary is in six sections:

  • This Section outlines the background and broad principles of GST.
  • Section II outlines the detailed operation of the GST.
  • Section III deals with registration.
  • Section IV deals with the furnishing of returns and the accounting for and calculation of the GST payable.
  • Section V deals with the administration of GST and outlines the assessment and objection, recovery and penalty, and offence provisions contained in the Bill. Certain transitional provisions are also covered.
  • Section VI deals with a number of special topics.

Background to the Goods and Services Tax Act

In the 1984 Budget, presented on 8 November 1984, the Government announced that a Goods and Services Tax would be introduced on 1 April 1986. In March 1985 a White Paper on GST was published and submissions were invited on the proposals outlined. In response to that invitation, a total of 1459 submissions were received, reflecting widespread public interest in the proposals.

The submissions were reviewed by a 3 member GST Advisory Panel headed by Dr Don Brash. The Panel's comments and recommendations were submitted to the Minister of Finance and the majority of their recommendations were accepted.

After receiving the Panel's report, the Government amended the proposed date for implementing GST from 1 April 1986 to 1 October 1986. This deferral gave interested persons an opportunity to make submissions on the Bill to the Finance and Expenditure Select Committee of Parliament. Submissions to this Committee had to be lodged by 27 September so that the Committee could conduct hearings during the months of September and October 1985. As planned, the legislation was passed before Christmas; thus allowing registration to commence early in 1986 as planned.

Broad Principles of GST

GST is a broadly based consumption tax. Its objective is to levy a tax on total consumption expenditure in New Zealand. To keep the administration of the tax as simple as possible it will be charged at a single rate - 10% - and will apply, with very few exceptions to all goods and services supplied in New Zealand. Exported goods and services will be taxable but at a rate of zero percent. GST will also be imposed at a rate of 10 percent on goods imported into New Zealand.

Only persons who conduct a "taxable activity" and are required to (or who opt to) register for GST purposes will be liable to charge and account for GST. The term "taxable activity" is defined in section 6 of the Act and is explained in Section II of this commentary. Registration is covered in Part VIII of the Act and is explained in Section III of this commentary.

It is not intended, nor is it the effect, that GST be a tax on business profits or turnover. GST is ultimately a tax on consumption and in reality is paid by the end-user. The tax is, however, "collected" along the way by "registered persons" and "returned" at regular intervals either to the Inland Revenue Department or the Customs Department.

The GST is charged at each stage of the production and distribution chain but each registered person in that chain who is charged GST by a "supplier" can deduct that GST ("input" tax) from the tax that they themselves collect from their customers. This method of returning only a net figure to the Department after deduction of "inputs" is called a "Credit Offset" system and has been referred to often in earlier publicity material.

Other main features of the operation of the GST are:

  • Any person who makes supplies of goods or services (in the course of taxable activity) that exceed $24,000 per annum is required to register, and charge and account for GST; Any person who makes such supplies less than $24,000 has the OPTION to register. Once they register, they too must charge and account for GST.
  • A "return" accounting for GST charged or collected, together with cheque for the net amount of GST payable must be forwarded to the Inland Revenue Department at regular intervals. The length of the return period will depend on the nature of the taxable activity carried on by the person. There are three return period lengths:
    1. One month;
    2. Two months; or
    3. Six months for certain categories of registered person.
  • Registered persons whose total supplies of goods or services (in the course of a taxable activity) are not in excess of $250,000 per annum (excluding GST) may account for tax on a "payments" (cash) basis rather than an "invoice" (accruals) basis. The difference between these two methods will be explained in more detail in Section IV.

Public Education Programme

This Bulletin explains the Department's interpretation of the Act in technical terms. However, the Department will conduct a comprehensive public education programmes up to and following the introduction of the tax on 1 October 1986.

At present, apart from this Bulletin, these plans include:

  • Departmental involvement in seminar programmes organised by the Society of Accountants, Retailers Federation and similar bodies between March and August.
  • an intensive programme of registration of taxpayers commencing in March. Information on eligibility to register will be sent to all prospective registered persons.
  • a guide to GST will be sent to all registered persons explaining the important procedures (especially how to complete a GST return) in everyday language.
  • radio, TV and print media advertising.
  • specialised information packages aimed at, for instance, non-profit bodies and persons making partial exempt supplies.
  • visits by District GST Officers to registered persons who require some more detailed advice on the tax.

Persons requiring further advice on GST, or assistance in organising GST training, should contact their nearest Inland Revenue District Office.

Section II - Operation of GST

Definitions

Sections 2 to 6 of the GST Act cover "definitions":

  • Section 2 is the general interpretation section and defines the majority of the terms used throughout the Act.
  • Section 3 defines the term "financial services".
  • Section 4 defines the term "open market value".
  • Section 5 defines the term "supply".
  • Section 6 defines the term "taxable activity".

Section 2: General Definitions

The more significant defined terms are -

"Registered Person"

This is the term which denotes who must charge and collect tax, make returns and pay tax to the Department. It is equivalent to "taxpayer" in the Income Tax Act 1976. It means any person who is registered or is liable to be registered under the Act.

"Taxable Supply"

This is any supply of goods or services made by a "registered person" in the course of a "taxable activity". It does not include an exempt supply. The term includes zero-rated supplies. GST is charged ONLY on taxable supplies.

"Goods"

The term "goods" includes all types of personal and real property. It is much broader in scope than the normal meaning of "goods". It does not however, include "choses in action" (such as copyrights, debts and insurance policies) which are included within the definition of SERVICES, nor does it include money. (See "Services" below)

"Services"

This term covers almost everything which is not "GOODS". It does not however include money within its scope. Together with "goods", the term embraces all things capable of being supplied for a consideration with the exception of money itself.

NOTE: The Act uses the term "currency" in Section 3 instead of "money" to avoid confusion with the term "money" used in Section 2 (which has a different purpose).

"Consideration"

This has been defined widely to include all amounts paid, or any act or forbearance, in respect of supplies of goods and services, whether made voluntarily or not. The term includes all Government charges, rates, and all contractual payments. The term is intentionally wider than its strict contractual meaning.

"Consideration" also covers many Government grants and subsidies which are provided for the supply of goods and services, or where the supply is induced by the grant or subsidy. It also covers "payment in kind", barter, "trade-off" of debts and similar arrangements.

"Input Tax"

This means,

  • Any tax charged on those goods and services that a registered person purchases or acquires for the principal purpose of carrying out a taxable activity.
  • Any tax paid on goods imported by that registered person.
  • An amount of tax calculated by applying the "tax fraction" to a non-taxable supply of secondhand goods made to a registered person (ie a supply made by a non-registered person).

In all cases the goods or services must be acquired by the purchaser for THE PRINCIPAL PURPOSE of making taxable supplies. Adjustments will be required where the Goods and Services are to be used for both taxable and other uses. These are explained on pages 61, 65 and 87.

"Output Tax"

This is the tax charged by a registered person on any supply of goods and services made by that person (ie a supply made in the course of carrying on a taxable activity). When the periodic return is completed the total input tax for the period is deducted from the Output Tax for that period and the difference is the tax due to be paid to the Department.

"Tax Fraction"

Is a method of calculating the total GST charged over a period of time. The calculation is applied to the total "consideration" (for taxable supplies) and works as follows:

Applied to the tax-inclusive price of most goods or services, this fraction will give the amount of tax included in that price. It should be noted, however, that there are a number of situations where the tax fraction CANNOT be applied to the total "consideration" because the tax content is not 1/11th of the total amount received for the supply. For example:

  • Hire Purchase: Because the amount received will include interest etc
  • Accommodation in a Hotel after 4 Weeks: Because of the special reduced value for long-term accommodation.
  • Goods or Services which include some Exempt Services: Because only the taxable goods or services are liable to the tax.
  • Supplies to which the transitional provisions apply: Because only some part of the supply. especially where continuous services are performed. is subject to the tax.

Also, when calculating "Input" tax it will not always be possible to take 1/11th of the price paid - for example:

  • Goods Imported: Because the tax is 10% of the CIF value
  • Supplies to Associates: Because the tax is 10% of the Open Market Value as defined in the Act, unless the associate is himself registered.

"Taxable Period"

This is the period of time covered by a return. This will be either one, two or six months.

"Tax Payable"

This is the net amount of GST payable by a registered person and is calculated by deducting input tax, and other deductions for adjustments such as GST on importation, bad debts, etc, from output tax. (It will of course, be necessary to add tax adjustments in order to calculate the output tax total.) This amount must be paid to the Inland Revenue Department. The "tax payable" figure is the basis for all assessments, objections, additional tax, penal tax and all recoveries action.

"Invoice"

This includes any document notifying an obligation to pay. It may also be a "tax invoice", but not necessarily.

"Tax Invoice"

The tax invoice is the documentation required to substantiate claims for a deduction of input tax. It is a central compliance element of the tax. It is explained in more detail in Section IV of this commentary. (Refer also to Section 24 of the Act.) A "tax invoice" may be an "invoice", but not necessarily.

"Non-profit Body"

This term includes charities and most clubs, etc, that operate for a purpose other than that of profit or gain to the members. Goods donated to such a body are exempt from GST when sold by that body. Also certain concessions relating to registration are available. (Refer to Section VI of this commentary.)

Specific Definitions:

Section 3: Meaning of Term "Financial Services"

Financial Services are exempt from GST under Section 14 of the Act ("Exempt Supplies"). Exported financial services are, however, zero-rated if they satisfy the criteria detailed in Section 11(2). The concepts of exemption and zero-rating are explained later in Section II of this commentary.

The definition of financial services is very detailed and requires an understanding of terms which have not previously been of direct relevance for income tax purposes. It is not proposed to provide a detailed analysis of all these terms in this commentary because they are of direct relevance to a specialised sector of the community rather than the community at large.

In general, financial services include -

  • the exchange of any currency, eg New Zealand currency for foreign currency, and the changing of notes to coins or vice versa;
  • the payment or collection of a cheque ("cheque" here includes money orders, postal notes and travellers cheques). The "payment" and "collection" are activities undertaken by the organisations who issue those items;
  • the issue of travellers cheques, bank cheques, postal notes, and money orders
  • the issue and transfer of debt, equity, and participatory securities: these include shares in companies, special partnerships and partnerships, debentures, and bills of exchange;
  • underwriting the issue of securities;
  • provision of credit under a credit contract - this includes the credit element in loans, mortgages, overdrafts, hire purchase, credit cards and financial leases;
  • the provision of life insurance, life reinsurance, and superannuation schemes;
  • the provision or assignment of a futures contract;
  • arranging any of the above - this will include lawyers' activities in arranging loans.

Section 4: Meaning of Term "Open Market Value"

An "Open Market Value" is required primarily to determine the value of certain supplies made for no consideration whatsoever, or for a consideration other than money, or as a result of a special arrangement between associated persons. In general, the open market value of a supply will be the price (excluding GST) which similar goods or services would generally fetch in similar circumstances. If this cannot be ascertained, the open market value is the price (excluding GST) which similar goods or services would fetch regardless of "purchases". If an "OMV" is not ascertainable in this way, then the legislation allows the Commissioner to determine the value in a fair and objective manner.

Section 5: Meaning of Term "Supply"

The broad base of the GST is dependent on very wide definitions of "taxable activity" and, of course, the variety of methods of "supply" in relation to those activities. For this reason, section 5(1) of the Act states that "supply" includes all forms of supply.

A taxable supply is any supply of goods and services made by a registered person in the course or furtherance of a taxable activity. It does not include supplies that are exempt under Section 14. It includes all forms of sale, leasing, bailment and other forms of transfer.

"Supply" has been deemed, for the purpose of GST, to specifically include:

  • the forced sale of goods to satisfy a debt owing by the registered person (Section 5(2));
  • any goods or services held at the time the person ceases to be a registered person AND for which input tax has been claimed (Section 5(3)). The provision does not apply where a liquidator or executor etc takes over the taxable activity;
  • a sale under the Door to Door Sales Act 1967, but only after the "cancellation period" has expired (Section 5(4));
  • a layby sale under the Layby Sales Act 1971, where the goods have been delivered and property has passed. NOTE: A SERVICE will be deemed to have occurred if the layby sale is cancelled and the seller keeps some of the payment to meet selling costs, or recovers selling costs from the buyer (Section 5(5));
  • a payment by the Government to a public authority, for example a Government Department, (Section 5(6)) (ie Expenditure Vote appropriation);
  • the provision of goods and services represented by the payment of rates (Section 5(7));
  • the placing of a bet (Section 5(8));
  • the purchase of a lottery ticket (Section 5(10));
  • the sale of a taxable activity as a going concern (Section 5(12));
  • an insurance payout received relating to a loss incurred in the course of making taxable supplies (Section 5(13)).
  • certain supplies to employees; section 21 ensures the imposition of GST in circumstances where goods and services are taken for private use or are supplied to employees free of cost, of at a greatly reduced price. Further details about the application of section 21 are given in Sections IV and VI of this commentary.

Section 6: Meaning of Term "Taxable activity"

The scope of the term "taxable activity" is intended to be very wide. Whether or not an activity is conducted for profit is irrelevant in determining whether it will constitute a "taxable activity". Of course practical considerations make it impossible and inappropriate to apply tax to all activities (eg one-off transactions, and those made in the course of an activity of a minor nature) and the requirements of the Act reflect this.

The liability to register for GST purposes depends upon whether a person conducts a "taxable activity" or not. This term embraces a wider range of activities than those usually covered by the use of the term "business". This was done to ensure that organisations such as non-profit and governmental bodies would be included in the scope of the tax.

Certain things are deemed to be done in the course or furtherance of a taxable activity, (eg anything done in connection with the commencement or termination of a taxable activity. and any employment accepted in the course of a taxable activity).

The relevant characteristics of a "taxable activity" are:

  • there must be some form of "activity" - economic or commercial;
  • that activity should be carried on continuously or regularly;
  • the activity should involve (or be intended to involve) the supply, for a consideration, of goods and services to another person.

A "taxable activity" explicitly EXCLUDES:

  • private recreational pursuits or hobbies, since activities carried on for pleasure represent final consumption. The establishment of guidelines in this area may in some cases present difficulties, but the test may be based on the commercial character of the activity - eg whether or not it is for the private pleasure of the person. as opposed to being for the making of supplies for a consideration.
  • occupation as an employee, under a master/servant relationship. While salaried or waged employees will not be conducting taxable activities in respect of their employment. a special provision relates to professionals who accept office with an employer AS PART OF their professional activities. Any remuneration from such an office will be subject to tax.
  • the making of exempt supplies. For instance a business that undertakes both financial services and operates a travel agency is only a taxable activity (and can only claim a deduction for input tax) to the extent of the travel business.
  • the directorship of a company. Directors will be treated as employees, and need not register UNLESS the Directorship is carried on as part of a wider taxable activity.
  • the Governor-General and others on the Civil List, Judges, Ombudsmen, the Solicitor-General, the Auditor-General, or the Chairman or members of local authorities, statutory boards or other bodies.

Imposition of GST (Section 8(1))

GST will be levied at the rate of 10 percent on the value of goods and services supplied in New Zealand on or after the 1st of October 1986 by a registered person in the course of conducting a taxable activity. It will also be levied on goods imported into New Zealand on or after that date by any person. The GST on imports will be collected by the Customs Department at importation, but otherwise GST will be paid to the Inland Revenue Department.

In order to be subject to GST, all the following conditions must be satisfied in relation to any one supply:

  • there must be a good or service involved;
  • that good or service must be supplied;
  • it must not be an exempt supply;
  • the place of supply must be in New Zealand;
  • the time of supply must be on or after 1 October 1986;
  • the supplier must be a registered person;
  • the supply must be made in the course or furtherance of a taxable activity carried on by the supplier.

If the above criteria are satisfied, the tax imposed on that supply will be 10 percent of the value determined under Section 10 of the Act. Tax will, however, be imposed at "zero" percent if the supplies are covered by the provisions of Section 11 of the Act which in the main deal with exported goods and services.

The imposition of GST on imported goods or services is dealt with separately and is covered by Sections 12 and 13 of the Act (See page 16 of this commentary).

Place of Supply (Section 8(2))

For goods and services to be subject to GST, their supply has to take place, or be deemed to take place in New Zealand.

The GST Act determines the place of supply of both goods and services primarily by reference to whether or not the supplier is resident in New Zealand. In addition, certain goods and services are deemed to be supplied in New Zealand even though the supplier is not resident in New Zealand. Under section 8(2). a supply is deemed to take place in New Zealand: -

  • If the supplier is resident in New Zealand, regardless of where the goods are situated or the services performed (if this is outside New Zealand the supply is zero-rated under section 11); or
  • If the supplier is non-resident in New Zealand, but the goods are in New Zealand at the time of supply.
  • If the supplier is resident in New Zealand, but the services are physically performed in New Zealand.

NOTE:

  1. In the case of a supply between to a registered person by a supplier who is a non-resident, the supply is deemed to take place OUTSIDE New Zealand unless both parties agree otherwise.
  2. See Section 2 of the Act for the definition of "resident". The definition in section 241 of the Income Tax Act has been extended to all persons who carry on any taxable or non-taxable activity from a fixed or permanent place in New Zealand.

Time of Supply (Section 9)

The time of supply rules contained in Section 9 are used to determine the return period in which the supply should be brought to account (although this may vary for persons on the payments basis). These rules apply in all circumstances except where the "transitional" provisions of Section 85 also apply (See pages 77 of this commentary):

The general rule is that the time of supply will be determined as being the earlier of:

  • the time an invoice is issued; or
  • the time any payment is received by the supplier.

(Section 9(1))

The application of the general rule and following special rules are dealt with in more detail in the context of completing returns, from page 30 below.

Special rules apply in a number of circumstances. These circumstances are as follows:

Associated persons - (as defined in section 67 of the Income Tax Act 1976) (Section 9(2)(a))

  • where the goods are to be removed, the time of supply will be the time of removal;
  • where the goods are not being removed, it will be the time they are made available;
  • in respect of services, the time of supply will be the time services are performed.
  • It is important to note that if payment is made or an invoice issued for a supply to an "associated person" BEFORE a return is due for that period to which the payment of invoice relates, then the time of supply is determined under the "general" rule as above rather than the "special" rule.

Door to Door Sales (Section 9(2)(b))

  • the time of supply will be the first day after the recipient's right to cancel the agreement has expired. (This cancellation period can vary, but is usually 7 days);

Layby Sales (Section 9(2)(c))

  • The time of supply will be the time at which property in the goods passes to the recipient (ie when the goods are eventually delivered or uplifted).
  • Where a layby sale is cancelled, and the seller retains or recovers any money, that money is deemed to be a supply of "services" (section 5(5) proviso). The time of supply of that "service" is the date of cancellation of the sale;

Placing of a bet (Section 9(2)(d))

  • The time of supply will be the time the bet is dealt with in terms of the Racing Act 1971 (which is the time the bets are totalled and deductions made);

Lotteries and other Prize Competitions (Section 9(2)(e))

  • the time of supply will be the date on which the first drawing of the lottery or prize is made

Amusement parlour machines meters, etc - (Section 9(2)(f))

  • the time of supply for coin or token operated machines, meters or other devices will be the date that the coins are emptied from the machine by, or on behalf of the supplier

Hire Agreements - (Section 9(3)(a) & (c))

  • for goods supplied under a hire agreement (including leases and rental but other than a hire purchase agreement) or for services which are supplied under any agreement providing for periodic payments, there is deemed to be a separate supply when each periodic payment is due, and the time of supply is te earlier of that due date or the actual date of receipt of payments;

Hire purchase - (Section 9(3)(b)).

  • the time of supply is when the hire purchase agreement is entered into.

Retention Payments - (Section 9(4))

  • for contracts providing for the retention of part of the contract price pending satisfactory performance of the contract, the time of supply for the retained sum is the date upon which payment of that sum is made;

Contracts providing for Variation of Work (Section 9(5))

for those contracts for building of civil engineering work which provide for a variation in the contracted work (ie "new" work) the time of supply of the new work is whenever and only to the extent that payment is made for that new work.

NOTE: This provision recognises a situation that occurs frequently in the building and civil engineering sectors.

Consideration not determined at time of removal - (Section 9(6))

for goods supplied where part or all of the consideration (eg selling price) is not determined at the time the goods are taken, the supply occurs only to the extent of, and at the time that, payment is due or is received or an invoice is issued, whichever is the earlier. This provision will apply to "pool marketing schemes", such as those operated by the New Zealand Meat Producers Board and New Zealand Milk Board.

Goods or Services put to a "Non Taxable" Use (Section 21(2))

Under Section 21(1) of the Act, a supply is deemed to be made where certain goods or services are applied for private of exempt use. The time of that deemed supply is the time that the goods or services are put to the non-taxable use.

Value of Supply (Section 10)

The "value" of taxable supplies is the amount paid for the supply, exclusive of GST. Likewise the "open market value" is tax exclusive.

The "consideration" for a supply is tax inclusive.

For most supplies, the "consideration" will be represented by the amount of money passingin the transaction (eg, an item purchased for $10 from a retailer). There are, however, special rules to determine the "value" or "consideration" for certain categories of supplies, for example:

Where goods and services are deemed to be supplied (under section 21(3)) to employees, the "consideration" will be the same as the value for "Fringe Benefit Tax" purposes (Section 10(7)).

Where goods and services have been taken for the private or exempt use of the registered person, the "value" of the supply is deemed to be the lesser of:

  1. the cost to the supplier, exclusive of GST; or
  2. the open market value of that supply (also excludes GST)

(section 10(8)).

Where a "service" is deemed to take place as a result of the cancellation of layby sale (See "Time of Supply" rules above), the "consideration" is deemed to be the full amount retained or recovered (section 10(9));

  • For credit contracts (eg a hire purchase agreement) - the "consideration" for the supply will be the cash price disclosed in the credit contract (section 10(5)); (ie, exclusive of interest and other charges);
  • The value of the supply of accommodation in hotels, rest homes, hospitals, etc, for stays exceeding four weeks, will be the amount of the room charge that relates to goods and services other than domestic goods and services (as defined in section 2 of the Act). In all cases, however, this amount will be deemed to be AT LEAST 20% of the price of the accommodation. This provision recognises that long-stay occupants should not be disadvantaged compared to other people who rent or lease their domestic accommodation;
  • For stays of no more than four weeks and for the first four weeks of any longer stay, the "value" of the supply will be the full price paid for the accommodation; (Section 10(6).)
  • For lottery tickets, etc, the "consideration" for the supply will be deemed to be the total ticket proceeds less the amount paid out or payable as cash prizes (section 10(14));
  • For vouchers, stamps, etc, where a monetary value is stated on the voucher
    • the amount of any premium over and above the stated monetary value is taxed as a tax inclusive charge when the voucher is purchased;
    • the balance is regarded as tax inclusive price when the voucher is redeemed (Section 10(16)).
  • Where monetary value is not stated on the voucher (eg milk tokens), the purchase price will be subject to tax only when the voucher, token, etc, is purchased. This treatment will also apply to postage stamps. The value of the supply when these tokens, postage stamps etc are used is deemed to be nil. (Section 10(17));
  • If one consideration (payment) relates to both a taxable supply and something else (eg an exempt supply), the consideration must be apportioned between the two elements to arrive at the output tax on the taxable part of the supply (Section 10(18)). An arbitrary, pro rata apportionment will generally be the only basis available.

Refer for further explanation to page 30 of this commentary.

Zero Rating (Section 11)

Where a supply of goods is liable to GST but at a rate of zero percent (ie zero-rated) the supplier pays no output tax but is able to deduct all input tax relating to the making of such supplies.

The Act explicitly zero-rates both exported goods and certain "exported services" to ensure that no GST will enter into the costs of either to the overseas purchaser. Because all goods supplied by a supplier who is resident in New Zealand are deemed to be supplied in New Zealand (and hence subject to GST) it has been necessary to zero-rate exported goods and services, and also goods that are not situated in New Zealand at the time of supply. Zero-rating now covers almost all identifiable exported services or goods.

Goods

In relation to a supply of GOODS, zero-rating applies to the following:

  • goods exported under the Customs Act 1966 - section 11(1)(a);
  • goods not in New Zealand at the time of supply - section 11(1)(b);
  • the supply of a taxable activity as a going concern - section 11(1)(e).

Zero-rating will not apply to exported second-hand goods for which an input tax credit has been allowed ("Proviso" to section 11(1)).

Services

In relation to a supply of SERVICES, zero-rating applies to the following:

  • the transporting, and the arranging of that transport, of passengers or goods into or out of New Zealand - section 11(2)(a);
  • services physically performed outside New Zealand - section 11(2)(d);
  • services directly connected with moveable property outside New Zealand
  • services directly connected with goods referred to in s 47(2) or s 181 of the Customs Act 1966 - For example:
    1. repairs performed in New Zealand to international aircraft that are temporarily imported into New Zealand;
    2. Livestock and Bloodstock temporarily imported into New Zealand (Section 11(2)(c)).
  • services performed in connection with land situated outside New Zealand - (section 11(2)(b));
  • services supplied for and to a person not resident in New Zealand and who is outside New Zealand when the services are performed - (section 11(2)(e));
  • the filing, granting, assignment transfer etc of intellectual property rights (eg copyrights or the like), for use outside New Zealand - (section 11(2)(f));
  • services that are an agreement to refrain from conducting a taxable activity outside New Zealand - (section 11(2)(g)).

Exemptions (Section 14)

No tax is charged on exempt supplies and no credit is allowed for input tax in respect of the making of those supplies. This is because the definition "input tax" in section 2 requires that goods or services are acquired for the principal purpose of making taxable supplied.

The following supplies are exempt from tax under Section 14

  • Financial services (other than those which are zero-rated); (Section 14(a)). The definition of financial services is contained on page 17.
  • Donated goods supplied by any non-profit body. Since tax has most likely been incurred when the goods were purchased by the donor, it inappropriate to tax the donated or gifted goods again when sold by the non-profit body in the course of a non-profit taxable activity. (eg cake stalls, opportunity shops etc). (Section 14(b).)
  • Rental accomodation: The supply of rental accommodation (ie domestic accommodation) is exempt. and the landlords of such dwellings may not claim any "input tax" back in respect of any costs. eg, maintenance, rates, capital costs etc. The rental of buildings which are not dwellings, ie shops, factories etc are NOT exempt. Short stay accommodation in hotels, motels and hospitals etc will be taxed in full (see special valuation rules in section 10 of the Act - see also notes on "Value of Supply" in Section II of this commentary and page 47 below).
  • The sale of certain rental dwellings. Dwellings used for residential rental for five or more years and used solely for that purpose in that time will be exempt if sold by a registered person. For example the Housing Corporation may regularly sell off excess rental stock and thus, in terms of the Act, be carrying on the a taxable activity of supplying dwellings. Section 14 of the Act exempts such transactions, thus removing any inequity that might otherwise occur where rental property sales are subjected to output tax but no input tax deduction has been allowed (Section 14(d));

Provision is made for apportionment of output tax on supplies which are partly taxable and partly exempt. (section 10(18)).

"Imported Goods" and Goods Sold "In Bond" (Clauses 12 and 13)

The general scheme of the GST contemplates the tax applying to all supplies of goods and services made in New Zealand by registered persons. It is also necessary to apply the tax to all goods imported to New Zealand as well as to all goods (mainly alcoholic beverages) supplied at "in bond" prices, ie supplied prior to excise duty being paid.

Both the tax on imported goods and the tax on the duty payable on goods cleared from bond will be collected by the Customs Department. This tax, levied under Sections 12 and 13 of the Act, will be levied, collected and paid as if it: were Customs Duty so the relevant provisions of the Customs Act 1966 will apply to the recovery of GST on imported foods. For this reason, any concessions applicable to "passengers baggage" and "personal effects" will likewise apply to GST.

Imported Goods

The GST will be imposed at the time that the goods are "entered or delivered" for home consumption ie cleared from Customs Control. The term "home consumption" is peculiar to the Customs Act and bears no relation to the actual USE of the goods.

The person importing the goods will be liable to pay the GST to Customs following similar procedures as used to pay customs duty.

The tax will be levied at 10 percent on the value of the imported goods as specified in section 12(2) of the Act. That value will be equal to the sum of:

  1. the value for duty purposes (whether or not Customs duty is payable) as determined under the Customs Act 1966; AND
  2. the amounts of customs duty and sales taxes, etc payable and levied under any of the Customs Acts; AND
  3. insurance and freight costs in bringing the foods to New Zealand not already included under (i) above); AND
  4. any fees or levies payable at the time of importation.

Goods sold "in bond":

Importers, manufacturers and other traders operate a network of bonded warehouses in which foods subject to customs duty and sales taxes may be held, under customs control, without the imposition of the duty and/or taxes. On customs clearance from these controlled areas, the owner of the foods is required to pay any Customs duties and taxes applicable. These warehouses hold both imported goods and goods manufactured in New Zealand. The advantage of the Bonded Warehouse is that payment of substantial amounts of revenue is usually deferred until such time as the importer sells the goods. For example, bulk importation or production of alcoholic spirit in drums or barrels and the subsequent bottling of those spirits for sale and distribution.

The ownership of foods manufactured in New Zealand may pass while the goods are still held under bond (such supplies being subject to GST). The supply being charged with tax will NOT include the excise duty because that duty is not levied until the time of clearance from cusotms control (ie entered or delivered for home consumption).

Section 13 of the Act provides that the "new" owner pays the GST on the "excise duty" content of the goods when they are removed from bond.

Any questions on the detailed Customs provisions and procedures that relate to the imposition of GST on imported foods or goods sold in bond should be referred to the Customs Department.

Section III - Registration

General Criteria (Section 51)

The GST Act provides that while anyone who carries on a taxable activity may register, the only persons who MUST register are those -

  • who have made sales in any period of 12 months of a tax-exclusive value in excess of $24,000;
  • who can reasonably estimate that they will make supplies in excess of $24,000 in the next 12 months.

A person is NOT required to be registered if it can be shown that the value of supplies in the following 12 months will not exceed $24,000.

Where that turnover figure is exceeded for certain exceptional reasons, the person can be relieved from the requirement to register. Those circumstances are:

  • where a scaling down, or cessation of business has resulted in extra sales of stock or plant;
  • where a capital item has been sold and replaced. (Section 51(1).)

The Governor General may, by Order-in-Council, increase the $24,000 threshold.

Any person becoming liable to be registered must notify the Department within 21 days of that event. A person may apply for registration in ANTICIPATION of commencing a taxable activity. (Sections 51(2) and (3).)

The Commissioner will determine whether the person is eligible to register, and registration will normally be effective from the date the person FIRST BECAME LIABLE to register. (section 51(4).)

Non-Profit Bodies (Section 51(5))

Section 51(5) allows non-profit bodies (as defined in section 2) to treat each branch of division of the body separately when applying the registration criteria. Thus, a branch or division need not register if it makes a total supply (in terms of section 51(1)) below the $24,000 threshold.

NOTE:

  1. This concession is limited to non-profit bodies only and does NOT apply to branches and divisions of other organisations.
  2. The specific circumstances of the concession are dealt with in Section VI of this commentary under the heading non-profit bodies.

Cancellation of Registration (Section 52)

Registration may be cancelled where the Commissioner is satisfied that the level of taxable supplies in the next 12 month period will fall below the registration "threshold" amount. The person must also have been registered for at least the previous 2 years. (Section 52(1).)

If a person ceases to carry on ALL taxable activities, the Commissioner must be notified of that fact within 21 days and their registration will be cancelled. If, however, there are reasonable grounds for believing that ANY activity will be carried on within the following 12 months, the registration will not be cancelled. (Section 52(3).)

NOTE: A registered person may have more than one taxable activity but they are treated for GST purposes as the one activity.

Change in Status (Section 53)

Registered persons must notify the Department of any significant change in their status, eg changes in:

  • name, address, principal taxable activity;
  • principal address from which the taxable activity is carried on;
  • changes affecting eligibility to use the 6 month "return" period;
  • eligibility to be a member of a group of companies.
  • changes affecting accounting basis for GST (ie, payment or invoice basis).

Special Cases (Sections 55-58 - Part IX of the Act)

There are a number of specific rules in relation to:

  • Groups of companies;
  • Branches and divisions of companies;
  • Partnerships, joint ventures and co-trustees.

Groups of companies (Section 55)

Where a number of companies constitute a "group" in terms of section 191 of the Income Tax Act 1976, that group can elect to group for GST purposes.

One member of the group will be the "representative member" and will be responsible for accounting for GST for ALL the members of the group. ALL members of the group MUST adopt the same "return period" and the same basis for accounting for GST. (Sections 55(7)(b)).

The individual members are thus not liable to make returns and account for the tax, but they must still issue tax invoices (when requested by recipients outside the group), keep records and register. Taxable supplies made between members of the group have the option of being charged with tax or disregarded for GST purposes. (Section 55(7)(c).)

Persons other than companies may "group" under the provisions of section 55 provided that some form of common control exists. (Section 55(8).)

Branches and divisions (Section 56)

Any registered person carrying on a taxable activity through branches which -

  • maintain their own accounting systems; and
  • are located in different places or carry out different activities,

can register one or more of those branches independently. Each branch, when registered, is to be regarded as no longer being part of the parent body for GST purposes (ie, it is a separate registered person), but:

  • it must retain the same taxable period;
  • it must retain the same accounting basis;
  • it must remain registered so long as the parent body is registered.

The separate registration can be cancelled on application by the registered person, but the parent body remains ultimately liable for tax if the branch or division defaults on its obligations.

This provision cannot be used by a business to "split" its activities in an attempt to qualify for any concessions relative to the "registration" or "return period" thresholds.

Partnerships, joint ventures, and trustees of a trust (Section 57)

The individual members of such "unincorporated bodies" are NOT liable to be individually registered; also, their taxable supplies are deemed to be made by the body itself, not by individual members.

The members of the body do, however, remain individually liable for the tax in the case of a default that occurs while they are a member. They are also individually liable to do all things required to be done under the Act. The term "body" is used in section 57 to cover all types of unincorporated bodies. Registration must be in the name of the body, and changes in membership generally have no effect on the body's registration (even though in law a new partnership comes into existence every time there is a change in membership).

In respect of UNINCORPORATED associations (other than partnerships, joint ventures or trusts) it is the responsibility of the president, chairman, treasurer or committee members to carry out any duties imposed under the Act. (See also the commentary on section 63 regarding the obligations of Officers and Employees of Corporate Bodies, on page 76. )

Personal representative liquidator, receiver, etc (Section 58)

In the situation of bankruptcy, incapacitation, or the death of a registered person, the Commissioner may deem any person who is, in the meantime, carrying on that taxable activity to be a registered person. Furthermore, a mortgagee who subsequently takes possession of a mortgagors property is deemed to be a registered person in any case where that mortgagee carries on the taxable activity of the mortgagor.

SECTIONS 59 AND 60 OF THE ACT (agents) are dealt with in Section VI of this commentary on page 80.

Form GST 1 - Goods and Services Tax Application for Registration has not been reproduced.

Section IV - Returns, Accounting Basis, Tax Invoice Calculation and Payment of Tax

Introduction

In this Section, the requirements of the Act in respect of the furnishing of GST returns, the ways in which the tax is accounted for and the calculation of tax payable will be outlined.

GST Tax Returns (Section 15)

The return periods of one, two and six months are specified in section 15 of the Act. On the registration of any person, a return "category" will be allocated to that person in order that the inflow of returns to the Department will be evenly spread, thus reducing bottlenecks, etc, in the processing procedures.

Two Month Return Period (Section 15(1))

The two categories for the two month return period are Category A and Category B. Registered persons included in Category A will account for GST over return periods of two months that end on the last day of the months of January, March, May, July, September and November. For Category B, the taxable periods will span the two months ending with the last day of the months of February, April, June, August, October and December.

Provision has been made in section 15(1)(d) of the Act for persons in Category A or Category B to apply to the Commissioner to change the end of their return period from the last day of the month to a last day of up to 7 days either side of the last day of the month. This will enable most businesses to adopt taxable periods ending with the same date as their internal accounting close-off dates.

Alternative Return Periods

Smaller businesses and those who expect to regularly receive refunds of tax may find a two month return period unsuitable. For this reason return periods of one month or six months can be adopted (in certain circumstances).

Month Return Period (Section 15(2))

Registered persons whose total of taxable supplies (excluding GST) in the previous 12 months has not exceeded $250,000 or whose total of taxable supplies for the succeeding 12 months is not likely to exceed $250,000, may apply to the Commissioner for a six-monthly return period. These persons will be in Category C. The Commissioner will nominate periods of six months in respect of which returns are to be furnished so that the flow of returns from persons in this Category is likewise spread evenly over the full year.

One Month Return Period (Section 15(3))

Many taxpayers are likely to be in a continuing, or at least regular, "refund" situation (eg, exporters). Even a two-month return period could create a cash-flow disadvantage for such people. For this reason any registered person may apply to the Department to be allocated a one-month return period (Category D).

Change of Categories (Section 15(4))

Registered persons who are allocated Category C may change that Category to Category A, B or D upon written application to the Department. If the qualifying criteria cannot be met for any twelve month period in respect of Category C then that person also must notify the Department of the change and a two month return Category (or one month if requested) will be allocated. Any change in category will apply with effect from the end of the taxable period during which the change is approved.

Lodgement of GST Returns (Section 16)

Returns for each taxable period are to be furnished to the Inland Revenue Department no later than the first day of the second month following the last day of the taxable period. For example, for a person in Category A, the last date for furnishing a return for the taxable period 1 December 1986 to 31 January 1987 will be 1 March 1987.

The last date for furnishing a return for any taxable period ending on a day up to 7 days either side of the end of the month (under section 15(1)(d)) will be the first day of the second month following the last day of the base taxable period.

Section 17 provides for special returns to be lodged where a supply takes place as a result of a forced sale in satisfaction of a debt. Section 18 allows the Commissioner to request a non-registered person to submit a return for the purposes of administering the GST.

Accounting Basis for GST (Section 19)

The GST Act provides for two bases of accounting for GST - the invoice basis and the PAYMENTS BASIS (section 19). THE CHOICE BETWEEN THESE BASES DETERMINES IN WHICH TAXABLE PERIOD "OUTPUT" TAX AND "INPUT" TAX IS BROUGHT TO ACCOUNT. The general rule (set out in section 19(1) of the Act) is that all persons should account for tax payable on an "invoice" basis. A registered person may, however, apply to adopt a "payments" basis in some circumstances. These situations are discussed below.

Selection of Accounting Basis (Section 19(2))

The "general" rule is that all persons shall account for tax payable on an invoice basis. A payments basis can only be adopted with the approval of the Commissioner. The payments basis is available to:

  1. Public Authorities, Local Authorities and non-profit bodies; and
  2. Registered persons whose taxable supplies over the past 12 months have not exceeded $250,000 or whose supplies for the succeeding 12 months are not likely to exceed $250,000 (both amounts exclude GST); and
  3. Any registered person where the Commissioner is satisfied that, due to the nature. volume, or value of taxable supplies made by that registered person and the nature of the accounting system employed by that person, it would be appropriate for that person to adopt a payments basis.

Any such person MAY adopt a payments basis from registration or from the first taxable period after which the approval to adopt a payments basis is given.

Where a person qualified for a "payments" basis on the above criteria then later ceases to meet the criteria, that person must notify the Department of that fact; the person must then adopt an invoice basis from the next taxable period (section 19(3)).

Taxable period for "Invoice" basis

As outlined earlier, (see commentary on page 11), a supply is generally considered to take place at the EARLIER of the date upon which an invoice is issued of the date on which any payment is received. For a person who is required to account for tax payable on an "invoice basis", both "input" tax and "output" tax are accounted for in the taxable period during which THE SUPPLIES OCCURRED. (Section 20(4)(a)(i) for output tax and section 20(3)(a) for input tax.)

In the case of tax paid to the Customs Department (on imports or goods removed from bond) the tax is deducted in the taxable period during which the PAYMENT IS MADE TO THE CUSTOMS DEPARTMENT (section 20(3)(a)(ii)).

Taxable Period for "Payments" basis

For registered persons entitled to use the "payments basis", if the supply is one that is deemed to occur at the earlier of invoicing or payment, the person only accounts for the output or input tax on that supply TO THE EXTENT TO WHICH PAYMENT HAS BEEN RECEIVED OR MADE in respect of that supply in that taxable period (section 20(3)(b)(i) and 20(4)(b)(ii)). Where that supply is given a specific time of supply rule under section 9, the person accounts for all the output tax or input tax on that supply in the period in which the supply has been deemed to occur. (Section 20(3)(b)(ii) and section 20(4)(b)(ii).)

Change in Accounting Basis (Section 19(4) to 19(10))

A person may, on application in writing, change the method of accounting for GST from a "payments" basis to an "invoice" basis and vice versa. To ensure that the correct amount of GST is collected, appropriate adjustments will need to be made at the time of change.

Section 19(4) requires that any person who changes the basis of accounting for GST must furnish a schedule of certain particulars (which will allow the calculation of the amount of tax payable/refundable as a result of the change). This schedule is to be furnished to the Department on of before the due date for furnishing the last return under the "old" basis of accounting (section 19(5)). ie the first day of the second month following the last day of the taxable period in which approval for the change was given. Any tax payable/refundable as a result of the change will be included as an adjustment in your last return on the old accounting basis (explained on page 67 of this commentary).

Tax Invoices (Section 24)

Section 24 of the Act sets out the requirements relating to "tax invoices". It must be remembered that a "tax invoice" is not necessarily the same as an invoice referred to in the previous parts of this Section. An "invoice" (for the purposes of attributing a time of supply) is a document notifying an obligation to make payment for a supply. A "tax invoice" is a document that contains certain particulars of a supply as required by section 24 and, in essence, constitutes the evidence required for a credit of input tax. Although a document may be both an "invoice" and a "tax invoice" it is not necessary for each invoice issued by a firm to be a tax invoice.

A tax invoice MUST be held in relation to a supply before the tax on that supply can be deducted as "input" tax.

Each registered person who supplies goods or services to another registered person must issue a "tax invoice" if requested to do so by that other registered person. The supplier has 28 days from the date of the request to provide the recipient with a tax invoice. Failure to do so within that time is an offence (sections 24(1) and 62(1)(1)).

The Act requires that for most supplies the following particulars be shown on a tax invoice: (Section 24(3)).

  1. The words "tax invoice" in a prominent place;
  2. The name, address, and registration number of the supplier;
  3. The name and address of the recipient;
  4. An individual serialised number and the date upon which the tax invoice is issued;
  5. A description of the goods and services supplied;
  6. The quantity or volume of the goods and services supplied;
  7. Either
    1. The consideration, excluding tax, for the supply, The total amount of tax charged, and The tax inclusive consideration for the supply; or
    2. Where the amount of tax charged is the tax fraction of the consideration. that consideration and a statement that it includes GST must be shown.

Only one "tax invoice" can be issued in respect of each supply and that each such invoice has to be clearly identified as a "tax invoice" by displaying the term "TAX INVOICE" in a prominent place.

Supplies up to $20 (Section 24(5))

Very small purchases such as parking meter charges, newspapers and bus fares are situations where the issue of a tax invoice is, for all practical purposes, not possible. For this reason no tax invoice is required if the consideration for the supply is up to $20. Registered persons may still deduct the "input" tax that is included in such purchases up to $20 even though a tax invoice is not held. Such a deduction can only be made, of course, if the supplier is a registered person. It is. therefore, the responsibility of the person making the deduction to ensure that tax is charged on the supply for which the deduction is claimed. To substantiate a claim for this input tax some record of the nature of supply, the date of the supply and the consideration for the supply should be retained by the person making the deduction; eg a cash book, petty cash book, etc.

Supplies up to $100 (Section 24(4))

Supplies for a consideration of up to $100 need not be supported by a full tax invoice and a simplified tax invoice is acceptable.

Accordingly, this simplified tax invoice need only show the following particulars:

  1. The words "tax invoice" in a prominent place:
  2. The name and registration number of the supplier:
  3. The date upon which the tax invoice is issued:
  4. A description of the goods and services supplied:
  5. The consideration for the supply and a statement that it includes a charge in respect of tax.

Multiple Supplies

It is intended that a tax invoice may contain details of more than one supply. This provision, together with the authority (under section 60) of a selling agent to issue tax invoices in his own name as if the supply was made by him, will enable agents and auctioneers to provide tax invoices that cover multiple supplies made by different principals to one recipient.

Special Cases where Tax Invoices Not Necessary (Section 24(6))

Many transactions take place in circumstances where no invoice is normally issued. The automatic bank deduction of rental payments is one example where there is an alternative way of establishing that a transaction took place, a tax invoice MAY not be required.

Section 24(6) gives the Commissioner the discretion to determine that some particulars need not be shown on a tax invoice or that a tax invoice not be required at all. The Commissioner will exercise this discretion where there are, or will be, alternative records available to establish the particulars of the supply of class of supplies.

Buyer-Created Invoices (Self-Billing) (Section 24(2))

In a number of industries, it is common for the buyer to create a document evidencing the circumstances of the sale. An example is where freezing companies or dairy co-operatives produce a sales document for purchases that is regarded as an invoice. Provision is made for these documents to be treated as tax invoices even though they were not issued by the supplier.

The Commissioner can grant approval for a recipient of supplyto issue the tax invoice for that supply. The approval may be made in respect of a recipient or class or classes of recipient or a supply or class of classes of supplies. The approval must be obtained prior to such tax invoices being issued. The following further conditions must also be met:

  1. The supplier and the recipient must agree that the supplier shall not also issue a tax invoice for the supply; and
  2. Two copies of that tax invoice must be produced, one to be retained by each party.

Tax Invoice Received After Taxable Period

Section 20(2) provides that no deduction may be made for input tax on a supply if a tax invoice required under section 24 is not held by the recipient.

Section 20(3)(f) provides that a deduction which has been denied, due to the absence of a tax invoice, may be made in a later pe riod if the tax invoice is subsequently obtained.

Refer to page 53 of this commentary for further details.

Credit and Debit Notes (Section 25)

Section 25 of the Act specifies how credit and debit adjustments are to be made to amounts of GST brought to account in a prior period and are later incorrect as a result of the return of goods sold, discounts or other changes in previously agreed consideration.

A precondition for the application of such adjustments is that a supplier has either:

  • provided a tax invoice in relation to a supply and the GST shown thereon is now incorrect; or
  • furnished a return accounting for an incorrect amount of output tax.

The incorrect GST or the incorrect output tax as above is most likely due to:

  • the previously invoiced supply of goods and services not being made; or
  • the previously agreed consideration for the supply of goods and services bein altered, whether due to the offer of a discount or otherwise; or
  • the goods and services or part of those goods and services supplied being returned to the supplier.

Incorrect Output Tax Accounted For on a Return

Where a supplier has accounted for an incorrect amount of output tax, an adjustment must be made in the return for the taxable period during which the erro became apparent. (Section 25(2) see explanation of adjustment on page 51 of this commentary.)

Incorrect Tax Invoice

Where the amount of GST shown on a tax invoice is found to be incorrect, a credit note or debit note MUST BE issued to the purchaser by the supplier.

Credit Note (Section 25(3)(a))

Where the GST shown on the tax invoice is too high a credit note must be issued to the purchaser. This credit note is similar to a tax invoice and must show the following particulars:

  • the word "credit note" in a prominent place;
  • the name, address, and registration number of the supplier;
  • the name and address of the purchaser;
  • the date on which the credit note was issued;
  • the amount by which the tax charged shown on the tax invoice exceeds the actual tax charged on that supply;
  • the number of the tax invoice and the date on which it was issued;
  • a brief explanation of the circumstances giving rise to the issuing of the credit note.

Section 25(3)(c)(d) and (e) to provide that:

  • only one credit note is issued;
  • any copies issued are marked "copy only";
  • a credit note is not required where a recipient takes up a "prompt payment" discount. (This provision applies not to prompt payment not to any other form of discount.)

Discounts for Prompt Payment

If a supply is made on terms which offer a discount for prompt payment, and a tax invoice is issued prior to the deadline for taking up the discount, the tax invoice will show the full sale price and charge GST accordingly. Where the discount is subsequently taken up, a credit will be given to the purchaser for the amount of the discount, but a credit note for GST purposes will not be required. The adjustment for GST will be made on the appropriate return (refer to commentary on page 51).

Where the tax invoice is issued after the deadline for taking up the discount, no adjustment is needed as the tax invoice will show the correct consideration.

The purchaser will still need to make an adjustment in his return for the discount received.

Debit Note (Section 25(3)(b))

Where the GST shown on the tax invoice is too low a debit note must be issued to the purchaser. This debit note must show the following particulars:

  • the word "debit note" in a prominent place;
  • the name, address, and registration number of the supplier;
  • the name and address of the recipient;
  • the date on which the debit note was issued;
  • the amount by which the actual tax charged exceeds the tax shown on the tax invoice on that supply;
  • the number of the tax invoice and the date on which it was issued;
  • a brief explanation of the circumstances giving rise to the issuing of the debit note.

Where a purchaser receives such a debit note of credit note the purchaser will need to account for the adjustment. See explanation of adjustment on page 51 of this commentary.

Time and Value of Supply (Sections 9 and 10)

Introduction

This part expands on the earlier discussion of the time (section 9) and value (section 10) of a taxable supply of goods and services. It will enable a registered person to determine, in respect of a taxable supply:

  • in which return period to account for the supply or deduct the tax included in a purchase
  • the amount which must be accounted for in the return
  • the panel of the return in which that amount is to be included.

Note that this discussion only applies to taxable supplies (including zero-rated supplies) made or purchased by registered persons. An explanation of exempt supplies is made on page 16 (section 14) and the place of supply on page 10 (section 8).

In reading this discussion regard should also be had as to whether the registered person will be accounting for the GST on a payments or an invoice basis.

A summary of the time and value of different types of supplies is contained in the tables starting on the next page. These tables should be used as a rough guide only. The tables should be read in conjunction with the appropriate paragraph of the discussion which contains the full explanation. View table here

Value of Supplies (Section 10)

The Goods and Services Tax Act 1985 provides that GST will be charged at the rate of 10 percent on the value of goods and services supplied. (Section 8(1)).

Therefore value is the price paid for a supply excluding GST. Consideration is the tax-inclusive price paid. (Section 10(2)).

For simplicity, the return will be based on the tax inclusive consideration for most supplies. Output tax and input tax will then be calculated by using the tax fraction.

REMEMBER

VALUE = tax-exclusive amount paid (or consideration less tax)
CONSIDERATION = tax-inclusive amount paid, including tax (or value plus tax)

For Example:

The value and consideration for an item on sale for $110 is:

Tax-exclusive price 100 This is the value
Tax 10  
Total Price $110 This is the consideration

To calculate input and output tax generally divide the consideration by 1/11.

Time of Supply (Section 9)

If the "time of supply" for a supply falls within a taxable period, then, if the registered person adopts an invoice basis the whole of the GST on the supply is included in the GST return for that taxable period (or claimed as a deduction in that return in the case of a purchase). For example, a sale is made and a 10% payment received - the full sale price must be accounted for in the period in which that payment is received.

In most cases the time of supply will be the date of the invoice or the date of payment if payment is made before an invoice is issued.

(Section 9(1)).

A registered person who adopts the payments basis will generally take account of supplies only to the extent of payments made or received. Exceptions to this rule apply in respect of hire purchase agreements, layby sales and certain other supplies. (See explanation below of special time of supply rules relating to particular types of supply.)

General Rules Applying to Most Supplies

The following outlines the rules applying to most supplies. However, there are a number of special types of supply to which the following general rules do not apply. These are discussed below.

Supplies made by the registered person:

A. If a registered person accounts on an invoice basis, a supply will generally be accounted for in the return which covers the earliest taxable period in which he either issues an invoice or receives any payment for that supply.

  • For example, a registered person makes a sale on 25 April and receives part payment immediately. An invoice is not issued until 3 May. The return period ends on 30 April. The whole supply must be included in that return.

The amount to be included in box 3 of the return will be the full tax inclusive consideration for the supply. (See page 73 for copy of Return form).

B. If the registered person accounts on a payments basis, a supply will generally be accounted for in the return which covers the date that any payment is received. (Section 20(3)(b)).

  • For example, a registered person makes a sale on 25 April and receives payment in four equal instalments in April, June, August, and October. The supply is only accounted for to the extent that payment is received in each return period. If each payment is received in a different return period, each return will include only one quarter of the full tax-inclusive consideration for the supply.

The amount to be included in box 3 of the return will generally be the full amount that has been received as payment during the return period.

Supplies received by a registered person:

A registered person may ONLY claim a deduction for the GST included in any purchase if:

  • the PRINCIPAL purpose of the purchase is for the taxable activity, AND
  • a tax invoice is held (where the purchase cost is more than $20).

If the purchase cost up to $20, then a deduction can be claimed without a tax invoice provided that it was bought for the principal purpose of the taxable activity. (Section 24(5)).

For any business purchase that is NOT made for the principal purpose of the taxable activity, NO DEDUCTION can be claimed at the time of purchase. An adjustment will be made, however, if that purchase is actually used in the taxable activity (refer to section 21(5)).

These rules for claiming a deduction apply for all purchases, even those covered by the special time and value rules outlined in the rest of this chapter.

A. If a registered person accounts on an invoice basis, he will generally be able to claim a deduction for tax included in business purchases in the return which covers the earliest period in which he is issued with an invoice or in which he makes any payment for that supply.

  • In order to claim this deduction he must hold a TAX INVOICE for the supply at the end of that period. If a tax invoice is not received until later, the claim can only be made in the period in which it was eventually received.
  • For example, on 25 April a registered person purchases goods and makes a part payment immediately. He receives an invoice (which is also a "tax invoice") on 3 July. Although the "time of supply" is technically on 25 April, the deduction may not be claimed until the return period in which the tax invoice is received (ie, the one that covers 3 July).
  • The amount to be included in box 7 of the return will be the full tax inclusive purchase price of the supply.

B. If a registered person accounts on a payments basis, he will generally be able to claim a deduction for tax included in business purchases as and when he makes payment for that supply. As is the case for the person accounting on the invoice basis, however, no deduction can be claimed unless a TAX INVOICE is held at the end of the return period in which any payment is made.

  • For example, on 25 April a registered person purchases goods and pays for them in four equal instalments in April, June, August, and October. He receives a tax invoice in June covering the full amount of the supply. If each of these payments are made in different return periods each is only deductible as and when made. However, note that as no tax invoice is held by the end of the return period in which the first payment is made, that deduction must be postponed until the tax invoice is received, ie, in the next period.
  • The amount to be included in box 7 of the return is the total amount paid in the period covered by the return.

Periodic Payments and Hire Agreements

A special rule applies to supplies made under agreements for

  • the hire of goods (not including hire purchase)
  • the supply of services for periodic payments

These agreements are treated as a series of separate supplies for each period of the agreement. (Section 9(2)(a)).

Supplies made by a registered person:

The following amounts should be included in box 3 of the GST return.

If a registered person is accounting for tax on:

  1. An Invoice Basis Include the amount due under the agreement if
    • the amount became due during the taxable period; or
    • payment was made to the registered person before it was due, during the period.
  2. A Payments Basis

Include the total amounts received during the taxable period, irrespective of when payment was due.

Example

A car is leased for $110 per month (including GST) and payments are due and paid on the 20th of each month. If the supplier has a 2 month return period, he will have to account for 2 supplies of $110 each during each taxable period.

Supplies received by a registered person:

If a registered person is accounting for tax on an invoice basis he may claim a deduction for tax in respect of each payment in full as it becomes due, or as he pays it, if earlier.

If he is accounting for tax on a payments basis, he may claim a deduction for tax in respect of each payment as and when made by him.

In both cases note that a Tax Invoice must be held before any deduction can be made.

Door To Door Sales (Section 9(2)(b))

Supplies made by a registered person:

When purchases are made from door to door salesmen, the purchaser has seven days from the date of sale to cancel it. Accordingly, the supplier cannot account for tax on the supply until that seven day period has expired.

The tax on the supply must be accounted for in full in the taxable period in which the eighth day following the date of purchase falls.

Accounting for tax in full at this point is required regardless of whether the supplier is on an invoice or payments basis.

Supplies received by a registered person:

Recipients may only claim a deduction for the tax included in such purchases in the return period in which the eighth day falls (provided that a tax invoice is held). This is the case even if payment is made or an invoice received prior to that date.

Example

A door-to-door sales company sells an item on 31 January, which also happens to be the last day of the company's taxable period. The purchaser has seven days from the date of the sale to cancel the agreement to purchase the item. This makes the eighth day 8 February. The supplier must include the full value of supply in the taxable period that covers 8 February.

Layby Sales (Section 9(2)(c))

Supplies made by a registered person:

A registered person should include in his return the total value of all layby sales where layby goods have been taken by or delivered to the purchaser during the taxable period. In practice this will mean that full payment has been received by then. There will, therefore, be no difference between registered persons accounting on an invoice or a payments basis.

Note that the tax is not accounted for as the various layby payments are received - even if a registered person is on a payments basis.

The amount to be included in box 3 of the return will be the full amount received by the supplier for the layby goods.

Example

A person pays a deposit of $500 on an item with a purchase price of $1,100 in October and pays the balance on layby in monthly instalments until December. This item is delivered by the registered person to the purchaser at the beginning of January. The registered person accounts for the supply in the taxable period that covers January.

In the case where a layby sale is cancelled and part of the consideration already paid by the purchaser is retained by the vendor (or some further amount is recovered) this amount must be accounted for during the taxable period in which the cancellation was made.

The amount to be included in box 3 of the return will be the full amount retained or recovered.

Example

A registered person enters into a layby agreement in March. The purchaser pays $100 of the total $1,100 purchase price. In June the purchaser cancels the agreement and forfeits the $100 already paid. The supplier accounts for $100 in the taxable period that covers June.

Supplies received by a registered person:

In the case of both invoice- and payments-based persons, no deduction may be claimed until the layby goods are fully paid for, uplifted, and a tax invoice obtained.

Where a registered person cancels layby sale, he will be entitled to a deduction of the tax fraction (1/11 of any cancellation charge made by the supplier, provided a tax invoice is obtained, in the period in which he cancels the layby agreement.

Hire Purchase Agreements (Section 9(3)(b))

Supplies made by a registered person:

If a registered person accounts for tax on EITHER an invoice or a payments basis, he is required to account for all hire purchase supplies made by him in the return covering the period in which the agreement was entered into.

For example, a supplier sells goods on HP on 7 June, with payments monthly for 36 months. The supply must be accounted for in full in the return covering the period in which the agreement was entered into.

The amount which is entered in box 3 of the return is the "cash price" of the goods, as determined under the Hire Purchase Act 1971.

Supplies received by a registered person:

A registered person may claim a deduction of tax in the period in which he enters into the HP agreement, provided that he holds a tax invoice for the supply.

This applies whether he accounts for tax on an invoice basis or a payments basis.

The amount to be included in box 7 of the return will be the "cash price" of the goods, as determined under the Hire Purchase Act 1971.

Retention Payments (Section 9(4))

Supplies made by a registered person:

If a registered person supplies goods and services under a contract (or under an Act of Parliament) which enables the recipient to retain part of the consideration temporarily, he need not return the retained part until it is actually paid to him. This is so whether he accounts for the tax on an invoice or a payments basis.

The amount to be included in box 3 of the return will be the full amount of any retention payment received by him.

Supplies received by a registered person:

If a registered person has retained any money under a contract (or under any Act) for any goods and services received by him, he is entitled to a deduction only when he makes payment to his supplier of the retained money.

The registered person is not entitled to any deduction for the retention prior to that time - even if he is on the invoice basis.

The amount to be included in box 7 is the full amount of the money paid by him.

Example

January, March and May. All payments are made on time.

A builder enters into a contract to build a house for $100,000 in November 1986. $40,000 is invoiced and paid in November and the balance is to be paid in $20,000 lots each 2 months ie $20,000 in

The builder accounts for $40,000 in the taxable period that covers November and $20,000 in each taxable period that covers January, March and May.

Contract Variations (Section 9(5))

Supplies made by a registered person:

If a registered person is the supplier of buildings or civil engineering works, and the recipient requests a variation in the contract, any extra tax (as a result of that variation) need only be accounted for in the return covering the period in which he receives that payment for the work.

This will be so whether he accounts for tax on an invoice basis or a payments basis.

For example, a builder on an invoice basis contracts to erect a house for $100,000. The recipient later asks for the addition of a room, for an extra $10,000. Although the builder has accounted for most of the work at the time of invoicing, he need not account for the extra $10,000 until he receives payment.

The amount to be included in box 3 of the return will be the full amount of the payment received in respect of the variation.

Supplies received by a registered person:

Where a registered person is the purchaser of a building or civil engineering work, and he requests a variation in the contract, any extra tax (as a result of that variation) may only be deducted in the return covering the date on which he makes payment for the extra work (provided a tax invoice is held).

This will be so whether he accounts for tax on an invoice basis or a payments basis.

The amount to be included in box 7 of the return will be the full amount paid by a registered person.

Full Consideration Not Known When Supply Occurs (Section 9(6))

Supplies made by a registered person:

If a registered person supplies goods other than by hire, but does not settle the final price until after the supply has physically taken place, the Act contains rules to allow him to account for tax as and when the final consideration is settled.

If he accounts on an invoice basis, he should include the tax on the supply in the period that he issues an invoice for any part of the supply, or payment is due or is received, whichever is the earlier.

For example, a farmer sells his produce to an exporter for a down-payment plus an end-of-season catch-up based on export prices. The farmer should account for tax immediately on the down-payment, but need not account for the tax on the later payment until it is due, or is received, or he sends an invoice for it.

The amount to be shown in box 3 of the return is initially the full amount of the down-payment and, in a later period, the full amount of the later payment.

If a registered person accounts on a payments basis, he need only account for payments as and when received, and not when due or invoiced. The full amount of each payment should be shown in box 3 of the return.

Supplies received by a registered person:

When a registered person purchases goods but does not agree on the consideration before uplifting them, he may not claim a deduction until the consideration is settled (ie until his supplier can issue a tax invoice). The supplier can issue an invoice that relates to only part for the consideration in order that he can claim a deduction of tax relating to that portion.

If he accounts on an invoice basis, the amount to be included in box 7 of the return will be the total amount invoiced to him or paid by him, whichever is earlier, in the period in which either occurs.

If he accounts on a payments basis he may deduct the amount of any payments made by him to the supplier, in the period in which the payment is made.

Example

A farmer delivers sheep to the freezing works in April. The price the sheep will fetch when the carcases are sold is unknown. The carcases are sold in July and an invoice and cheque for $1,100, being the final sale price, are sent to the farmer in August. The farmer accounts for the $1,100 in the taxable period that covers August. $100 of this is GST.

Lotteries and Other Games of Chance (Section 10(14) & (15))

If a registered person runs a raffle, lottery, or other game of chance, he must include in box 3 of his return the proceeds of the lottery (ie, total sales of tickets/cards etc) LESS the total amount of prizes that are paid or are to be paid in cash.

This amount will be included in his return for the period during which the first drawing, or first determination of a result, occurred. For example, if one raffle has a number of draws over a period of weeks, the return in which the above amount should be shown will be the one which covers the date of the first draw.

The above applies whether or not the registered person is on the invoice or payments basis.

Example      
Total Sales   Prizes  
565 tickets at $2 each = $1,130   1st $500
    2nd $200
    3rd $100
Total Proceeds $1,130 Total prizes   $800
Difference $330      

Amount to be included in taxable period which covers the date the raffle was drawn $330 ($30 of tax).

GST paid on non-cash prizes purchased by a registered person will be deductible in the normal way: -

  • if the registered person is on the invoice basis, by including the full purchase price in box 7 of his return for the earliest period in which an invoice is received or payment made;
  • if he is on the payments basis, by including the amount of each payment as and when it is made by him.

In the event that the purchase of a raffle/lottery ticket will be deductible to a registered person, the organiser of the raffle/lottery will have to be approached after the drawing commences in order to obtain a tax invoice which will show the amount of the original purchase price that has been subject to the GST and the amount of the GST itself. Once that has been obtained, he may include the total of those amounts in box 7 of his return.

Supplies to Associated Persons (Section 9(2)(a)) (Section 10(3))

Special valuation and timing rules apply for some supplies made to persons associated with a registered person, such as relatives, or closely connected associated companies.

Supplies made by a registered person:

When a registered person supplies goods or services to an associated person, and that person is not able to claim a deduction for that supply (eg because not registered) he must check to see whether the amount charged was less than the open market value (including GST) of the supply. If so, it is the open market value, including GST, which must be included in box 3 of the return. He does not include the amount actually charged.

Note that the legislation treats "open market value" as a tax exclusive concept. For the purposes of this bulletin, however, the further step of adding the tax onto that value has been taken, in order to permit effective comparison with actual consideration received.

Unless he receives a payment or issues the person an invoice prior to the last day for furnishing a return (one month after the end of the period) he must include the open market value of the supply in the return which covers the period in which he physically supplied the goods or services to his associate. If he received payment or issued an invoice before that time, that date of invoice or payment determines the period in which the supply must be returned.

For example, X gives his wife some goods from his store on 25 April, and does not receive any payment until June 16. Since the supply physically occurred on April 25, X will return it in the period in which that date falls.

If X's period ended on 30 April, and some payment had been received before 1 June, then the date of payment would be used.

These rules apply whether he accounts on an invoice or payments basis.

Supplies received by a registered person:

If a registered person receives goods or services in the course of his taxable activity from an associated person, there are no special valuation rules.

If he accounts for tax on an invoice basis, he may claim a deduction for the tax in the return which covers the period in which he was physically supplied the goods or services by his associate. If however he made payment or received an invoice before the time when a return was due from the supplier for that period, that date of invoice or payment determines the period in which the deduction may be claimed.

The full amount payable by a registered person should be included in box 7 of the return.

If a registered person accounts on a payments basis, he may only claim a deduction to the extent of any payment made by him for the supply. That amount should be included in box 7 of the return.

Accommodation (Section 10(6))

While the supply of accommodation in a dwelling is exempt, the supply of accommodation in a hotel, motel, or other "commercial dwelling" is taxable, but at a reduced rate after 4 weeks.

Supplies made by a registered person:

If a registered person's taxable activity is that of a hotel motel or other "commercial dwelling" he will be required to calculate the amount of GST in a slightly different manner so far as it relates only to accommodation ("domestic goods and services") .

All other supplies made by him will be accounted for in the normal way. Where a joint charge is made for these along with the accommodation (eg for bed and breakfast) that charge will need to be separated.

GST on accommodation up to 4 weeks is charged in full. The amount shown in box 3 of the return in respect of these short-term guests is the total amount payable for the supply.

For accommodation over 4 weeks, you must include in box 3 of the return a minimum of 20% of the actual tax exclusive amount charged for the room, plus the tax on that portion. That reduced amount must also be taken into account when issuing tax invoices to guests. In this case, the tax must be shown separately. Remember that other goods and services provided (such as meals and laundry) are still taxed in full.

The percentage of the amount charged which should be included in box 3 of the return is that portion of the value of the room charge (excluding GST) that is paid for -

  • the right to occupy the premises
  • any of the following if they are provided as part of the right to occupy the premises
    • cleaning and maintenance
    • electricity, gas, air conditioning
    • telephone (but not tolls), television, radio or similar chattels

Note that this portion cannot be less than 20% of the accommodation charge (excluding GST).

If a registered person accounts on an invoice basis the supply is accounted for in the earliest period in which he issues an invoice or receives payment for the accommodation.

If he accounts on a payments basis he must include the supply in the period in which he receives payment. However, the reduced value after 4 weeks is still the value on which tax is charged, not the total amount of money paid to him.

Supplies received by a registered person:

The normal rules apply for determining when a registered person makes a deduction of tax included in accommodation purchased by him.

It should be noted that for accommodation purchased in excess of four weeks only the reduced amount of the charge (ie the minimum of 20 % and the tax on that) should be included in box 7 of the return.

Example

A person stays in a hotel for 5 weeks.

The weekly room charge of $200 covers use of telephone (not tolls), television, radio, cleaning charges, and power.

The account for the 5 weeks is as follows:

Weeks 1-4 - $200 per week = $800
GST on weeks 1-4 10% = $80
Week 5   $200
GST - minimum charge 20% of 200 = 40
tax at 10% on $40 = $4
  Total $1,084
  GST content = $84

Amount to be included in box 3 (or box 7 if accommodation purchased by you) is the taxable room rates ($800 and $40) plus the tax charged ($80 + $4).

Tokens, Stamps and Vouchers (Section 10(16) & (17))

Special rules relate to the reporting of sales of gift vouchers, postage stamps, milk tokens etc, as these are merely mediums of exchange in their own right.

A. Sales of vouchers etc which state a monetary amount

This does not apply to sales of postage stamps.

If a registered person sells such a voucher he must not include the sale price in box 3. If he sells the voucher for more than the face value, he must include the amount of the excess in box 3 of his return in the period in which he supplied the voucher.

When such a voucher is redeemed by him, the value of the supply for which the voucher is given in exchange or part exchange will be entered in his return in the normal way.

If a registered person purchases such a voucher, he may not obtain a tax invoice in respect of it, or a deduction. He will however be able to obtain a tax invoice and claim a deduction when he eventually redeems (cashes in) his voucher, and the amount to be included in box 7 of the return will be the full amount which he pays for the goods or services in question.

B. Sales of vouchers which DO NOT state a monetary amount, and Postage Stamps

If a registered person supplies such a voucher, etc (such as a milk token) he must include the full amount charged for the voucher in box 3 of his return for the period in which the supply was made (ie earlier of invoice or payment on the invoice basis, time of payment on the payments basis). Note that when these vouchers are redeemed however he will not be required to account for their value again - the receipt of such vouchers is ignored for GST purposes.

For example a florist sells a voucher entitling the bearer to a bunch of red roses, but stating no monetary value. The florist includes in his return the total paid for the voucher. When the bearer of the voucher returns to the shop and uses the voucher, the florist is not required to account for the transaction represented by the exchanging of the voucher for the roses.

If a registered person purchases a voucher with no monetary value, or postage stamps, he is entitled to a tax invoice (provided the purchase exceeds $20), and to claim a deduction in the period in which the supply was made to him. The amount to be included in box 7 of the return will be the full amount paid for the voucher (or invoiced to him if he accounts on an invoice basis and has received the invoice prior to making payment).

Coin Operated Amusement and Vending Machines, etc (Section 9(2)(f) (Section 10(14) & (15))

A special rule deals with the time at which supplies made through coin operated machines must be included in any return. This rule applies whether one accounts for tax on an invoice or payments basis.

If a registered person supplies goods or services through any coin-operated device or machine (for example a video game, a cigarette machine, or a parking meter) he is required to include the total value of the coins which he removes from the machines in box 3 of his return for the period in which he removed the coins from the machine.

Where a supply is made through a token-operated device or machine, the token is accounted for as described in the previous section relating to tokens, stamps and vouchers. Where the token does not have a monetary value stated on it, the removal of such a token from the machine or device is ignored for the purposes of box 3 of the return - its value having been included in that box at the time it was sold.

In the rare cases where a registered person receives business goods or services through any coin-operated device or machine he may simply claim a deduction in the period in which the money was paid. The amount paid should be included in box 7 in the normal way.

Local Body Rates

Supplies made by a registered person:

Clearly, the only registered persons who will be charging rates are the local bodies themselves. Those local bodies accounting on a payments basis will enter the amount of each rates payment (and penalties) in box 3 of the return as and when they are received. Bodies accounting on an invoice basis will enter in box 3 of the return the full rate charged at the earliest time payment is received.

Many local authorities collect rates on an instalment basis, with the total rate being collected over the period of one year. While a local body accounting on a payments basis still accounts for each payment as and when received, the bodies accounting on an invoice basis will only enter in box 3 of the return the total of each instalment at the time it is due or received, whichever occurs first.

Supplies received by a registered person:

When a registered person pays rates (and penalties for late payment), it is paying for services supplied by the local body who levied those rates.

If a registered person accounts on a paints basis, he will enter in box 7 of the return the total amount of each payment of rates (or penalty) that he makes as and when he pays (provided, of course, he holds a tax invoice in respect of those payments). This is the case whether or not the rates are required to be paid in one lump sum or in instalments.

If a registered person is accounting for GST on the invoice basis and the rates are due to be paid in instalments, he will enter in box 7 of the return the amount of each instalment at the time they are due to be paid (or at the time they are actually paid, if earlier). This is the case even where an invoice or a tax invoice has been issued before the due date of payment.

Also, if he is on the invoice basis and the rates are to be paid in one instalment (or if a penalty is to be paid), he may enter the full amount of rates (or penalty) in box 7 of the return when he makes any payment or receives an invoice, whichever is earlier.

Racing

If a registered person is a racing club, the TAB or the NZ Racing Authority, it is required to make certain deductions from bets on races before the dividend pool is established.

It will enter the total of those deductions in box 3 of the return which covers the period in which the deductions are made by it.

Grants and Subsidies

These payments will normally be consideration for taxable supplies and if a registered person receives one he must account for it in the normal way, ie depending on the accounting basis he has adopted.

When he receives a grant or subsidy from a Government Department he will not normally need to issue a tax invoice in response.

However if he receives a grant or subsidy from another registered person (eg a research grant) they are likely to require a tax invoice from him.

If he pays a grant or subsidy that is consideration for taxable supplies, he may request a tax invoice and claim the total amount paid in box 7 in the same manner as any other purchases of taxable supplies.

Credit and Debit Notes (Section 25)

Credit notes are often issued by a supplier when for any reason (eg faulty goods returned to a shop) the consideration for a supply is reduced. Debit notes are also issued by the supplier when the consideration is subsequently increased.

The issue of a debit note or credit note is generally required by the GST Act when a tax invoice has previously been issued. The credit or debit note will show the increase or reduction in tax (as the case may be) on the supply and certain other information detailed in page 28. This must be done whether or not the supplier accounts for tax on an invoice or payments basis. The issue of a credit note is not required in the case where a prompt payment discount is the reason for the reduction in the consideration.

The Act requires registered persons (usually only those on an invoice basis) to adjust their return for such changes in consideration even if credit and debit notes are not required to be issued (eg where a simple cash discount is given). This adjustment occurs in boxes 3 and 7 of the return.

If a registered person accounts on a payments basis, the following adjustments should ONLY be done in respect of credit and debit notes received or issued that relate to the following types of supplies/purchases:

  • hire purchase,
  • supplies to associated persons,
  • door to door sales, and
  • layby sales,

for which tax invoices have previously been issued/received. In these cases, when eventually payment is made or refund received after the issue of the debit or credit note, no further adjustment may be included in box 3 or box 7 of the return.

A. Reduction of the agreed price

If a registered person is the supplier of goods and services and after issuing an invoice or receiving payment the price of that supply is reduced, he must include in box 7 of his return, for the period in which that reduction occurred (normally this will also be the period in which a credit note or other advice is issued by him) the amount of the reduction.

If he has issued a tax invoice for the above supply, he must issue a credit note showing that reduction in price.

If he is the recipient of that supply, he must include in box 3 of his return, for the period in which the reduction was made (normally this will also be the period in which the credit note or other advice is received by him) the amount of the reduction as shown on the credit note.

In the case where a prompt payment discount is taken up, the resulting reduction in the price of the supply does not need to be shown on a credit note, however both the supplier and the recipient must make the appropriate adjustments as detailed above.

B. Increase of the agreed price

If a registered person is the supplier of goods and services and after issuing an invoice or receiving payment the price of that supply is increased, he must include in box 3 of his return, for the period in which that increase occurred (normally this will also be the period in which a debit note or other advice is issued by his) the amount of the increase.

If he has issued a tax invoice for the above supply, he must issue a debit note showing that increase in price.

If he is the recipient of that supply, he must include in box 7 of his return, for the period in which the increase was made (normally this will also be the period in which the debit note or other advice is received by him) the amount of the increase as shown on the debit note.

Secondhand Goods

If a registered person supplies secondhand goods such as antiques, he will account for those supplies in the normal way.

If he purchases secondhand goods from

  • a non-registered person, or
  • a registered person who sells them to him in his private capacity

he may claim a deduction in box 7 of the return in the normal manner. This claim may be made even though he will not have a tax invoice for the purchase, however he will be required to retain certain information relating to the purchase.

If he purchases secondhand goods from another registered person who supplies them in the course of his taxable activity, he must obtain a tax invoice in order to claim a deduction.

In all cases he must hold a tax invoice in order to claim any deduction.

Receiving a Tax Invoice Too Late to Claim a Deduction (Section 20(3)(f))

There will be times where a registered person will be unable to claim a deduction for a purchase because a tax invoice is not held at the time the claim would normally be made.

If he never receives a tax invoice, he may never claim the amount as a deduction.

If a tax invoice is obtained in a later return period, he may then claim the amount or amounts which he would previously have entered in box 7 of his return.

For example, a person on an invoice basis may receive an invoice at the time the goods were delivered, but because that invoice did not happen to be a tax invoice, no claim for a deduction could be made at that time. If the supplier issues a tax invoice 2 months later, the purchaser may claim his deduction in that later period, ie the full amount on the tax invoice will be included in box 7 of the return covering the period in which the tax invoice was received.

As a further example, a person on the payments basis received an invoice at the time goods are delivered and made a payment of one half of the full price of the goods at that time. Because the invoice received did not happen to be a tax invoice, the person was not able to include the amount paid in box 7 of the return covering the period in which that payment was made. The receipt of a tax invoice in a later period would enable that first payment to be included in box 7 of the return covering that later period. The balance of the purchase price will be able to be claimed when paid.

Insurance Claims Paid (Section 20(3)(d))

If a registered person is an insurance company or any other insurer and it provides insurance for which the premium is subject to the GST (eg fire and general, medical insurances), any cash claim payments that it makes to the insured in respect of such policies will be included in box 7 of the return as and when the payments are made.

For all other payments that it makes in respect of claims on such policies, eg a payment to a panelbeater for repairs to an insured vehicle, a tax invoice will be required in order for it to claim a deduction in the normal way.

These rules apply whether it accounts on the invoice or payments basis.

If a registered person receives a cash payment from his insurer in respect of a policy (eg a policy on the business motor car) he will be required to include 1/11 of the payment received as an adjustment in the first tax adjustments panel in his return, as long as the loss insured against related to his taxable activity.

Tax Adjustments

Introduction

The previous part dealt with the time and value of the bulk of taxable supplies. These will be shown in the return at their tax inclusive consideration and the GST will be calculated by taking 1/11th of the total.

This part of the commentary deals with the transactions that will be shown as tax adjustments on the return. These tax adjustments are:

A. Output Tax Side

  • Private use of business goods and services (section 21(1))
  • Goods and services used for other exempt purposes (section 21(1))
  • Fringe benefits for employees
  • Insurance receipts
  • Bad debts recovered
  • Barter transactions (supplies where payment is not in money) (section 10(2))
  • Exported secondhand goods (sections 11(1) and 10(4))
  • Assets held when registration ceases (section 5(3))

B. Input Tax Side

  • GST paid to the Customs Department (sections 12 and 13)
  • Use of private goods and services in a taxable activity (section 21(5))
  • Bad debts written-off (section 26)
  • Wholesale sales tax credit (section 83)

C. Both Input and Output Tax Sides

  • Adjustment on a change of accounting basis (section 19(7) and (8))

A summary of the time and value rules for these adjustments is contained in the tables starting on the next page. These tables are a rough guide only and should be read in conjunction with the appropriate paragraph of the following commentary.

View table here.

A. TAX ADJUSTMENTS ON OUTPUT TAX SIDE

Private Use of Business Goods and Services (Section 21(1))

Goods or services taken from a taxable activity for private purposes require an adjustment for the tax on the goods or services in the return which covers the period during which the registered person uses those goods or services for private purposes.

The person is required to include in box 6 of the return ONE-ELEVENTH (ie, the tax fraction) of the cost of the goods (or the open market value of the goods, if lower). Both the cost and open market value include GST.

The Department will publish detailed rules on establishing the cost and openmarket value of goods and services in particular cases. Apportionment rules are being developed to cover the case where goods are used partly for private purposes and partly for business purposes in any period. Registered persons in that position will effectively be required to add back part of the original GST deduction that they received for the goods.

These rules apply whether a person accounts on an invoice or a payments basis.

Goods and Services Used for Other Exempt Purposes (Section 21(1))

In the same way as for private use, if goods or services are taken from a taxable activity for the purposes of any EXEMPT activity (eg providing residential accommodation or banking) carried on the registered person is required to account for the tax on the goods or services in the return which covers the period during which the goods or services are used for exempt purposes.

The person is required to include in box 6 of the return ONE-ELEVENTH (ie, the tax fraction) of the cost of the goods (or the open market value of the goods if lower). Both the cost and open market value include GST.

Again, the Department will publish detailed rules on establishing the cost and open-market value of goods and services in particular cases. Apportionment rules are being developed to cover the case where goods are used partly for exempt purposes and partly for business purposes in any period. Registered persons in that position will effectively be required to add back part of the original GST deduction that they received for the goods.

These rules apply whether the person accounts on an invoice or a payments basis.

De minimis rule (section (21)): A registered person will not be required to account for goods and services used for exempt purposes if exempt activities fall below a certain annual level. This level is set at the lesser of -

  • $48,000, or
  • 5% of total turnover

received from all activities in any 12 month period following the date at which any particular goods and services are applied for exempt purposes.

For instance a shop with annual sales of $1,000,000 provides some HP financing to its customers, with credit worth $40,000 pa. Since the credit provided falls below the $48,000 level AND is less than 5% of total turnover, the shop need not take into account any goods and services it uses in the exempt activity of providing credit.

Fringe Benefits for Employees (Section 21(3) and (4))

If a registered person is liable to pay Fringe Benefit Tax to the Inland Revenue Department, he may be also liable to account for GST on the value of those fringe benefits.

The only type of fringe benefit on which GST is not payable is employment related loans.

If a registered person provides fringe benefits other than employment-related loans, he must include in his return, in the tax adjustments box 6, one-eleventh (ie, the tax fraction) of the "taxable value" (for FBT purposes) of those fringe benefits, (ensuring that the "taxable value" figure relating to the value of any employment-related loans has been excluded).

This amount is included in the return which covers the period during which registered persons are obliged to pay any FBT (normally payable quarterly) to the Inland Revenue Department.

Insurance Receipts (Section 5(13))

The Act deems a supply to occur whenever a payment under an insurance policy for a loss incurred in a taxable activity is received. The full amount of any such payment must be included in the return which covers the date on which the payment was received.

The amount to be included in the tax adjustments box 6 will be one-eleventh (ie, the tax fraction) of the full amount of the indemnity payment received.

This applies whether tax is accounted for on an invoice or payments basis.

Bad Debts Recovered

If a registered person has had a GST deduction in the past for any bad debt written-off and recovers part of that debt, he must make an adjustment for the amount of the bad debt written-off.

The amount to be included in box 6 of the return is one-eleventh (ie, the tax fraction) of the amount recovered.

For example, a person accounting for GST on an invoice basis has a bad debt of $45,000 (this arose from a fully taxable supply) and recovers, some time later, the sum of $4400. At the time of recovery, he will include in box 6 of the relevant return one-eleventh of the recovered amount, or $400. This adjustment will be made at the time of recovery whether this person is still on the invoice basis or has since changed to the payments basis.

Barter (Supplies Where Payment is Not in Money) (Section 10(2))

Where taxable supplies are provided in exchange for other goods or services, the registered person must enter in tax adjustments box 6 of the return one eleventh (ie, the tax fraction) of the OPEN MARKET VALUE (including GST) of the goods and/or services that have been received in exchange for those supplies. It does not matter what the value is of the goods and services that have been supplied.

Where a taxable supply is made and in exchange money AND goods or services are received -

  • the tax fraction of the open market value of those goods and services received in exchange is entered in box 6 of the return, and
  • the amount of money received must be entered in box 3 of the return.

The above applies whether the registered person accounts on an invoice or payments basis.

Where goods and/or services are received in full or part exchange for taxable supplies that have been made, and the supplier and recipient have established a value in dollars for the exchange, the only amount included in the return is that value. It will be included in box 3 of the return. In those circumstances, the consideration is simply consideration in money, and subject to the normal rules.

Exported Secondhand Goods

Where a registered person exports secondhand goods (for which an imputed credit has previously been claimed) in the course of a taxable activity he must -

  1. include the sale/invoiced amount of the sale in box 3 of his return; and
  2. include the same amount in box 4 of his return if evidence is held that those goods have been exported; and
  3. include one-eleventh of the cost price (including GST) of the exported second-hand goods in box 6 of the return.

Note: this only applies in respect of exported second-hand goods (previously used goods purchased from a non registered person) the purchase price of which is included in box 7 of a previous return. In respect of all other exported goods, only steps (i) and (ii) above need be completed.

The above must be done whether the registered person accounts on an invoice or payments basis.

Assets Held When Registration Ceases

If, at the time when a registered person ceases to be registered, he still holds assets forming part of a taxable activity and included the purchase price of those assets in box 7 of a previous return, that person must include in his last GST return, a tax adjustment in box 6.

The amount to be included will be one-eleventh (ie, the tax fraction) of the open market value (or the cost price if lower) of those assets. Note: that both the open market value and the purchase price should include GST.

Whether or not those goods are sold or disposed of after registration has ceased, no further adjustment other than the above need be made.

This adjustment must be made whether the person accounted on an invoice or payments basis.

B. TAX ADJUSTMENTS ON INPUT TAX SIDE

Bad Debts Written-off (Section 26)

This adjustment may only be made if the registered person accounts on an invoice basis.

If a registered person makes a taxable supply (which he has properly accounted for in a previous return) and part or all of the consideration for that supply has been written-off as a bad debt, he may make an adjustment in box 8 of his return for the period when the bad debt is written-off-

The amount that is to be included in box 8 of his return is one-eleventh (ie, the tax fraction) of the full amount written-off.

For example, a registered person sells goods for a tax-inclusive price of $16.50, receives a cheque for that amount and includes the sale in box 3 of his return. The cheque later bounces and, after taking all reasonable steps, the $16.50 is written-off six months later as a bad debt. At the time that that amount is written-off, the registered person will include $1.50 (ie, the tax fraction of $16.50) in box 8 of his return covering that period.

If the supply that gave rise to the bad debt was one where the GST was not payable on the full price, (eg a charge for the fifth week of hotel accommodation, or sale under a hire purchase agreement) the amount to be included in box 8 of the return must be the amount written-off as a proportion of the full sale price (incl GST), multiplied by the GST included in that sale price.

For example, a registered person makes a sale under a hire purchase agreement where the "cash price" of the goods supplied was $1,100 ($1,000 and $100 GST) and the full amount paid under the hire purchase was $1,650 (includes finance charges etc). The purchaser defaults in respect of one-half of the total payable (ie, $825) and this amount is considered irrecoverable. At the time that it is written-off as a bad debt, a registered person will include in box 8 of his return one-half (ie, $825/$1,650) of $100, ie, $50.

If, in any of the cases above, part or all of the bad debt written-off is later recovered, a registered person must make the adjustment explained on page 62.

GST Paid To Customs Department (Sections 12, 13)

The Customs Department collects GST in two circumstances:

  • on the importation of goods into New Zealand - the tax is charged on the landed value (including insurance and duties) of the goods, as assessed by Customs.
  • when New Zealand manufactured goods are removed by a purchaser from a bonded warehouse at "in bond" prices - for example, liquor - the tax is charged on the amount of the excise duty.

If a registered person is charged GST by the Customs Department in either circumstance (the first is by far the most common) he may claim a deduction of the tax by including it in tax adjustment box 8 of his return for the period in which that GST was paid by him to Customs. The amount of tax will appear on the documents provided by Customs.

This applies whether a registered person accounts on an invoice or payments basis.

Use of Private Goods and Services in a Taxable Activity (Section 21(5))

If a registered person brings into his taxable activity goods and services for which he received no deduction at the time of purchase (ie, they were purchased mainly for private or exempt purposes), he is able to make an adjustment for the tax on the goods or services in the return which covers the period during which he used the goods or services in his taxable activity.

The registered person will include in box 8 of the return one-eleventh (ie, the tax fraction) of the cost of the goods (or the current open market value of the goods if lower). Both the cost and open market value should include GST.

The Inland Revenue Department will publish detailed rules on establishing the cost and open-market value of goods and services in particular cases. Apportionment rules are being developed to cover the case where goods are used partly for business and partly for private purposes in any period. Registered persons in that position will effectively be able to deduct only some portion of the original GST deduction that they received for the goods.

Note that this adjustment is only available in cases where the goods and services brought into the taxable activity were purchased or acquired on or after 1 October 1986.

These rules apply whether a registered person accounts on an invoice or a payments basis.

Wholesale Sales Tax Credit (Section 83)

If a registered person has paid Wholesale Sales Tax to a wholesaler at any time in the past, under the Sales Tax Act 1974, on any trading stock or stationery held by him on 30 September 1986, he is entitled to a special deduction of that WST, as a credit against his GST liability.

Note that it does not apply to:

  • any capital assets
  • goods held for hire (for example, the rental stock of a TV hire firm)
  • goods (if any) which remain subject to WST after the introduction of GST
  • secondhand goods

The trading stock or stationery must be for use in a taxable activity (not an exempt activity).

The registered person will need to hold records to justify the amount representing WST as claimed by him.

The credit may only be claimed in any GST return made by the registered person in any period up to 31 March 1987, by entering the amount in box 9 of the return.

C. TAX ADJUSTMENTS ON BOTH INPUT AND OUTPUT TAX SIDE

Adjustment Upon a Change of Accounting Basis

Where a registered person has previously been furnishing GST returns on one accounting basis (invoice or payments) and later chooses (or is required) to adopt the other basis, an adjustment must be undertaken in the last return which a registered person files on the old basis. This adjustment merely recognises the different ways in which each basis brings supplies and purchases to account for GST purposes.

This adjustment is not made where a registered person simply changes his return period (ie, from monthly to two-monthly returns, or from category A to category B)

If a registered person changes from one basis to the other he is required to make the following calculation: -

  1. Identify all of his creditors (ie, persons who have invoiced him for taxable supplies for which he has not paid) as at the last day that he will be accounting for tax on the old basis.
  2. Identify all of his debtors (ie, persons to whom he has issued invoices for taxable supplies but who have not yet paid him) as at the last day that he will be accounting for tax on the old basis.
  3. For all of the above creditors and debtors record the amounts outstanding which relate ONLY to supplies referred to in page 38 (supplies covered by the general rules), page 39 (periodic payments and hire agreements), and page 44 (consideration not known at time of supply). (For all other supplies, the special rules ensure that there is no difference between the accounting bases as to when they are brought to account.)
  4. For both creditors and debtors, calculate the amount of tax that is included in each. As long as none of the creditors and debtors arise from zero-rated supplies, accommodation in excess of four weeks, or hire purchase sales, this amount may be calculated simply by dividing creditors and debtors by 11. Where such supplies are included, the actual tax component of the creditors and debtors will have to be established from the invoices.
  5. Calculate the difference between the tax on creditors and the tax on debtors.

A: Adjustment on Change from Payments to Invoice Basis (Section 19(8))

If tax on creditors exceeds tax on debtors, the difference must be included in Box 8 of the return.

If tax on creditors is less than tax on debtors, the difference must be included in Box 6 of the return.

If tax on creditors is equal to tax on debtors, no entry in the return is required.

B: Adjustment on Change from Invoice to Payments Basis (Section 19(7)).

If tax on creditors exceeds tax on debtors, the difference must be included in Box 6 of the return.

If tax on creditors is less than tax on debtors, the difference must be included in Box 8 of the return.

If tax on creditors is equal to tax on debtors, no entry in the return is required.

Return Calculations

Introduction

This shows how the Goods and Services Tax Return Form (GST 101) will be completed to show the taxable supplies made during the period and the tax adjustments for the period. A return will be sent to each "registered person" in the final working week of each taxable period. The form when completed is to be sent to the Inland Revenue office at the address preprinted on it.

The returns and any payment are due to be received by the Inland Revenue Department no later than one month and one day after the last day of a registered person's taxable period (section 16).

This part summarises how each block on the return will be completed. Reference should be made to the immediately preceding two parts of this commentary ("Time and Value of Supply" and "Tax Adjustments") for an explanation of how to calculate the figures to be entered.

Block 1: Preprinted Details

This portion of the form has not been reproduced

This portion of the Form will be preprinted before being mailed to each registered person, showing:

  • GST number
  • name of the "registered person"
  • business address
  • taxable period covered by the return
  • due date for furnishing the return and making any required payment
  • the address of the Inland Revenue district office where the return and payment is to be sent to.

Block 2: Goods and Services Supplied

This portion of the form has not been reproduced.

In this panel the registered person will show:

  1. the total value of taxable supplies (including zero-rated supplies) made during the taxable period. Refer to the preceding part of this commentary ("Time and Value of Supply"), to determine which supplies must be included in box 3.
  2. the total value of zero-rated supplies which formed part of return box 3.
  3. the total relevant Tax Adjustments for supplies of goods and services made by the registered person for the taxable period. The tax adjustments box in this panel should be used to show the tax on:
    • goods and services taken for private use (to be shown separately)
    • goods and services used for other exempt purposes
    • barter transactions
    • fringe benefits provided to employees
    • bad debts recovered
    • exported secondhand goods
    • insurance payments received
    • assets retained at the time of ceasing to be registered.
    • This tax adjustments box should also be used where a change in accounting basis results in further tax becoming payable. Refer to the preceding part of this commentary: "Tax Adjustments".

  4. total output tax.

Block 3: Deductions of Goods and Services Tax Paid by You

This portion of the form has not been reproduced

In this panel the registered person will show:

  1. the total value of supplies received by him for the principal purpose of making taxable supplies for which tax invoices are held. NOTE: items under $20 value will not require a tax invoice, but a record of:
    • what was purchased
    • when it was purchased
    • how much it cost,
  • will be needed. See the preceding part of this commentary ("Time and Value of Taxable Supply") to determine when deductions can be made.
  1. the total of tax adjustments for supplies of goods and services received by the registered person for the taxable period. The tax adjustments box in this panel should be used to show:
    • GST paid to the Customs Department
    • tax on private/exempt goods and services used in the taxable activity
    • tax on bad debts written-off.
  1. This tax adjustments box should also be used where a change in accounting basis results in tax to be refunded. See the preceding part of this commentary ("Tax Adjustments").
  2. Any adjustment for wholesale sales tax. Full credit will be given for sales tax paid on trading stock and stationery held at 30 September 1986. No credit will be given for any sales tax incurred in the purchase of goods which form part of the depreciable capital of the business. The claim for credit on sales tax can be made on any return furnished before 31 March 1987. See the part of this commentary dealing with "Tax Adjustments".

Block 4: Calculation of Tax Payable and Declaration

This portion of the form has not been reproduced

The registered person will use this block:

  1. to subtract the total GST tax paid (Panel B) from the total GST tax received (Panel A). The balance is what is required to be paid to the Inland Revenue Department, or if Panel B is greater than Panel A a refund is claimed.
  2. to print his Name, position of authority, the date, and telephone number
  3. to sign the return's declaration panel.

This declaration must be completed by a responsible person:

for a one-person business the sole proprietor
for a partnership a partner
for a trust a trustee
for a company a director or secretary
for a statutory corporation authorised person
local bodies an office holder

Furnishing the Return and Payment of Tax

When the GST return is posted to the Department, the top two copies of the form should be sent to the Inland Revenue district office nominated on the top of the form with a cheque for payment of any amount due. The third copy should be retained for the registered person's records. If a refund is due it will be sent within 15 working days or interest will be paid - subject to certain criteria.

The tax calculated (on the return) for each taxable period is due and payable to the Inland Revenue Department on the same day on which the return is required to be furnished (ie, one month and one day after the end of the taxable period). This is the "due date".

Draft Return Form (GST 101) has not been reproduced.

Section V - Administration

Assessments and Objections (Sections 27 to 40)

Assessments

The tax is essentially "self-assessed", that is registered persons will normally calculate and pay tax without any notice of assessment being issued by the Department.

However, the Commissioner has the power (under section 27) to issue an assessment where -

  1. DEFAULT is made in furnishing any return; or
  2. THE COMMISSIONER IS NOT SATISFIED with any return; or
  3. the REGISTERED PERSON IS NOT SATISFIED with any return made; or
  4. any NON-REGISTERED PERSON UNLAWFULLY CHARGES TAX on supplies.
    • the tax so assessed is payable unless the person establishes that the assessment is excessive or that the assessment is not valid because tax is not payable (section 27(1)).
    • Where such assessment is made after the otherwise "due date" for payment, the Commissioner will establish a new "due date" (section 27(4)).
    • Where a non-registered person purports to charge tax on supplies made, ANY TAX SO CHARGED (whether or not COLLECTED) is payable to the Inland Revenue Department (section 27(6)).

Objections to Assessments

If an assessment is made, it may be objected to in the same manner as is available for income tax assessments, and may be referred to the Taxation Review Authority or the High Court. Interest will be charged on tax dispute in the same way as for income tax (sections 33-40).

Other Objections

Objections may also be made in respect of the exercise of certain discretions by the Commissioner (section 32). These discretions relate to:

  1. the taxable period (category A, B, C or D) allocated to a registered person; or
  2. the accounting basis to be used by a registered person; or
  3. certain concessions relating to the issue of tax invoices by registered persons (eg eligibility for "buyer-created" invoices);
  4. whether or not a person is liable to register under the Act;
  5. the cancellation of registration;
  6. eligibility for grouping of companies;
  7. eligibility for registration of branches or divisions.

These rights of objection against determinations of the Commissioner have been introduced into the Act to ensure that the affected party has a right to be heard before an independent body.

Recoveries, Refunds and Reliefs (Sections 41 to 50)

These provisions are modelled very closely on those in the Income Tax Act 1976. The main points to note are -

  • Additional tax will be charged at the rate of 10% for the first month and a further cumulative 2% for each extra month the tax remains unpaid (section 41);
  • Outstanding tax will rank the same as PAYE, ie as a debt above all secured debts. but after claims for unpaid wages (section 42);
  • A procedure similar to that in s 400 of the Income Tax Act 1976 will be available to recover the outstanding GST debt (section 43);
  • Refunds may be claimed within eight years of the return period (section 45(1));
  • The Commissioner is required to pay interest on any refunds that are not made within 15 working days of the receipt of a return - provided that the return is completed satisfactorily and there is no other tax outstanding (section 46)
  • Any GST refund may be set off against any unpaid GST, income tax or other tax (section 48(2));
  • The Commissioner may refrain from either collecting or refunding small amounts of tax (of $5 or under) calculated on the return. Such amounts will be refunded if the person so requests (section 48).

Penalties (Sections 62 to 74)

Offences (Section 62)

Certain offences relate specifically to GST; others are similar to those in the Income Tax Act 1976. Those relating specifically to GST include:

  • failure to register as required;
  • failure to keep proper records;
  • issuing a false or erroneous tax invoice;
  • failure to issue a tax invoice when requested by the recipient of goods and services;
  • tax being unlawfully charged by a person who is NOT registered.

A variable scale of maximum fines has been adopted and the penalties increase for second and subsequent offences.

For Example:

  • Failure to notify the Commissioner of any matter as required
  • Failure to keep proper records
first offence $2,000
second offence $4,000
subsequent $6,000
  • Refuses or fails to furnish any return or information
  • Fails to provide a tax invoice
first offence $ 500 PER MONTH OF DEFAULT
second offence $ 750 PER MONTH OF DEFAULT
subsequent $1,000 PER MONTH OF DEFAULT

Fails to register, makes false statements, knowingly issues incorrect tax invoices, etc,

first offence $15,000
second offence $25,000.

Employees of Corporate Bodies (Section 63)

This provision makes it an offence for certain officers and employees of a Corporate body to fail to lodge returns, provide information, etc. Without this provision it would be more difficult to establish liability of corporate entities for such failure.

Penal Tax (Sections 67 to 74)

The provisions for imposing penal tax are the same as those applying to income tax.

General (Sections 75 to 81)

Record-Keeping (Section 75)

The requirements are similar to those in the Income Tax Act 1976, but in addition require the retention of tax invoices, credit notes and debit notes.

The retention period is 10 years from the end of the taxable period to which they relate.

Avoidance (section 76)

This general anti-avoidance provision serves a similar role to section 99 of the Income Tax Act 1976. In addition, it will prevent companies of other persons from artificially splitting their activity into branches in an attempt to take advantage of the registration threshold of $24,000, the payments basis, or the longer return period option.

The effect of the imposition of the tax (Section 78)

The imposition of the tax does have an effect on certain fixed contracts and statutory charges. The tax can be added to the contract price UNLESS the contract EXPRESSLY PROVIDES that the price will not be affected by the imposition of the tax or any change to the rate of tax. There is also provision for the supplier to recover the tax from the recipient of goods and services.

Disclosure of Information (Section 79)

This section provides for the Customs Department and the Inland Revenue Department to exchange information relevant to their respective revenue gathering functions.

Transitional Provisions (Sections 82 to 85)

The transitional provisions cover four major aspects of, the change over to a GST regime. These are:

  • Registration of taxpayers
  • Deduction for sales tax already paid
  • Certain supplies made PRIOR to 1 October 1986
  • Certain contracts entered into ON OR BEFORE 20 August 1985.

Registration (Section 82)

The Act contains criteria for EARLY REGISTRATION of persons prior to the introduction of the GST in October 1986. Essentially, persons must register if they expect to make supplies of more than $24,000 IN THE YEAR ENDED 30 SEPTEMBER 1986 (or can reasonably expect to have such a turnover in the 12 months following 30 September 1986). The Department's aim is to register these persons by 31 AUGUST 1986. FAILURE of a person to register by 31 August 1986 is an offence.

Credit for Sales Tax (Section 83)

A FULL CREDIT will be given to registered persons for Sales Tax paid on TRADING STOCK AND STATIONERY held at 30 September 1986. Such stock and stationery will need to have been acquired or used for a "taxable activity". If it was acquired or used to make EXEMPT supplies NO credit will be given. Neither will credit be given for any Sales Tax incurred in the purchase of goods which form part of the depreciable capital of a business. Refer also to page 66 of this commentary.

Supplies made prior to 1 October 1986 (Section 84)

Where the "time of supply" rules (section 9) determine the time of supply to be:

  • PRIOR to 1 October 1986 but the delivery/performance of the supply does not occur until ON OR AFTER that date; or
  • ON OR AFTER 1 October 1986 and the delivery/performance of the supply occurs PRIOR to that date,

the time of supply is deemed to be the time WHEN THE GOODS ARE DELIVERED OF MADE AVAILABLE OR THE SERVICES ARE PERFORMED.

Example: A one year subscription to a magazine covering July 1986 to June 1987 issues will be taxable to the extent of those magazines supplied ON AND AFTER the 1st of October 1986 - IRRESPECTIVE of when the subscription is paid or invoiced. If 3 magazines are supplied prior to 1 October 1986 and the remaining 9 are supplied AFTER that date, only 9/12ths of the subscription value is subject to GST. (For the following year's subscription (July - June 1988) the time of supply is determined solely by reference to the rules in section 9.)

As a result of these provisions some suppliers may need to increase charges when setting subscriptions covering the period after 1 October 1986.

Where goods are supplied under an "AGREEMENT TO HIRE" such supply is deemed to be a supply of SERVICES (section 84(2)). This measure is necessary to prevent goods hired or leased just prior to 1 October 1986 from avoiding the tax because of the "time of performance" rules relating to goods (section 84(1)(a)).

Example: If a car is leased and taken PRIOR to 1 October 1986 and payment is not due until AFTER 1 October 1986 then the supply would, under the usual time of supply rules of section 9(3)(a), be deemed to take place when PAYMENT becomes due. By deeming the supply of the leased goods to be a "service", the liability to tax is governed by the time the service is PERFORMED, ie, it remains taxable as to the period AFTER 1 October 1986.

Where any goods or services are deemed to be supplied ON OR AFTER 1 October 1986 in accordance with section 84, and invoicing or payment has occurred PRIOR to 1 October 1986, the GST will have to be brought to account AS IF the invoicing or payment occurred on 1 October 1986 (section 84(3)(b)).

Where a supply of goods, being a building or civil engineering work is deemed to take place on or after 1 October 1986, the value for GST purposes will EXCLUDE all work and materials PERMANENTLY INCORPORATED IN OR FIXED ON THE SITE AS AT THE USE OF THE 30TH DAY OF SEPTEMBER 1986 (section 84(4)).

Certain Contracts entered into on or before 20 August 1985 (Section 85)

For contracts entered into on or before 20 August 1985 the supplies made will be zero-rated if that contract is "NON-REVIEWABLE", ie, the terms of the contract will not allow the agreed price to be altered by the imposition of GST. (This provision applies regardless of whether or not delivery, invoicing or payment occur on or after 1 October 1986.) Deductions for "input" tax can, however, be claimed in the usual way.

For all "REVIEWABLE" contracts entered into on or before 20 August 1985 the supply will be taxable at 10% only if it is made AFTER the contract price has been reviewed and only if the review takes place AFTER 1 October 1986. (Any review which takes place after 20 August 1985 but before 1 October 1986 will mean GST is payable on any supplies made ON AND AFTER 1 October 1986.)

Contracts entered into after 20 August 1985

For such contracts the time of invoicing of or payment for the supply will determine whether or not tax is chargeable. It will, however, be necessary to apply the "transitional" provisions (section 84) to any supply made which spans the introduction date.

Section VI - Special Topics

Second-hand Goods

Paragraph (c) of the definition of "input tax" (in section 2 of the Act) refers to an amount calculated by applying the tax fraction (one-eleventh) to the price of SECOND-HAND "non-taxable" goods bought by a registered person. The goods would be, in effect, non-taxable only if the SUPPLIER was not a registered person (or the goods were PRIVATE assets of a registered person, eg, goods NOT associated with that registered person's taxable activity).

The effect of this measure is that one-eleventh of the price paid for the purchase of the second-hand goods can be claimed as "input tax" and offset against output tax in the registered person's return. The second-hand goods will, probably, have been subject to GST when they were purchased "new". When the goods are sold again by the registered person the gross margin ("added value") is all that is subject to GST.

Example: A book shop owner purchases used books from a university student for $55. The shop owner may deduct one-eleventh of the purchase (ie $5) as input tax.

Agents (Section 60)

It is recognised that in agency arrangements the supply is made by or to the principal and not the agent.

The agent may nevertheless issue a tax invoice on behalf of his principal (where the principal is a registered person), and may request a tax invoice when purchasing on behalf of his principal. The agent is required to maintain sufficient records, in respect of such tax invoices, to enable the Inland Revenue Department to trace the principal on whose behalf the transaction was entered into.

Where the agent is registered, he will be required to charge and account for tax on his commission.

Auctioneers (Sections 60(4) and (5))

In an auction, bidders who are registered persons will need to know whether the purchases they make are taxable supplies (ie whether they can get a tax invoice). In order for all the sales at the auction to be treated in the same way, the Act therefore allows the auctioneer to treat ALL sales as taxable IF THE PRINCIPALS AGREE. If the principal IS UNREGISTERED, the tax collected is paid to the Department by the auctioneer. Where the principal is REGISTERED, the GST is passed to the principal and is accounted for by the principal in the normal way. It must be emphasised that this is an OPTIONAL approach. If either the principal or auctioneer choose not to adopt this approach, then the only sale upon which tax MUST be charged is a sale on behalf of a registered person in the course of that person's taxable activity.

The BIDDING at auction may be done on either a tax-inclusive or tax-exclusive basis - the latter will involve the tax being added onto the successful bid, probably when payment is made. It is expected that each auctioneer will decide on the approach that suits him best. The commission charged by the auctioneer is, of course, subject to GST if the auctioneer is registered.

Non-profit Bodies (Sections 14(B) 19(2) and 52(5))

Three specific concessions are available to these bodies. The concessions are

  1. Where goods or services are DONATED TO the non-profit body, their subsequent sale BY THE NON-PROFIT BODY will be EXEMPT (section 14). The sale will, of course, have to be in the course of a NON-PROFIT taxable activity. The body will be unable to claim any tax credit relating directly to the sale, but note that the de minimis rule in section 21(1) will apply in some cases.
  2. To prevent the need for registration non-profit bodies may, in certain circumstances, treat each local branch separately and thus take advantage of the $24,000 turnover threshold. Each branch must maintain an independent accounting system, and be identifiable by its activities or its location (section 51(5)). The "splitting" of business activities to get under the $24,000 threshold is NOT available to any other organisation or person. The anti-avoidance provisions (section 76) will prevent any such splitting.
  3. They are automatically entitled to adopt the payments basis of accounting for GST.

Hire Purchase

Section 9(3)(b) provides that, where goods are supplied under a hire purchase agreement. the time of supply is the date upon which THE AGREEMENT IS ENTERED INTO.

The value of the supply under a hire purchase agreement is deemed to be the "CASH price" (section 10(5)). As with all other credit contracts, the cash price of the contract (ie the price charged EXCLUDING finance charges) is deemed to be the "consideration in money" for the supply. The "cash price" is treated as a tax-INCLUSIVE selling price and the GST content is arrived at by applying the tax fraction (one-eleventh) to that cash price.

The GST on hire purchase transactions must be brought to account in the return for the taxable period during which the agreement was entered into irrespective of the accounting basis being used.

There are three different situations in which hire purchase agreements are made:

  1. A retailer sells a good under a hire purchase agreement under which only the retailer and the purchaser are parties. The purchaser makes payments to the retailer until "title" in the goods passes to the purchaser on the making of the last payment. In this case the RETAILER must account for GST on the supply AT THE TIME THE AGREEMENT IS ENTERED INTO.
    Examples
    1. Retailer sells good by hire purchase to purchaser who is not registered.
      • Cash price (tax-inclusive) = $2,750 (GST = one-eleventh = $250) Retailer to account for $250 GST ("output tax") ("Input tax" credit is NOT available to the purchaser)
    2. Retailer sells good by hire purchase to purchaser who is registered
      • Cash price (tax-inclusive) $2,750 (GST = one-eleventh = $250) Retailer to account for $250 GST (= "Output tax") ("Input tax" credit of $250 IS available to the purchaser)
  2. A retailer, having negotiated a sale to a consumer, sells the good to a finance company who then sells that good to the consumer under a hire purchase agreement. The consumer makes the periodic payments to the finance company until such time (on the making of the last payment) that title in the goods passes to the consumer. In these circumstances there are two taxable supplies of the good in question:
    1. One from the retailer to the finance company, charged and accounted for by the retailer. The time of supply and accounting basis are covered by the normal rules. NOTE:The retailer in this case is not a party to the hire purchase agreement so the "general" time of supply rules will apply.
    2. Another supply, by way of hire purchase, from the finance company to the consumer. The finance company must account for GST on the supply in the return for the taxable period during which the agreement was entered into.
  3. NOTE: The finance company is entitled to an "input tax" credit for the GST charged to it in (a) above, on the assumption that it will register in respect of its taxable activity of supplying goods.
  4. Example: RETAILER SELLS good to finance company
    • Price (tax-inclusive) = $2,750 (GST = one-eleventh = $250)
    • Retailer to account for $250 GST (= "Output tax") ("Input tax" credit of $250 Is available to the finance company)
  5. FINANCE COMPANY SELLS good by hire purchase to purchaser who is NOT registered. Finance company to account for $250 GST (= "Output tax") ("Input tax" credit is not available to the purchaser) NOTE:Where finance company sells to a purchaser who is registered then that registered person may claim the "input tax" credit, if the purchase relates to his business.
  6. A retailer sells a good to a purchaser under a hire purchase agreement to which the retailer and purchaser are parties. THE RETAILER THEN ASSIGNS HIS RIGHT, TITLE AND INTEREST IN THE HIRE PURCHASE AGREEMENT TO A FINANCE COMPANY for a consideration equal to the amount UNPAID by the consumer. The purchaser then makes the periodic payments under the hire purchase agreement TO THE FINANCE COMPANY until such time (on the making of the last payment) that title in the goods passes to the consumer. In this case there are again TWO supplies but only ONE is taxable:
    1. The sale of the good under a have purchase agreement BY THE RETAILER is a taxable supply and THE RETAILER MUST ACCOUNT FOR GST (in the return for the taxable period during which the agreement was entered into). (See examples (a) and (b) under paragraph (1) above.)
    2. The "ASSIGNMENT" OF the hire purchase agreement is an exempt supply (refer section 3(1)(c)). Retailer assigns hire purchase agreement for $2,750 (less any deposit that may have been paid) to finance company
      • exempt from GST.

Repossession

Under a hire purchase agreement the person who holds the agreement (ie retailer or finance company) and also has title to the goods, has the right to repossess those goods if the consumer defaults in payment. When this action is taken the goods are usually resold by the person holding title and the proceeds are taken by the "repossessor" in satisfaction of the whole or part of the debt outstanding.

This RESALE by the person holding title to the goods will be a taxable supply upon which that person will again have to account for GST.

  1. Purchaser is a registered person
  2. The passing of possession (NOT title) from the original purchaser to the "repossessor" is a SUPPLY of a good. The value of that supply is arrived at by the application of the rules in section 10 the Act. Since the basis of the repossession is that a part of the debt outstanding will be "satisfied" by the proceeds of the "resale". the "repossession" by the finance company or retailer will be treated as a supply by the original purchaser for a consideration in money. The amount of the consideration will be the amount eventually recovered by the resale. As this amount is not determined AT THE TIME OF REPOSSESSION, the provisions of section 9(6) apply. The supply (repossession) is deemed to take place to the extent that, and at the time payment for that second sale is due or is received. The result is that the defaulting purchaser (a registered person) has to pay GST (as "output tax") on the "deemed" supply (the repossession) to take account of the forgiveness of his debt. The finance company or retailer will be credited with having paid the GST as "input tax" on this deemed supply (note they have already accounted for this portion of the output GST on the first sale). If the repossession and resale do NOT satisfy all of the original debt and the retailer finance or company is left with a "bad debt", then provision exists under section 26 to adjust a future return to recover the GST already paid. The actual "resale" of the repossessed goods constitutes another supply of course, so the retailer or finance company has to account for and return one-eleventh of the selling price as "output tax".
  3. Purchaser is not a registered person Where the purchaser is not a registered person THE REPOSSESSION constitutes "the supply of second-hand goods" for which the repossessor will be entitled to deduct (as "input tax") one-eleventh of that amount of debt subsequently "satisfied" by the resale. (See page 80 re Second-Hand Goods). As in (5) above, the actual "resale" of the repossessed goods constitutes another supply so the retailer or finance company has to account for and return one-eleventh of the selling price as "output tax".

"Pre-incorporation" Contracts

In setting up a company, expenses are likely to be incurred which will include GST. For a company which is "up and running" such GST content would be offset as "input tax".

Legally, there is no entity in existence before a company is incorporated and this situation creates a problem when the newly incorporated company wishes to claim back expenses incurred "before it existed".

It is also clear that a company cannot be registered for GST before its incorporation because no "company" as such exists, and something which does not exist cannot trade. The promoter (person setting up the company) is personally liable under any contract entered into prior to incorporation.

Section 22 of the Act allows a company to claim any input tax on goods and services acquired before the company's incorporation by any person (usually a promoter) who subsequently becomes a member of the company where the goods and services were acquired in connection with the incorporation and for the taxable activity the company would be carrying on once incorporated. The newly incorporated company is DEEMED to be the recipient of the goods or services originally supplied to the promotor and likewise is deemed to have paid the tax. This provision is subject to a number of conditions listed in the proviso to section 22 but in any case, the promotor must have been reimbursed by the company in respect of those pre-incorporation costs.

Racing

Only a certain proportion of any bet placed RELATES TO SERVICES RECEIVED by the person placing the bet. The remainder of the bet RELATES TO PRIZES PAID OUT. If there is a $1 bet placed, and 80c is paid out in prizes, ONLY THE 20 CENTS RETAINED BY THE ORGANISER will be charged with GST.

For this reason there is a special provision in the GST Act (section 5(8)) whereby the supply is deemed to be made in part by the Racing Club, TAB and the New Zealand Racing Authority respectively.

The TIME of supply (section 9(2)(d)) is set by reference to the Racing Act 1971. The SUPPLY OF SERVICES does not take place when the bet is made, but only takes place when the deductions are made as provided in the Racing Act 1971 (levies etc).

The consideration for the supply (ie the total deductions) is split between the three organisations mentioned above. (This is done because of the structuring of the racing system pursuant to the Racing Act 1971).

Lotteries and Raffles

As mentioned above prize money is not subject to GST. Only the "services" portion of the payment for raffle tickets and lottery tickets will be subject to GST; the proportion that is to be paid back in prizes will NOT be subject to tax.

Section 5(10) of the GST Act deems a supply of services to occur where a person pays any amount of money to participate in a New Zealand lottery, New Zealand prize competition, lottery, prize competition, or game of chance. The person or body who organises it, pursuant to the Gaming and Lotteries Act 1977, is deemed to have supplied the services.

The Gaming and Lotteries Act 1977 covers the following:

New Zealand lotteries - Golden and Mammoth Kiwis only;
New Zealand prize competitions.  
Games of chance - includes Roulette, Crown and Anchor, Unders and Overs, Pontoon and Rodeo Raceway.
- also includes Housie which is governed by the Housie Regulations 1975.
- also includes games of chance played by means of an amusement device such as video machines, pinball machines, flipball;
Prize competitions - includes Spot the Ball, similar newspaper competitions, duplicate bridge, snooker.

The TIME of any supply in respect of lotteries, games of change, etc, is when the first drawing occurs (section 9(2)(e)). If there is more than one drawing of prizes for any lottery or other competition, the liability to pay GST arises on the date of the first drawing. The time of supply for games of chance played BY MEANS OF A GAMING MACHINE OR AN AMUSEMENT DEVICE OR SIMILAR COIN OPERATED MACHINE is when the machine IS EMPTIED OF ITS COINS OR TOKENS (section 9(2)(f)).

The CONSIDERATION for a supply is the total proceeds of the sale of tickets, LESS all prizes payable in CASH in respect of that lottery or other competition (section 10(14)). The person or body who conducts the lottery or any other competition must account for GST on the sum that is left. Tax on purchases of non-money prizes will be deductible as input tax in the normal manner.

NOTE: Where any SELLING agent is paid commission, he must charge GST on this amount, and give a tax invoice to the person who pays the commission to him (for example the New Zealand Lottery Board). The Lottery Board can then claim an "input" credit for the GST paid on the commission, and the selling agent accounts for the GST charged on the Commission.

Provision of Credit

Financial services are exempt from GST under section 14. Included in the definition of financial services (in section 3) is "the provision of credit under a "credit contract", ("credit contract" is defined in the Credit Contracts Act 1981). That term essentially encompasses all agreements that provide for the supply of goods or services where payment will occur at a later stage and at a price in excess of the "cash price" (ie the price if payment were made without credit being supplied).

In general, however, transactions involving a penalty for late payment (such as ordinary business credit) do not constitute credit contracts even though the total amount paid may exceed the cash price. In such cases where the excess is charged on a default by the purchaser, the full amount charged, including any penalty, is taxable.

Inputs Used for Private or Exempt Purposes

Deduction of Tax on Purchases

In order for a deduction to be made of the GST included in the purchase, the goods or services must be acquired for the principal purpose of making taxable supplies.

If this test is satisfied, the tax component of the purchase is deductible IN FULL (subject only to the accounting basis rules) as input tax. This is the case even where those goods and services are, at the time of purchase, intended for partial use in some private of exempt activity, or where they are subsequently used only for such an activity.

Where goods and services are acquired for the principal purpose of making taxable supplies and are used ONLY for such purposes, the full deduction for input tax is made and no subsequent adjustment is necessary.

Adjustment for Ongoing Private/Exempt Use

Where goods and services are acquired for the principal purpose of making taxable supplies but are used partly for private or other exempt purposes on an on-going basis, the full deduction for input tax is made and an adjustment is required to be made in each return period in which such private/exempt use occurs.

Section 21(1) of the Act requires that where such goods and services are used for private/exempt purposes a supply occurs TO THE EXTENT THAT THEY ARE SO USED and that supply is valued at the lesser of cost or open market value.

In practice, this means that for each return period some portion of the cost (or open market value if lower) of the good of service supplied must be included as an adjustment on the output tax side. For example, where a motorcar purchased for the principal purpose of making taxable supplies is also used on an on-going basis for making exempt supplies the adjustment to be made in a return period might be calculated as follows:

Full purchase price (incl GST) $33,000
Cost attributable to each year of effective life of vehicle (5 years,on a straight-line basis) on a straight-line basis) $6,600
Cost attributable to any two-month return period (1/6th of annual "cost") $1,100
Proportion of exempt use in period 30%
"Cost" of section 21(1) supply (incl GST) $330
One-eleventh to be included in return box 6 $30

The above example indicates one way in which the adjustment may be made in a situation where the extent of private/exempt use may be fairly readily ascertained. For purchases such as general office overheads where the extent of private/exempt use may not be so apparent, an adjustment based on some indirect method (such as turnover) may be acceptable.

A more comprehensive series of guidelines will be available shortly, however it can be assumed that the Department will accept alternative methods of calculating the required adjustments provided that they yeild an acceptable result.

Adjustment for Full Private/Exempt use after Purchase

Where goods and services are acquired for the principal purpose of making taxable supplies and are subsequently used ONLY for private/exempt purposes, the full deduction for input tax is made at the time of purchase and an adjustment is required at the time of transfer to the private/exempt use.

As is the situation with ongoing partial private/exempt use, the supply that is deemed to occur when the goods and services are applied wholly for private/exempt purposes are valued at the lesser of cost or open market value in relation to that application.

For the purposes of valuing this type of supply, the cost is likely to be determined on the basis of the original cost price, less some proportion based on the unexpired portion of the economic life of the asset (ie, the book value under straight-line depreciation). Open market value will be as at the time of the application for private/exempt purposes.

Adjustment not Required

The adjustments outlined above are NOT required to be undertaken in respect of goods and services used for exempt purposes where it is expected that in the next 12 months the total value of exempt supplies will be less than $48,000 AND will be less than 5 percent of the value of all supplies made.

Further details of the determination of the required adjustments will be released shortly. Refer also to page 61 of this commentary.

Private/Exempt Inputs Used in the Taxable Activity

As explained above, in order for a deduction to be made of the GST included in a purchase, the goods or services must be acquired for the principal purpose of making taxable supplies. Where the purchase fails this test, no deduction is allowed at the time of purchase.

Recognising that some credit for input tax should be allowed if goods and services purchased principally for purposes OTHER than making taxable supplies are subsequently applied for that use, section 21(5) allows a deduction from output tax of one-eleventh (the tax fraction) of the lesser of the cost or open market value of the supply made to the taxable activity.

As with inputs used for private or exempt purposes, an adjustment will be made both where there is ongoing business use of a private/exempt purchase and where the good or service is fully applied for taxable activity purposes subsequent to the purchase. Accordingly, the determination of the amount of the adjustment to be made will be done in a similar manner.

The Department will shortly be releasing guidelines on the methods of determining the amount of adjustment that should be included in each return. Refer also to page 65 of this commentary.

GST and Income Tax

The following discussion outlines the options for the treatment of GST for income tax purposes. As such, this will mainly be of direct interest to Chartered Accountants in public Practice. It is understood that the NZ Society of Accountants is currently examining this issue with a view to promulgating an Accounting Standard discussing in more detail accounting for GST for income tax purposes.

Non Registered Persons

Non-registered persons will account for income tax purposes for GST on a tax inclusive basis. This means

  • All taxable income will be tax inclusive.
  • All deductible expenditure will be tax inclusive.
  • Depreciation will be calculated on the tax inclusive cost of the assets.

Registered Persons

Registered persons will have two approaches available for dealing with GST for income tax purposes. These are:

  1. Tax exclusive approach.
  2. Tax inclusive approach.

Under the tax exclusive approach GST would be totally eliminated from all items for income tax purposes.

All taxable income would be tax exclusive.

  • All deductible expenditure would be tax exclusive.
  • Depreciation would be calculated on the tax exclusive cost of the assets.
  • Payments of GST to the Inland Revenue Department would not be deductible and refunds of GST from the Inland Revenue Department would not be assessable.

Under the tax inclusive approach GST would be eliminated from the cost of assets and therefore depreciation calculations.

  • All taxable income would be tax inclusive.
  • All deductible expenditure would be tax inclusive.
  • Depreciation would be calculated on the tax exclusive cost of the assets.
  • Payments of GST to the Inland Revenue Department would be deductible and refunds of GST from the Inland Revenue Department would be assessable after the netting off of GST on transactions involving capital assets.