Goods and Services Tax Bill 1985
Archived legislative commentary on Goods and Services Tax Bill 1985 from PIB vol 149 Sep 1985.
This commentary item was published in Public Information Bulletin Volume 149, September 1985
The Goods and Services Tax Bill 1985 was introduced to Parliament on 22 August 1985 and referred to the Finance and Expenditure Select Committee.
This Public Information Bulletin contains an outline of the broad principles of GST, and explains the Department's interpretation of the provisions of the Bill.
This commentary was prepared by Inland Revenue Department at the request of the Minister of Finance, with a view to assisting individuals and organisations that may be contemplating making submissions to the Select Committee, and also those persons with an interest in the detail of the proposed application of the tax.
It should be noted that the Bill has no validity until passed into law, and may be subject to change as a result of the Select Committee's consideration.
Section I Background
The Goods and Services Tax Bill 1985 was introduced to Parliament on 22 August. This Bill 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. Until passed, the Bill has no legal effect and some changes may be made during the Parliamentary process. The Department must apply the law in the form that it is ultimately enacted. As a result the commentary contained in this document should not be regarded as binding on the Department.
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 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 Bil
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 by way of two reports to the Minister of Finance. The first was released on 21 June and the second was released on 22 August. The majority of the Panel's recommendations were accepted, and these are reflected in the revised Bill. The most important of the changes made from the White Paper departmental draft legislation are:
- an optional exemption from registration where a person's turnover is below $24,000 pa;
- provision for accounting on a "cash" basis as an alternative to the "accruals" basis;
- alternative return periods for small businesses and exporters;
- exemption for the sale of donated goods by non-profit bodies;
- simplification of GST invoices;
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 will give interested persons an opportunity to make submissions on the Bill to the Finance and Expenditure Select Committee of Parliament. Submissions to this Committee must be lodged by 27 September and the Committee will then conduct hearings during the months of September and October 1985. It is hoped that the legislation will be passed before Christmas, so that registration can commence early in 1986.
Broad principle 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 register for GST purposes will be liable to charge and account for GST. The term "taxable activity" is defined in clause 6 of the Bill and is explained in Section II of this commentary. Registration is covered in Part VIII of the Bill 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. To arrive at the figure of tax payable to the Department, registered persons who are charged GST on purchases made for their taxable activity (ie input tax) may deduct that tax from the GST they in turn charge and collect on the supplies they make (ie output tax). It is through this mechanism (referred to as "credit offset") that GST charged at each stage of the production and distribution chain will be eventually borne by the final consumer.
The other main features of the operation of the GST are:
- Any person whose turnover of supplies from a taxable activity is over $24,000 per annum is required to register, and charge and account for GST;
- A GST return must be furnished periodically. 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:
- One month;
- Two months; or
- Six months;
- Financial services, sales of goods donated to non-profit bodies, the rental of dwellings and the sale of such rented dwellings will all be exempt from GST;
- Special valuation rules ensure that where land is supplied by a registered person, tax is not charged on that part of the supply that represents the value of the land.
- Registered persons whose total taxable supplies are up to $250,000 per annum (excluding GST) may account for tax on a payments (cash) basis rather than an invoice (accruals) basis.
Section II Operation of GST
Clauses 2 to 6 of the GST Bill are definitional clauses:
- Clause 2 is the general interpretation clause and defines the majority of the terms used throughout the Bill.
- Clause 3 defines the term "financial services".
- Clause 4 defines the term "open market value".
- Clause 5 defines the term "supply".
- Clause 6 defines the term "taxable activity".
Clause 2: General Definition
The more significant defined terms are -
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 Bill.
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 (page 18). GST is charged only on taxable supplies.
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.
This term means anything 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.
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. This will include all Government charges, rates, and all contractual payments. The term is wider than its strict contractual meaning.
It will also cover 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.
This means -
- tax charged on goods and services supplied to any person.
- tax paid on goods imported by that person.
- an amount of tax calculated by applying the tax fraction to a non-taxable supply of secondhand goods made to a registered person.
In all cases the goods or services must be acquired by the purchaser for the principal purpose of making taxable supplies.
No provision has been made to apportion input tax on goods acquired partly for taxable purposes. However, the section entitled "SUPPLY" in this Section outlines the treatment of private or exempt use of assets of a taxable activity (eg the use of a motor vehicle to collect domestic rents).
This is the tax charged on any taxable supply of goods and services by a registered person (ie a supply made in the course of carrying on a taxable activity). Input tax is deducted from output tax to calculate the tax payable to the Department.
This may be used to calculate the GST charged for any period, and is applied to the total consideration for taxable supplies. The formula for determining the tax fraction is:
|100 + tax rate||100+10|
Applied to the tax-inclusive price of any goods or services, this fraction will give the amount of tax included in that price.
This is the period of time covered by a return. This will be either one, two or six months.
This is the net amount of GST payable by a registered person and is calculated by deducting input tax, and other deductions, from output tax. This amount must be paid to the Inland Revenue Department and is the basis for all assessments, objections, additional tax, penal tax and all recoveries action.
This includes any document notifying an obligation to pay. It may also be a tax invoice, but not necessarily.
The tax invoice is the documentation required to substantiate claims for 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 clause 26 of the Bill). A tax invoice may be an invoice, but not necessarily.
This term includes charities and most clubs, etc, that are carried on other than for the purpose of profit or gain to the members. Goods donated to the body are exempt from GST when sold and certain concessions as to registration are available. (Refer to Section VI of this commentary.)
Clause 3: Definition of Financial Services
Financial Services are exempt from GST under clause 17(a) of the Bill. Exported financial services are, however, zero-rated if they satisfy any of the criteria detailed in clause 14(2). The concepts of exemption and zero-rating are explained later in this Section 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 description of all these terms in this commentary.
In general, financial services include -
- the exchange of money, eg changing 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 organisation who issues 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 (see also page 49-51);
- the assignment of a hire purchase agreement;
- the provision of life insurance and reinsurance, or superannuation schemes;
- the provision or assignment of a futures contract;
- arranging any of the above - this will include lawyers' activities in arranging loans.
Clause 4: Definition of Open Market Value
"Open Market Value" is principally used for the purposes of determining the value of certain supplies specified in clause 10. In general, the open market value of a supply will be the price (excluding GST) which the same 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. If this is not ascertainable the legislation allows the Commissioner to determine a method of ascertaining the value in a fair and objective manner.
Clause 6: Taxable Activity
The White Paper indicated that the liability to register for GST purposes would be determined by whether a person conducted a "taxable activity". This term was intended to embrace a wider range of activities than those usually envisaged by the use of the term "business". This was done to ensure that organisations such as non-profit and governmental bodies would be included in the scope of the tax. The features of a taxable activity were to include regularity and continuity and the making of supplies for consideration (ie, payment would occur in some form). Finally the total of that consideration would be above some minimum level. In relation to this latter point, the White Paper stressed that such a minimum turnover ($2,500 pa was specified) did not constitute a small trader threshold, but was merely one of a number of factors to be used in determining whether an activity was a "taxable activity". The White Paper stated that occupation as an employee would be specifically excluded from the scope of the definition of taxable activity.
Reference: White Paper (WP) paras 25-29; White Paper Draft Legislation (WPD) cl.4.
GST Bill 1985
The redrafted definition of "taxable activity" contained in clause 6 of the Bill reflects the intentions of the White Paper, but does so in a slightly different manner than the White Paper draft legislation. The clause specifies that all activities of public and local authorities fall within the term "taxable activity". The range of exclusions is specifically extended to hobbies and the making of exempt supplies. 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 explicit requirement for a minimum turnover has been omitted.
Reference: Goods and Services Tax Bill 1985 (GSTB) cl.6.
The scope of the term "taxable activity" is intended to be very wide. In contrast with income tax, GST is a tax on consumption - not profits. 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 clause reflect this.
While reference is made in clause 6(1)(a) to the manner in which a taxable activity may be conducted (ie business, vocation, club etc), the term is in no way restricted to activities conducted in such a manner.
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.
The term is used to describe a "business" in the very broadest sense of that word.
The definition of taxable activity explicitly excludes:
- private recreational pursuits or hobbies, since activities carried on for pleasure represent final consumption (clause 6(3)(a)). 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 (clause 6(3)(b)). A further 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. (Note: this would not apply to directorships - see below).
- the making of exempt supplies (refer page 18). 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 may not register.
- 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.
Clause 5: Supply
The White Paper narrative did not explicitly separate the concepts of "supply" and "taxable supply", however the draft departmental legislation did draw this distinction. Broadly a supply of goods was defined as being any supply, and a supply of services only being a supply to the extent that it was for consideration.
Reference: WPD cl.13.
Goods and Services Tax Bill 1985
The Bill defines the term "supply" more comprehensively than previously, specifically including a broad range of transactions such as door to door and layby sales, supplies to the Crown by Government Departments, racing bets, payment of insurance premiums, and the purchase of a lottery ticket. An extensive list appears below.
Reference: GSTB cl.5.
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 clause 17. It includes all forms of sale, leasing, bailment and other forms of transfer (clause 5(1)).
"Supply" has been extended in its meaning to specifically include:
- the forced sale of goods to satisfy a debt owing by the registered person (clause 5(3));
- any goods or services held at the time the person ceases to be a registered person and for which input tax has been claimed (clause 5(4)). The provision does not apply where a liquidator of executor etc takes over the taxable activity;
- a credit agreement under the Door to Door Sales Act 1967, (clause 5(5));
- a layby sale under the Layby Sales Act 1971, where the goods have been delivered and property has passed. 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 (clause 5(6));
- a payment by Government to a public authority (clause 5(7)) (ie Expenditure Vote appropriation);
- the provision of goods and services for the payment of rates (clause 5(8));
- the placing of a bet (clause 5(9));
- the purchase of a lottery ticket (clause 5(11));
- the disposal of a taxable activity as a going concern (clause 5(13));
- an insurance payout relating to a loss incurred in the course of making the taxable supply (clause 5(14)).
A supply will also be deemed (under clause 5(2)) to include the following:
- goods and services supplied to an employee by an employer for use other than in the employer's taxable activity;
- goods and services supplied to a person associated with an employee of the registered person or the registered person himself. An associated person is defined in the same way as in s 67 of the Income Tax Act 1976, and also includes a person acting as trustee to another, and relatives of that person;
- goods and services applied by a registered person for a purpose other than making a taxable supply (eg trading stock taken for private use). It is this provision (clause 5(2)(b)) that also deals with goods of services used for both taxable and exempt of private purposes (eg a motor vehicle used for both exempt and taxable activities).
The aim of these latter 3 provisions is to prevent avoidance of tax in circumstances where goods and services are taken for private use or supplied to employees or associates free of tax, or at a greatly reduced price. In addition the last provision provides for the recovery of input tax previously allowed where an asset is used for a non-taxable purpose.
Imposition of GST
The White Paper stated that GST would be levied on the value of goods and services supplied in New Zealand on or after the 1st of April 1986 by a registered person in the course of conducting a taxable activity. It would also be levied on goods imported into New Zealand on or after that date by any person. This GST would be collected by the Customs Department at importation.
Reference: WP paras 22-24; WPD cl 11.
The Bill differs from the White Paper in only two respects:
- The rate of the GST to apply is set at 10 percent;
- The tax will apply to supplies made, and goods imported, on or after 1 October 1986.
Reference: GSTB cls 8(1) and 15(1).
Clause 8 of the Bill does not deal with the imposition of GST on imports.
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 amount of tax to be imposed on that supply will be 10 percent of the value determined under clause 10 of the Bill. Tax will, however, be imposed at zero percent if the supplies are covered in the zero-rating provisions in clause 14 of the Bill.
The imposition of GST on importation is dealt with at pages 19 and 20.
Time of supply(Clause 9)
The White Paper stated that the time when a supply occurs would be the earlier of:
- the time when the goods were removed or the services performed;
- the time an invoice was issued;
- the time of payment;
The White Paper allowed for the time of supply to be determined solely on the basis of invoicing or payment only in certain limited cases.
Reference: WP paras 34 and 35: WPD cls 15 and 16.
Following recommendations made by the Advisory Panel, the Bill now allows the time of supply to be determined, generally as the earlier of payment or invoicing. The time of removal/performance test contained in the White Paper is now only relevant in the transitional period (ie to supplies occurring on or around 1 October 1986) and in relation to supplies to associated persons. The Bill does, however, contain specific time of supply rules for a number of special cases.
Reference: GSTB c1s 9 and 85.
The time of supply rules contained in clause 9 are used to determine the return period in which the supply should be brought to account (some modifications are necessary for persons adopting a payments basis). These rules will apply in all circumstances except where the transitional arrangements take effect (see pages 40 and 41):
In general, 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 (clause 9(1)).
Special rules apply in a number of circumstances. These specific time of supply rules are as follows:
- Associated persons - clause 9(2)(a) (defined as in section 67 of the Income Tax Act 1976)
- 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;
- with respect to services, the time of supply will be the time services are performed.
If payment is made or an invoice issued for a supply to an associated person before a return is due to be furnished for that taxable period, the time of supply is determined under the general rule explained above.
- Deemed Supply for Non-taxable use - Clause 9(2)(b)
- the time of supply is the date on which any goods or service is put to a private or exempt use;
- Door to Door Sales - Clause 9(2)(c)
- the time of supply will be the last day the recipient can exercise his right to cancel the agreement (usually 7 days after entering the contract);
- Layby Sales - Clause 9(2)(d)
- 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 the layby sale is cancelled, the time of supply of the retained charge is the date of cancellation;
- Placing of a bet - Clause 9(2)(e)
- 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);
- Lottery tickets - Clause 9(2)(f)
- 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 - Clause 9(2)(g)
- 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;
- Time payments - Clause 9(3)(a)
- for goods supplied under a hire agreement (other than a hire purchase agreement) or for services which are supplied under an 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 the earlier of that due date or the actual date of payment;
- Hire purchase - Clause 9(3)(b)
- the time of supply is when the hire purchase agreement is entered into.
- Retention Payments - Clause 9(4)
- for contracts providing for the retention of part of the consideration pending full performance of the contract, the time of supply for the retained sum is the date upon which payment of that sum becomes due or is received;
- Consideration not determined at time of removal - Clause 9(5)
- for goods supplied where part or all of the consideration 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.
Place of supply (Clause 8(2))
For goods and services to be subject to GST, their supply had to take place, or be deemed to take place, in New Zealand. The White Paper stated that the place of supply for goods was where the goods were situated at the time of supply, and for services, where the supplier of the service was based. Provision was made in the draft legislation to deem certain "exported" services to be supplied outside New Zealand. This would have had the effect of exempting those services rather than zero-rating them.
Reference: WP paras 32 and 33; WPD c1 14.
The GST Bill determines the place of supply of both goods and services 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. The full zero-rating of services is now achieved by a specific provision in the Bill rather than by reference to the place of supply rules.
Reference: GSTB c1 8(2).
Only supplies which occur in New Zealand are charged with tax. Under clause 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 clause 14); or
- If the supplier is not resident in New Zealand, but the goods are in New Zealand at the time of supply or the services are physically performed in New Zealand (by a person who is in New Zealand at the time of supply).
- The latter rule is modified (in clause 8(2)(b)) in the case of supplies between two registered persons. While the supply is deemed to take place outside New Zealand the parties can agree to deem the supply to take place inside New Zealand where the supplier is a non-resident.
Residence is defined in clause 2 to mean resident as determined in accordance with section 241 of the Income Tax Act 1976, but is extended to all persons who carry on any taxable activity from a "fixed or permanent place in New Zealand relating to the carrying on of the taxable activity".
Value of supply(Clause 10 and 11)
The value of goods and services supplied was generally to be the price paid for those goods and services excluding GST. Adding the 10 percent GST to the "value" of a supply would therefore yield the total amount actually paid by the purchaser. The White Paper stated also that, where the payment was not in money, open market value would be used. It was stated that business gifts of up to $50 would be valued at nil for GST purposes, but that gifts in excess of that amount would be taxed on their market value. Goods taken for private use were to be valued at cost.
Imported goods were to be valued at cost including insurance, freight, and customs duties and any sales taxes applicable.
Reference: WP paras 36 - 40; WPD cls 9 and 10.
The Bill outlines specific rules for the determination of the value of a larger number of supplies than was indicated in the White Paper. The general rule remains that the value is the price paid excluding GST, and for supplies for a consideration not in money, the open market value of the consideration is used. Supplies for private use are, however, valued at the greater of cost or consideration paid - a change from the White Paper valuation at market value.
A separate clause is included for the valuation of a supply of land.
The valuation of imported goods is essentially unchanged.
Reference: GSTB cls 10, 11 and 15.
The value of taxable supplies (other than a supply of land) will be the amount paid for the supply but not including GST chargeable (or the open market value where payment is not in money terms) - clause 10(2). This means that the consideration for a supply is tax inclusive. Special rules, however, apply in certain cases:
- the supply is made for no consideration or for less than the open market value; and
- the supplier and the recipient are associated persons, and the recipient is not acquiring the supply for the purpose of making taxable supplies,
the value of the supply will be deemed to be the open market value (clause 10(3));
- goods and services are supplied to an employee; or
- goods and services are supplied to any person associated with the registered person or an employee; or
- goods and services have been taken for the private or exempt use of the registered person,-
the consideration for the supply is deemed to be the cost of the goods or service to the supplier or the consideration paid by the recipient, whichever is the greater. If neither of these can be determined the value of the supply is its open market value (clause 10(7)). It is this provision that values private or exempt use of "business" assets and its effect is to recover input credits previously allowed. (Refer to Section VI - page 51).
- For credit contracts (eg a hire purchase agreement) - the consideration for the supply will be the cash price disclosed in the credit contract (clause 10(5));
- The value of accommodation in hotels, rest homes, hospitals, etc, for stays exceeding four weeks, will be the amount attributable to the supply of goods and services other than the accommodation itself (ie the value of the supply will include only the element relating to food taken, laundry services, telephone calls, etc). However in all cases at least of the price for the room will be taxable (clause 10(6)). 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;
- For lottery tickets, the consideration for the supply will be deemed to be the total sale proceeds less the amount paid out or payable as cash prizes (clause 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 (clause 10(16)).
Where monetary value is not stated on the voucher (eg milk tokens), the purchase price will be subject to tax 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 (clause 10(17));
The consideration for the supply of land is equal to the value of the improvements. This value is calculated by using the following formula:
a/b x c a value of improvements as shown on the district valuation roll b capital value (ie total value including improvements) c amount paid for the supply of land, including improvements.
The effect of this method of valuation (which is contained in clause 11) is that GST is not charged on land itself but, if land and buildings are supplied, GST is charged on that part of the price which is applicable to the buildings. Provision is also made in clauses 11 and 12 for a special valuation to be obtained by the registered person, and for objections to be made to the Land Valuation Tribunal; If a consideration 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 (clause 10(18)). An arbitrary, pro rata apportionment will generally be the only basis available.
Zero-rating (Clause 14)
The White Paper stated that exported goods and certain services performed in New Zealand for overseas recipients would not be subject to the tax. The draft legislation provided explicitly for the zero-rating of exported goods and deemed "exported services" to be supplied outside New Zealand effectively exempting them from tax.
Reference: WP paras 16, 32 and 33; WPD clauses 12 and 14(7)
The Bill 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 such goods that are not situated in New Zealand at the time of supply. The list of specified services which are treated as "exported" has been expanded since the release of the White Paper and zero rating now covers almost all identifiable exported services.
Reference: GSTB clause 14
Where a supply of goods is charged with GST but at a rate of zero percent (ie zero-rating) the supplier is able to deduct all input tax relating to the making of such supplies. This is so because a "zero-rated" supply is defined as being a "taxable supply". This is not the case for "exempt supplies" (see page 18).
In relation to a supply of goods, zero-rating applies to the following:
- goods exported under the Customs Act 1966 - clause 14(1)(a);
- goods not in New Zealand at the time of supply - clause 14(1)(b);
- the supply of a taxable activity as a going concern - clause 14(1)(c).
Zero-rating will not apply to exported second-hand goods for which an input tax credit has been allowed.
In relation to a supply of services, zero-rating applies to the following:
- the transporting of passengers or goods into or out of New Zealand clause 14(2)(a);
- services physically performed outside New Zealand - clause 14(2)(d);
- services directly connected with moveable property outside New Zealand or repairs to goods referred to in s 47(2) or s 181 of the Customs Act 1966 (eg repairs performed in New Zealand to international aircraft that are temporarily imported into New Zealand) - clause 14(2)(c);
- services performed in connection with land situated outside New Zealand - clause 14(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 - clause 14(2)(e);
- the assignment or transfer of copyrights or the like, for use outside New Zealand - clause 14(2)(f)
- services that are an agreement to refrain from conducting a taxable activity outside New Zealand - clause 14(2)(g).
Exemptions (Clause 17)
The only exempt supplies that were contemplated at the time the White Paper was issued were:
- the rental of residential dwellings;
- the supply of land (excluding buildings).
The draft legislation was not intended to apply to these exempt supplies as the Provisions giving effect to this treatment were to be drafted after consultation with interested parties.
Reference: WP paras 17, 114, and 115; WPD na.
GST Bill 1985
Following the release of the Advisory Panel's reports and two discussion documents issued by the Government, the category of exempt goods and services was extended to include:
- financial services
- donated goods supplied by non-profit bodies, and
- the sale of certain rental dwellings.
The concessionary treatment of land is by way of specific valuation provisions contained in clauses 9,11 and 13 of the Bill.
Reference: GSTB cl.s 3, 9, 11, 13 and 17.
No tax is charged on exempt supplies, but no credit for input tax in respect of the making of those supplies is available. Input tax credits are denied by the operation of the definition of "input tax" in clause 2 which requires that goods or services are acquired for the principal purpose of making taxable supplies. Further clause 5(2) deems a "self supply" to occur if goods are put to an exempt use after they are acquired.
Under clause 17 the following supplies are exempt from the tax:
- financial services (other than those which are zero-rated);
- donated goods supplied by any non-profit body. This exemption reflects the recommendations of the Advisory Panel. While unconditional gifts of money are not "consideration" for a supply and therefore not charged with tax, this does not apply to goods donated to a non-profit body (eg for cake stalls or opportunity shops) which are subsequently to be sold in the course of a taxable activity. Since tax has probably already been borne on the original purchase, it was considered inappropriate to tax the goods again when sold by the non-profit body. "Donated goods" are limited to those gifted to a non-profit body and intended for use by that body in its non-profit activities;
- rental accommodation. This exemption has remained unchanged from that set out in the White Paper. GST will, however, be imposed on short stay accommodation in hotels, motels and hospitals - special valuation rules are provided in clause 10. Landlords of residential dwellings may not claim any input tax relating to the dwelling (eg maintenance, capital cost, rates). The rental of buildings which are not dwellings (eg shops, factories, offices) is not exempt;
- the sale of certain rental dwellings. Dwellings used for residential rental for five or more years and used for no taxable activity 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 be considered to be carrying on a taxable activity of supplying dwellings. Clause 17 of the Bill exempts such transactions. This exemption removes any inequity that might otherwise occur where rental property sales are subject to GST output tax and no input tax deduction has previously been given;
Provision is made for apportionment of output tax on supplies which are partly taxable and partly exempt (clause 10(18)).
Importation and excise duty (Clauses 15 and 16)
While the general scheme of the GST contemplates the tax applying to all supplies of goods and services made in New Zealand by registered persons, the White Paper stated that specific provision was to be made for the application of the tax to all goods imported to New Zealand by any person, and for the imposition of GST on goods (mainly alcoholic beverages) supplied at "in bond" prices, ie before excise duty was paid.
Reference: WP paras 15, 37, 39, and 40; WPD cl 10.
The Bill contains no significant modifications to the White Paper statements, but does contain a clause which explicitly deals with the imposition of GST on the excise component of goods supplied "in bond" at prices which exclude excise. Both the tax on importation, and the tax on clearance from bond, will be collected by the Customs Department.
Reference: GSTB cls 15 and 16.
GST will be levied and collected by the Customs Department on goods imported into New Zealand (clause 15(1)). The tax will be imposed at the time that the goods are removed from Customs control (ie clearance from bond), at which point they are "entered/delivered for home consumption". The tax will be payable to Customs by the person importing the goods under the same procedures that apply to Customs duty.
The tax will be levied at 10 percent on the value of the imported goods as specified in clause 15(2) of the Bill. That value will be equal to the sum of:
- the Customs value for duty purposes (whether or not Customs duty is payable) as determined under the Customs Act 1966; and
- the amounts of customs duty and sales taxes etc payable and levied under any of the Customs Acts; and
- insurance and freight costs in bringing the goods to New Zealand (if not already included under (i) above); and
- any fees payable at the time of importation.
Any questions on the detailed Customs provisions and procedures that relate to the imposition of GST on imported goods should be referred to the Customs Department.
B Supplies made at "in bond" prices
The Customs Department operates a network of bonded warehouses in which goods subject to customs duty and sales taxes may be held, under Customs control, without the imposition of the duty and/or taxes. On release from these controlled areas, the owner of the goods is required to pay any Customs duties and taxes applicable. These warehouses are used for holding both imported goods and also certain goods which are manufactured in New Zealand. An example of the latter is the production of alcoholic spirits and the subsequent bottling of those spirits for final consumption.
The ownership of goods manufactured in New Zealand may pass while they are held in bond, such supplies being subject to GST in the normal way. When the goods are removed from bond by the owner, excise duty may be payable but no supply necessarily takes place. Clause 16 of the Bill ensures that when goods are removed from bond, and excise duty is payable, the owner of the goods is liable for GST on the amount of duty payable.
As with the imposition of GST on imports the Customs Department will be levying and collecting this GST in the same manner as the excise duty itself.
Questions on these provisions and the detailed Customs procedures should be referred to the Customs Department.
Section III - Registration
General criteria (Clause 53)
A number of changes to the registration criteria have resulted from the Brash Report. Under the White Paper proposals, all persons carrying on a taxable activity were required to register. In contrast, the GST Bill 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 value in excess of $24,000. This registration requirement is qualified to the extent that 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;
- who can reasonably predict that they will make supplies in excess of $24,000 in the next 12 months.
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 replaced;
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.
The Commissioner will determine whether the person is eligible to register, and registration will be effective from the date of the Commissioner's notification.
Non-profit bodies(Clause 53(5))
Clause 53(5) allows non-profit bodies (which are defined in clause 2) to treat each branch or division of the body separately when applying the registration criteria. The specific circumstances where this may be done are dealt with in Section VI of this commentary under the heading NON-PROFIT BODIES (page 44). Thus, that branch or division need not register if its turnover is up to $24,000. Note that this concession, which reflects a recommendation of the Advisory Panel, is limited to non-profit bodies and does not apply to branches and divisions of other bodies.
Cancellation of registration(Clause 54)
Registration may be cancelled where the Commissioner is satisfied that the level of taxable supplies in the next 12 month period will fall below $24,000, or if all taxable activities have ceased. Except where the taxable activity has ceased, a person must remain registered for at least 2 years before the registration can be cancelled.
Change in status (Clause 55)
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 a taxable period of other than two months or a payments basis for accounting for GST;
- eligibility to be a member of a group of companies.
Part IX of the Bill provides 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 (Clause 57)
Where a number of companies are a group in terms of section 191 of the Income Tax Act 1976 that group can elect to group for GST purposes.
The effect of this is that one member of the group becomes a "representative member" and will be responsible for accounting for GST in respect of the activities of all the members of the group. The individual members are relieved of their liabilities to make returns and account for the tax, but must still issue tax invoices (when requested by recipients outside the group), keep records and register under the Bill.
The Advisory Panel recommended the extension of this principle beyond companies, and subclause (8) is designed to do this for other persons (eg partnerships) linked by common control.
Branches and divisions (Clause 58)
Any registered person carrying on a taxable activity through branches which -
- maintain their own accounting systems;
- are located in different places or carry out different activities,
can register each branch separately. Each branch, when registered, is to be regarded as no longer being part of the parent body for GST purposes, 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 into branches so as to utilise the concessions available to businesses with turnovers of taxable supplies below $24,000 or $250,000 (registration and six month returns).
Partnerships, Joint ventures and co-trustees (Clause 59)
Special rules provide for these types of unincorporated bodies to be registered in their own right. That is, taxable supplies will be made by the partnership, etc, as a whole, not by individual partners.
The members of the body, however, remain ultimately liable for the tax in the case of a default, and are also liable to do all things required to be done under the Act. The term "body" is used in clause 59 to refer to all types of unincorporated bodies. Registration must be in the name of the body, and changes in membership generally have no effect on registration, although in law a new partnership comes into existence every time there is a change in membership
The Bill retains the White Paper rule in respect of unincorporated associations (other than partnerships, joint ventures or trusts) that it is the responsibility of the president, chairman, treasurer or committee members to carry out any duties imposed under the Act.
Part XII of the Bill contains a provision allowing the Commissioner to register persons by 31 August 1986, prior to the introduction of the tax. Refer to Section V of this commentary for further comments in this regard.
S Section IV - Tax mechanism - Returns and calculations
In this Section, the requirements of the returns and the calculation of tax Bill in respect of the furnishing of tax payable will be outlined.
The return periods are specified in clause 18 of the Bill. Upon registration of any person, a return category will be allocated to that person so as to achieve an even flow of returns each month.
Two Month Return Period - clause 18(1)
The two basic categories are Category A and Category B. Registered persons included in Category A will account for GST over return periods of two months that will end on the last day of the month 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 clause 18(1)(d) of the Bill 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 change from the White Paper proposal reflects a recommendation of the Advisory Panel and will enable most businesses to use taxable periods ending with the same date as their internal accounting close-off dates.
Alternative Return Periods
The Advisory Panel considered that, for smaller businesses and those who expect to regularly receive refunds of tax, the requirement that the return period be two months was unduly onerous. Accordingly, the White Paper proposal that all persons furnish returns for two monthly periods has been modified to provide for return periods of six months or one month to be adopted in certain circumstances.
Six Month Return Period - clause 18(2)
Registered persons whose turnover of taxable supplies in the previous 12 months has not exceeded $250,000 or whose turnover of taxable supplies for the succeeding 12 months is not likely to exceed $250,000, may apply to the Commissioner for six month return periods. These persons will be allocated 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 spread evenly over the full year.
One Month Return Period - clause 18(3)
Where 75% of the value of a registered person's taxable supplies made in the past 12 months has been zero-rated or 75% of the value of the taxable supplies to be made in the succeeding 12 months is likely to be zero-rated, that person may apply to the Department to be allocated Category D. Persons in this Category will be required to furnish returns for taxable periods of one month. By adopting this shortened taxable period the cash flow disadvantage to persons in a continuing refund position will be reduced.
Change of Categories - clause 18(4)
Registered persons who are allocated Category C or D may change that Category to Category A of B upon written application to the Department. In addition, if the circumstances change for any twelve month period so that -
- the person's turnover exceeds $250,000, or,
- less than 75% of the supplies are zero rated,
that person must notify the Department of the change and a two month return Category will be allocated.
Return Filing Requirements - clause 19
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 January 1987 will be 1 March 1987. 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 clause 18(1)(d)) will remain unaltered. That is, the return will still be required to be lodged on the first day of the second month of the last day of the base taxable period.
Payment of Tax Payable - clause 25(1)
The tax calculated on the return furnished for each taxable period is due and payable to the Department by the same day by which the return is required to be furnished. This is the "due date".
Calculation tax payable
Tax payable is arrived at by subtracting, from the total output tax for a taxable period, the total of:
- the input tax for that period; and
- certain other amounts such as the GST portion of bad debts written off and refunds for goods returned etc (these other deductions are discussed later).
In the White Paper proposals there was only one method of accounting for GST. In some ways the method resembled an "accruals" accounting system.
The Advisory Panel recommended that, to make GST simpler for persons whose accounting systems are run on a "cash basis" (ie small businesses, non-profit bodies, Government agencies etc), provision should be made for an alternative method of calculation of tax payable. This method is called the "payments basis".
As a result, in the GST Bill, there are two bases of accounting for GST - the INVOICE BASIS and the PAYMENTS BASIS. 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 clause 22(1) of the Bill 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.
(i) Invoice Basis
As outlined earlier, clause 9 of the Bill provides that a supply generally takes place at the earlier of the date upon which an invoice is issued or the date on which a payment is made. For a person who is required to account for tax payable on an "invoice basis", both input tax and output tax on supplies is accounted for in the taxable period during which the supplies have occurred as specified in clause 9 (clause 23(4)(a) and clause 23(3)(a)).
A deduction for input tax on any supply may be made for that taxable period only if a tax invoice is held for that supply (clause 23(2)).
In the case of tax paid to the Customs Department for imports or goods removed from bond, the input tax is deducted in the taxable period during which the payment is made to the Customs Department (clause 23(3)(a)).
(ii) 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 in a taxable period to the extent to which payment has been received or made in respect of that supply in that taxable period (clauses 23(3)(b)(i) and 23(4)(b)(i)). Where that supply is given a specific time of supply rule under clause 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.
As with the invoice basis, a deduction for input tax paid during the period may only be made in that period if a "tax invoice" is held for the supply.
(iii) Selection of Accounting Basis
The general rule set out in clause 22(1) of the Bill 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:
- Public Authorities, Local Authorities and non-profit bodies; and
- 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
- 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. (clause 22(2))
Any such person may adopt a payments basis from registration of from the first taxable period after which the approval to adopt a payments basis is made.
Where a person has adopted a payments basis and ceases to qualify under the criteria set out in (a), (b) and (c) above, that person must notify the Department of that fact and that person must adopt an invoice basis from the next taxable period (clause 22(3)).
On the periodic return, the figure of tax payable for that taxable period is arrived at as follows:
The output tax on supplies to be brought to account in that taxable period is totalled. This may be done by applying the tax fraction to:
- The total consideration for supplies made during the period (invoice basis); or
- The total of the payments received during the period and the total value of supplies made during the period where there are special rules for determining time of supply (payments basis).
Some organisations with more advanced accounting systems may separate the GST charge when "taking up" their sales in their own records. At the end of a period it may be possible for these organisations to total the output tax attributable to the taxable period without applying the tax fraction to the total of supplies made. This approach is also permissible.
- The input tax on supplies for the period is totalled. A similar approach to that outlined in Step 1 is used depending upon whether the registered person accounts on an invoice or payments basis. As stated earlier, NO deduction for input tax incurred may be made until a tax invoice (if applicable - refer pages 29 to 31 is obtained.
- The GST paid to the Customs Department during the taxable period is totalled.
- The other deductions discussed on pages 31 to 36 are totalled.
The amounts obtained in Step 2 are totalled and the sum is deducted from the figure in Step 1. The resultant figure is tax payable and must be remitted to the Department by the last date for furnishing the return for that taxable period.
If the total of the amounts deducted exceed the amount arrived at under step 1 that excess will be refunded to the registered person.
Change in Accounting Basis
A person may, on application, 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, provision has been made in clause 22 of the Bill for appropriate adjustments to be made.
Clause 22(4) requires that any person who changes the basis of accounting for GST must furnish a special return to calculate the amount of tax payable as a result of the change in the basis of accounting. This return is to be furnished to the Department on or before the last day for furnishing the last return completed on the old basis of accounting (clause 22(5)), ie the first day of the second month following the last day of the taxable period during which the direction to adopt the new basis is given. Any tax payable on the return is payable by the same date.
Change from an Invoice Basis to a Payments Basis - clause 22(7)
Where the change is from an invoice basis to a payments basis the input tax deduction made when an invoice was received from a creditor must be reversed to avoid a double deduction when payment is made. Similarly the output tax brought to account on all debtors must be reversed as output tax will be brought to account in a subsequent period when payment is received for the supply.
It is anticipated that the adjustment will be calculated as follows:
Step 1 - Identify all debtors and creditors of the taxable activity as at the last day of the taxable period in which the old accounting method is used;
Step 2 - Identify those debtors and creditors relating to the supplies that, pursuant to clause 9 of the Bill, have a time of supply occurring at the earlier of invoicing or payment. There is no adjustment in respect of debtors and creditors relating to supplies which have special time of supply rules.
Step 3 - In respect of the amount of all debtors and creditors identified above, calculate the total amount of output tax or input tax by applying the tax fraction to the respective totals.
Step 4 - Subtract the output tax from the input tax. The result is tax payable. If the output tax exceeds the input tax the person is due for a refund of the excess.
Change from a Payments Basis to Invoice Basis - clause 22(8)
The reverse of the above applies to a change from a payments basis to an invoice basis.
It is anticipated that the adjustment will be calculated as follows:
Identify all debtors and creditors of the taxable activity as at the last day of the taxable period during which the old accounting method is used;
Identify those debtors and creditors relating to supplies that, pursuant to clause 9, have a time of supply at the earlier of invoice or payment.
In respect of the amount of all debtors and creditors identified above calculate the total amount of output tax or input tax by applying the tax fraction.
Subtract the input tax from the output tax. The result is tax payable. If the input tax exceeds the output tax the registered person is due for a refund of the excess.
Note, however, that only input tax on supplies in respect of which a tax invoice (if applicable) is held may be deducted in Step 4 above.
Before a deduction can be made of input tax, a "tax invoice" must be held in relation to that supply. Clause 26 of the Bill 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 written notification of an obligation to make payment for a supply. A "tax invoice" is a document that contains all the particulars of a supply required in clause 26 and is, in essence, an evidentiary requirement 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.
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 (clause 26(1) and 64(1)(l)).
Supplies for up to $10
No tax invoice is required if the consideration for the supply is up to $10. This provision (in clause 26(5) of the Bill) reflects a recommendation of the Advisory Panel. The Panel considered that no invoices should be required for very small purchases such as parking meter charges, newspapers and bus fares, where the issue of tax invoices is, for all practical purposes, not possible.
Registered persons may still deduct input tax included in the purchase price of goods or services if the purchase price is up to $10 and 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. From a compliance point of view 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 for up to $100
The Advisory Panel recommended that supplies for up to $100 in value need not be supported by a full tax invoice but that some simplified tax invoice be acceptable.
Accordingly, under clause 26(4), provision has been made for a tax invoice to be issued containing much less detail than that required for the majority of supplies. This simplified tax invoice must show the following particulars:
- The name and registration number of the supplier:
- The date upon which the tax invoice is issued:
- A description of the goods and services supplied:
- The consideration for the supply and a statement that it includes a charge in respect of tax.
Full Invoices - clause 26(3)
In the majority of cases a recipient of taxable supplies will be required to obtain a tax invoice showing the following details in order to make a deduction:
- The name, address, and registration number of the supplier;
- The name and address of the recipient;
- An individual serialised number and the date upon which the tax invoice is issued;
- A description of the goods and services supplied;
- The quantity or volume of the goods and services supplied;
- The consideration, excluding tax, for the supply;
- The total amount of tax charged;
- The tax inclusive consideration for the supply.
These requirements are similar to those in the White Paper proposal but the requirement for the date of the supply has been omitted.
It is intended that, while the Bill refers to single supplies, a tax invoice may contain details of more than one supply. This approach, combined with the power (under clause 61) 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.
Special Cases where Tax Invoices Not Necessary
The Advisory Panel noted that many transactions take place in the community in circumstances where no invoice is issued. Automatic bank deduction of rental payments was cited as an example. The Report recommended that, where there is an alternative way of establishing that a transaction took place, a tax invoice should not be required.
To reflect this recommendation clause 26(6) provides for a general discretion on the part of the Commissioner to determine that some particulars in relation to a supply or class of supplies not be required on a tax invoice or that a tax invoice not be required at all. The Commissioner will exercise this discretion where there are, of will be, sufficient records available to establish the particulars of the supply or class of supplies. It is anticipated that the Commissioner will exercise this discretion, for example, in automatic bank deduction situations.
The Advisory Panel commented that, in a number of industries, it is common for the buyer to create a document evidencing the circumstances of the sale. Examples were given in the rural sector where freezing companies, dairy co-operatives, or selling agents, produce a sales document that is regarded as an invoice. The Panel recommended that provision be made for these documents to be treated as tax invoices even though they were not issued by the supplier.
To reflect this recommendation, provision has been made (in clause 26(2)) for the Commissioner to grant approval for a recipient of a supply to issue the tax invoice for that supply. The approval may be made in respect of a recipient or class of classes of recipient or a supply of class or classes of supplies. The approval must be obtained prior to such tax invoices being issued. The following further conditions must also be met:
- The supplier and the recipient must agree that the supplier shall not issue a tax invoice for the supply; and
- Two copies of that tax invoice must be produced, one to be retained by each party.
It is anticipated that approval will be granted for this approach in industries such as the rural industry (freezing companies, dairy co-operatives etc) and, together with the general discretion outlined above, the provisions assure some degree of flexibility in the process of issuing tax invoices.
Reference has been made to deductions - other than input tax - that may be made in calculating tax payable for any taxable period. They are specified in clause 23(3), paragraphs (c) to (f).
The deductions fall under 5 headings:
- Bad debts
- Adjustments - debit notes and credit notes
- Cash payment for a claim made under a contract of insurance
- Use of private/exempt assets
- Tax invoice issued after the end of the taxable period.
(a) Bad Debts
Clause 28 of the Bill provides for the deduction of the tax charged in respect of a bad debt has been written off during the taxable period. To qualify for this deduction the following conditions must be satisfied:
- The registered person making the deduction must be accounting for GST on an invoice basis;
- A taxable supply for a consideration in money must have been made and output tax on that supply correctly accounted for;
- The Commissioner must be satisfied that the registered person has written off as a bad debt the whole or part of the consideration not paid.
Where the above conditions are met, a deduction may be made of the GST in respect of that part of the consideration that is written-off as a bad debt. Prior approval from the Commissioner to make such a deduction is NOT required. This is a change from the proposal set out in the White Paper. In general, this provision reflects the treatment of bad debts adopted for income tax purposes.
A supply is made for a consideration of $1,100 ($1,000 + $100 GST) and only one half of the consideration is paid to the supplier. When the supplier writes off the $550 unpaid amount as a bad debt, a deduction may be made calculated as follows -
Bad Debt Written Off X GST on Supply Total Consideration ie, $550 X $100 = $50 $1,100
No deduction for a bad debt is available where the supply of goods to which the bad debt relates is a supply under a Hire Purchase Agreement. The effect is to place finance companies, who often have Hire Purchase agreements assigned to them, in the same position as if they had loaned the funds to the purchaser without the security of a Hire Purchase agreement. In this manner, any loss incurred by the financier is treated as a loss of monies loaned rather than the non-payment for a good or service.
Recovery of Debts Written Off
If a supplier, after making a deduction for a bad debt, receives payment of part of the consideration, there is deemed to be a further supply made upon which tax is to be charged. In this manner all or part of the deduction previously made for the bad debt is brought to account as output tax.
In the above example, if the supplier subsequently recovers a further $330 (ie total payments of $880), the amount deemed to be tax charged on a supply by the person who recovered the debt is calculated as follows:
(Bad debt Recovered / Bad debt Written Off) × Deduction Made
ie $330 / $550 × $50
= $30 tax charged to be brought to account
(b) Adjustments - Credit and Debit Notes
Clause 27 of the Bill specifies how adjustments are to be made to amounts of GST incorrectly brought to account in a prior period (eg as a result of the return of goods sold, discounts of other changes in previously agreed consideration).
A precondition for the application of the provision 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 shown on a tax invoice and the output tax incorrectly accounted for must have arisen due to:
- the supply of goods and services being cancelled; of
- the previously agreed consideration for the supply of goods and services being altered, whether due to the offer of a discount or otherwise; or
- the goods and services of part of those goods and services supplied being returned to the supplier.
Incorrect Output Tax Accounted For
Where the person has accounted for an incorrect amount of output tax, an adjustment must be made in the taxable period during which the error became apparent.
- Deduction to be Made
If the amount of output tax accounted for was too high, a deduction may be made in the return for the amount by which the output tax accounted for exceeds the correct amount of output tax.
Goods are sold for a total of $22,000 over a six month period. A provision for a "discount" or "rebate" existed so that if $10,000 or more of purchases are made over that period, 20 percent of the original sale price would be refunded or credited at the end of that period.
The firm supplying the goods accounts for $2,000 GST on sales for the six month period. When the firm "rebates" $4,400 to the purchaser at the end of the period, a GST deduction of $400 (1/11 of the rebate) is made by that firm.
- Deemed Supply
If the amount of output tax accounted for was less than that which should have been accounted for, the amount of the excess must be included as tax charged on supplies in the taxable period during which the error becomes apparent.
Incorrect Tax Invoice, Debit and Credit Notes
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.
- Credit Note
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 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.
- Debit Note
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 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 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 debit note.
- Position of the Purchaser
Where a purchaser receives a debit note or credit note an adjustment is necessary to returns made by that person.
In the case of the receipt of a credit note, the purchaser must treat the decrease in GST shown on the credit note as tax charged on a supply made during the period in which the credit note was issued, ie in the example given earlier of the $4,400 rebate, the purchaser will account for $400 GST as output tax in the period in which the credit note was issued.
Where the purchaser has not claimed a full deduction for the GST shown on the tax invoice (eg where the purchaser accounts for tax on a payments basis and full payment has not been made) only that part of the adjustment that has been deducted needs to be brought to account as output tax.
In the case of the receipt of a debit note, the purchaser may make a deduction of the increase in GST shown on the debit note.
(c) Indemnity under Contract of Insurance
Where an insurance company pays out a cash amount to another person as an indemnity under a contract of insurance, a deduction may be made under clause 23(3)(d) by the insurance company for the imputed GST in that payment. The payment in this case is treated as a tax inclusive purchase and the amount to be deducted is calculated by applying the tax fraction to the amount paid.
As the insurance company will charge GST on the whole of its taxable premiums, this provision ensures that only the "margin" or "value added" by the company is, in effect, subject to GST. In this way the result is the same as that applying to any other enterprise that charges tax on its outputs and receives a credit for the tax paid on its inputs.
The credit, under this paragraph only applies where the contract of insurance, itself, was a taxable supply (ie the premium was taxed). Further, the credit cannot be claimed if the insurance firm acquires goods or services or imports goods as a result of the payment since an input credit will be given in those cases under the normal rules.
(d) Use of Private/Exempt Assets
Input tax can only be deducted where the goods or service is acquired for the principal purpose of making taxable supplies. There are circumstances where a registered person may acquire a good or service for only incidental "business" use and subsequently that good or service is put to use in the taxable activity of that person. An example could be a private motor vehicle that is either temporarily or permanently put to use in a doctor's practice.
Clause 23(5) of the Bill provides for a deduction to be made where a good is applied for the purpose of making taxable supplies. The amount that may be deducted is calculated by applying the tax fraction to the lesser of:
- the cost of the goods or service; and
- the open market value of the goods or service.
The deduction is available only to the extent that the goods or service is put to business use. An apportionment will be required where the goods or service is only partly used in the business.
Where the goods or service originally used for some other purpose is subsequently put to use solely is for the purpose of making taxable supplies, the "cost" will be the full cost to the person who appropriated the goods (ie the price for which the goods were acquired by the person or, if he produced them himself, the cost of production including overheads).
Open Market Value:
This term is explained fully in Section II of this commentary and is defined in clause 4 of the Bill.
In the case of a person who appropriates for his taxable activity a private motor vehicle with an open market value of $22,000 (tax inclusive) and an original price of $33,000, the deduction to be made (under clause 23(3)(e)) is
1/11th of $22,000
The situation where a good or service is put partly for business purposes and partly for private or exempt purposes is discussed in Section VI of this commentary.
(f) Tax Invoice Received After Taxable Period
Clause 23(2) provides that no deduction may be made for input tax on a supply if a tax invoice required under clause 26 is not held by the recipient.
Clause 23(3)(f) provides for a deduction which has been denied, due to the absence of a tax invoice, to be made in a later period if the tax invoice is subsequently obtained.
Section V - Administration
Assessments and objections (Parts IV and V of the Bill)
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 clause 30) to issue an assessment where -
- default is made in furnishing any return; or
- the Commissioner is not satisfied with any return; or
- the registered person is himself not satisfied with any return made by him; or
- any non-registered person purports to charge tax on supplies.
Objections to Assessments
If an assessment is made, it may be objected to in the same manner as available for income tax assessments, and may be referred to the TRA or the High Court. Interest will be charged on tax in dispute in the same way as income tax. (refer clauses 36-43)
In addition, objections may be made (under clause 35) in respect of the exercise of certain discretions by the Commissioner. These discretions relate to:
- the taxable period (category A, B, C or D) allocated to a registered person; or
- the accounting basis to be used by a registered person; or
- certain concessions relating to the issue of tax invoices by registered persons (eg eligibility for self billing);
- whether the person is liable to register under the Bill;
- the cancellation of registration;
- eligibility for grouping of companies;
- eligibility for registration of branches or divisions.
These rights of objection have been introduced into the Bill subsequent to the White Paper and are intended to ensure that, where the determination of a matter of importance is left to the Commissioner the affected party has a right to be heard before an independent body.
Recoveries, refunds and reliefs (Parts VI & VII of the Bill)
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 2% for each extra month the tax remains unpaid (clause 44);
- A procedure similar to that in s 400 of the Income Tax Act 1976 will be available to recover outstanding GST (clause 46);
- Outstanding tax will rank the same as PAYE, ie as a debt above all secured debts, but after claims for unpaid wages (clause 45);
- Refunds may be claimed within eight years of the return period (clause 48(1));
- Any GST refund may be set off against any unpaid GST, income tax or other tax (clause 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 (clause 50).
Penalties (Part X of the Bill)
The Provisions for imposing penal tax are identical for those applying for income tax. They are dealt with in clauses 68-74.
Offences - clause 64
Certain specific offences relating to GST have been included in addition to other offences that are similar to those in the Income Tax Act 1976. To summarise, these offences cover:
- 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;
- representing that tax is charged, by a person who is not registered.
A variable scale of penalties has been adopted. Major offences are punishable by a penalty not exceeding $2,000, or $10,000 in the case of a company. Lesser offences such as failure to keep records, or issuing an incomplete tax invoice, attract a penalty of up to $500, of $2,500 in the case of a company.
Failure to provide a tax invoice, or failure to notify the Department of certain changes in the taxpayer's status, result in a maximum penalty of $100, or $500 in the case of a company, for each month that the offence continues.
General (Part XI of the Bill)
This part of the Bill contains provisions dealing with -
- Record-keeping requirements - clause 76. These 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. The general anti-avoidance provision is similar to section 99 of the Income Tax Act 1976. In addition, its provisions prevent companies or other persons from taking advantage of the registration threshold of $24,000, the payments basis, or the longer return period option, by artificially splitting their activity into branches - clause 77.
- The effect of the imposition of the tax on certain fixed contracts and statutory charges. The tax can be added to the contract price, or to statutory charges - clause 79.
- Disclosure of information between this Department and the Customs Department for the purposes of GST - clause 80.
- Power to make regulations - clause 82.
Transitional Provisnios(Part XII of the Bill)
Both the first and second report of the Advisory Panel on Goods and Services Tax contained recommendations on transitional provisions associated with the introduction of GST. These were adopted in part and the transitional provisions therefore differ from the proposals contained in the White Paper. Further consideration has been given to the matter. The transitional provisions are in three parts: arrangements for the registration of taxable activities prior to 1 October 1986, arrangements for credit of Sales Tax paid on goods, and arrangements for long-term contracts. The Bill also specifies the tax status of supplies where invoicing, payment and performance span the introduction date.
Registration - clause 83
- The Bill contains criteria for early registration of persons prior to the commencement 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, in preparation for the commencement of the tax. Failure of a person to register by 31 August 1986 is an offence.
Credit for Sales Tax - clause 84
- A full credit will be given to registered persons 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 a business. The Bill provides for the claim for the credit to be made in any return furnished before 31 March 1987.
Supplies Spanning Introduction - clause 85
Where the time of supply rules under clause 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
- determine the time of supply to be on or after 1 October 1986 and the delivery/performance of the supply occurs prior to that date,
the time of supply will be the time when the goods are delivered/made available or the services are performed.
A one year subscription to a magazine covering July 1986 to June 1987 issues will be taxable to the extent that the payment relates to magazines supplied on and after the 1st of October 1986 - irrespective of when the subscription is paid or invoiced. In this case, if 3 magazines are supplied prior to 1 October 1986 and the remaining 9 are supplied after that date, 9/12ths of the subscription value is subject to GST. For the following year's subscription (July 1987-June 1988) the time of supply is determined solely with reference to the rules specified in clause 9.
As a result of these provisions some suppliers may need to increase charges when setting subscriptions covering the period after 1 October 1986.
Long Term Contracts - clause 86
In relation to contracts currently in existence, the Bill provides that-
- For supplies-
- made pursuant to binding non-reviewable contracts that do not contain any provision that would allow the agreed price to be altered by an amount of GST; and
- those contracts have been entered into on or before the date of the Statement on Taxation and Benefit Reform (20 August 1985),
no GST will be chargeable - irrespective of whether delivery/performance, invoicing, or payment occur on or after 1 October 1986. Deduction may be made for input tax on such supplies in the normal way;
- For supplies made pursuant to all other contracts entered into on or before the date of the announcement, GST will apply only to supplies made after the first opportunity for review of the contract price following 1 October 1986. However, where the contract price is reviewed after 20 August 1985 but before 1 October 1986, GST will apply to supplies made on and after 1 October 1986;
For all other supplies, (ie those made pursuant to contracts entered into after the date of the announcement) primary regard will be had to the time of invoicing or payment when determining whether tax is chargeable in respect of any supply. However, it will be necessary to apply the transitional provisions relating to supplies spanning the introduction date (outlined above).
Construction in Progress - clause 85(3)
The Advisory Panel in their recommendations on the transition to the GST sought to apply the tax only to that part of payments relating to construction work undertaken after the date of introduction. The White Paper proposed that the time of supply would be determined with reference to the date a building was made available to the customer. The Advisory Panel considered that this treatment would not recognise the fact that goods and services are continuously supplied in the course of construction and that simply determining the time of supply with respect to the date on which the building is made available would unfairly apply the GST to construction undertaken prior to the time of introduction. The Bill provides that for construction projects being undertaken on 1 October 1986, such projects will be taxable only to the extent of the work done and materials fixed on site after that date.
Section VI - Special topics
Land is not exempt from GST, but the consideration for any supply of land, for GST purposes, is limited, under clause 11(1), to the value of improvements (buildings etc) included in the supply. The supply of bare land is not subject to GST. The main points underlying the treatment of real estate transactions are as follows:
- "land" is defined in clause 2 as a fee simple estate in land, or a tenancy for a term of or in excess of 21 years. Land leased for a lesser period than 21 years will be fully subject to the tax (eg a shop lease for 3 years).
- the value of any supply is limited to the value of "improvements", a term defined in clause 2 as meaning all value added to the land (eg buildings, fences etc), but not including landscaping, drainage or subdivision work.
- the value of improvements is calculated (under clause 11(2)) on a pro rata basis from the district land valuation roll, under the Valuation of Land Act 1951. An example would be the taxable supply of a building for total consideration of $100,000. If the last Government valuation showed a value of $60,000, of which $40,000 was improvements, the value of improvements included in the total consideration is-
- 40,000 / 60,000 x 100,000 = $66,666.
- The GST on that supply would be 1/11 of $66,666 or $6,060.
- there are provisions in clauses 11(3) and 12 allowing the registered person to appeal against the result of that valuation method.
- since the term "improvements" does not include the development, levelling, drainage or subdivision of the bare land, land developers (a defined term based on section 67 of the Income Tax Act 1976) will also be required to charge tax on the value represented by any such land development work done by them within 10 years of selling the land. This will require such persons to keep detailed records of GST deducted in respect of development work. This provision (clause 13) is necessary in order to tax value added to the land by development work, while permitting the developer to make full input tax deductions as the work is carried out.
A common question relates to whether the tax will apply to the sale of private dwellings. In general, GST will not apply to the sale of houses by private persons. GST will only apply to houses sold in the course of a taxable activity, such as the sale of "spec" houses by a builder.
It should be noted that buildings partly constructed as at 1 October 1986 will only be taxed in respect of the value of work done and materials fixed on site on or after that date (see page 41).
"Input tax" is defined in clause 2 and includes an amount calculated by applying the tax fraction to the price of second-hand goods bought by registered persons if tax is not charged on that supply (ie the vendor is not a registered person of the goods are private assets of a registered person). This ensures that when the registered person charges GST when the goods are resold by him, or when he incorporates them into other goods for sale, only the "margin" or "value added" by him is, in effect, subject to GST.
A book shop owner purchases used books from a university student for $55. The shop owner may deduct 1/11th of the purchase price (ie $5) as input tax.
Agents - Clause 61
The Bill recognises 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 - clause 62
Auctioneers often do not know, when selling on behalf of a large number of persons, whether the sales will be taxable or not (ie whether the principal is registered). The Bill therefore provides that with the agreement of the principal, the auctioneer can treat all sales as taxable. When 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 is stressed that this is an optional approach. If both the principal and auctioneer do not choose to adopt this approach, the sale by auction will only be taxable if the principal whose goods are sold is a registered person selling goods in the course of his taxable activity.
Auctions may themselves be carried on on either a tax-inclusive or tax-exclusive bidding 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.
Two specific concessions are available to these bodies. The concessions are -
(a) Where goods or services are donated to the non-profit body, the supply of those goods or services by the non-profit body will be exempt (clause 17). The body will, of course, be unable to claim tax credits relating directly to the sale.
(b) For the purposes of applying the $24,000 turnover threshold, non-profit bodies may, in certain circumstances, treat each local branch separately. To take advantage of this provision each branch must maintain an independent accounting system, and be identifiable by its activities or its location - clause 53(5).
Note: A specific anti-avoidance provision prevents this kind of splitting of business activities in all cases other than non-profit bodies - clause 77.
Clause 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 determined in Clause 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, ie the "cash price" is treated as a tax-inclusive selling price and the GST on the supply is arrived at by applying the tax fraction 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:
- A retailer sells a good under a hire purchase agreement to which the retailer and the consumer are parties. The consumer makes payments under the agreement, to the retailer, until such time (on the making of the last payment) that title in the goods passes to the consumer.
In this case the retailer must account for GST on the supply at the time the agreement is entered into.
- A retailer, having negotiated a sale to a consumer, sells the goods to a finance company who then sells that goods to the consumer under a hire purchase agreement. The consumer makes the periodic payments, under the 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 these circumstances there are two taxable supplies:
- One from the retailer to the finance company, upon which the finance company is entitled to an input credit for the GST charged and accounted for by the retailer. The time of supply and accounting basis are covered by the normal rules.
- 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.
- A retailer sells a good to a consumer under a hire purchase agreement to which the retailer and consumer 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 consumer 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 two supplies also:
- (a) The sale of the goods under a hire 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.
- (b) The assignment of the hire purchase agreement is an exempt supply (refer clause 3(1)(h)). This is necessary because if it were a taxable supply by the retailer, no credit would be available to the finance company as the rights under the agreement were not acquired for the principal purpose of making taxable supplies (the provision of credit is an exempt supply).
The GST consequences of these three situations are illustrated in the following examples:
(a) Retailer sells goods by hire purchase to consumer who is not registered. - Cash price $2,750 (includes $250 GST) Output tax - retailer $250 No input tax credit - (b) Retailer sells goods by hire purchase to consumer who is registered - Cash price $2,750 (includes $250 GST) Output tax - retailer $250 Input tax - consumer $250
(c) Retailer sells goods to finance company - Price $2,750 (includes $250 GST) Output tax - retailer $250 Input tax - finance company $250 Finance company sells goods by hire purchase to consumer who is not registered Output tax - finance company $250 Input tax - consumer - eg (d) As in (c) above except consumer is registered Output tax - finance company 250 Input tax - consumer $250
eg (e) As in (a) and (b) above for sale by finance company to consumer Retailer assigns hire purchase agreement for $2,750 to finance company - exempt from GST
Under a hire purchase agreement the person who holds the agreement (ie retailer or finance company) and, as a result, the title to the goods has the right to repossess those goods if the consumer defaults in payment under the agreement. When this action is taken the goods must be resold by the repossessor and the proceeds are appropriated by the repossessor in satisfaction of the whole or part of the debt outstanding.
This resale by the repossessor will be a taxable supply upon which the repossessor will have to account for GST under the normal rules.
(i) Consumer is a registered person
- The passing of possession from the consumer to the repossessor is a supply of a good. The value of that supply is arrived at by the application of the rules in clause 10 of the Bill. Since the basis of the repossession is that a part of the debt outstanding will be forgiven (or the right to recover it will be waived), the supply of the possession of the goods to the finance company or retailer will be treated as a supply for a consideration in money. The amount of the consideration will be the amount of the debt forgiven. As this amount is not determined at the time of repossession, the provisions of clause 9(5) apply. The result is that the supply (repossession) is deemed to take place to the extent that, and at the time payment is due or is received. This will be the time at which the debt is waived ie after the resale of the repossessed goods. The consequence of this approach is that the repossessor will be entitled to an input credit of 1/11th of the debt waived, and the consumer, being a registered person, will have to account for output tax to that extent.
(ii) Consumer who is not registered
- Where the consumer is not a registered person the repossession constitutes the supply of second-hand goods for which the repossessor will be entitled to deduct input tax of 1/11th of the debt waived.
The following are examples of the GST consequences of repossessions and resales:
eg In the examples cited earlier where a good was sold for $2,750 under a hire purchase agreement it is assumed that only $500 was paid by the consumer. The vendor repossesses the goods and resells it for $1,100.
(a) Goods repossessed from non-registered consumer, Input tax - retailer (second hand goods) $100 Output tax - retailer (on resale) $100 (b) Goods repossessed from registered consumer, Output tax - consumer (on repossession) $100 Input tax - repossessor (On repossession) $100 Output tax - repossessor (On resale) $100
The Bill contains no requirements as to how prices are to be displayed. In responding to the Advisory Panel's report, the Minister indicated that unless prices displayed at the retail level are GST inclusive the consumer must be made aware of the "all up" price of the goods on the ticket. It is likely that legislation to give effect to this decision will be included in appropriate Trade and Industry legislation.
Pre-incorporation contracts Clause 24
A provision is necessary to cover the situation where a company is being incorporated. Without this provision a problem arises if that company, after incorporation, wishes to claim input tax credits on expenses incurred before its incorporation (technically there is no legal entity in existence before a company is incorporated). Because it is non-existent, it cannot enter into any sort of binding contract, and therefore there are difficulties in claiming input tax when it is necessary for someone (usually the promoter) to make arrangements for the "company" to adopt when the incorporation is finally effected, for example leasing business premises.
It is also clear that a company cannot be registered 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 on any contract entered into prior to ratification by the incorporated company. Clause 24 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 becomes a member of the company (and is reimbursed by the company) if the goods and services were acquired in connection with the incorporation or 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 in this situation, and to have paid the tax charged, as if the supply had occurred during the taxable period in which the person was reimbursed by the company. This is subject to a number of conditions listed in the proviso.
This ensures that new companies are not unfairly disadvantaged by being unable to claim input credits and corrects a situation that would otherwise be an anomaly in the GST system.
A special provision on racing is needed in the Goods and Services Tax Bill because 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. It is not the intention to tax prize money, therefore GST is not payable on the full price of a bet. If there is a $1 bet placed, and 80c is paid out in prizes, only the 20c retained by the organiser will be charged with GST.
Clause 5(9) deems a supply to be made where any person bets money on any race, and details the part of the supply deemed to be made by, respectively, the racing club, TAB and New Zealand Racing Authority.
The time of supply (clause 9(2)(e)) is set by reference to the Racing Act 1971. This ensures that the supply of services does not take place when the bet is made, but takes place when the deductions under the Racing Act 1971 (levies etc) are received by the various bodies.
The value of the supply 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).
Clause 10(12) states that the consideration for any supply of services deemed to have been made under Clause 5(9) are the deductions made from the total amount of betting under Section 42 and 97 of the Racing Act 1971. This clause ensures that prize money is not subject to GST and that only the sum of the deductions are subject to GST.
The percentage rates of the deductions are listed in the Racing Act 1971 and each body whether it is the Racing Club, TAB or New Zealand Racing Authority, then has to account for GST on the total of the deductions they received.
Lotteries and raffles
It is necessary to have specific provision for lotteries to only subject only the services portion to GST. A proportion of the total ticket price will be charged with GST and the sum that is to be paid back in prizes to the ticket holders will not be subject to tax.
The Gaming and Lotteries Act 1977 covers these areas:
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.
Clause 5(11) 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 is deemed to have supplied the services.
The time of any supply under clause 9(2)(f) is when the first drawing occurs. This ensures that if there is more than one drawing of prizes for any lottery or other competition, that liability to pay GST arises on the date of the first drawing.
Games of chance played by means of a gaming machine or an amusement device come under the time of supply provision in clause 9(2)(g) which applies to all coin operated machines. The time of supply for these machines is when the machine is emptied of its coins or tokens.
The consideration for a supply deemed to be made under clause 5(11) is the total proceeds of the sale of tickets, after deducting all prizes payable in respect of that lottery or other competition (clause 10(14)). This ensures that the money to be paid back in prizes is not subject to GST. The person or body who conducts the lottery or any other competition must account for GST on the sum that is left.
Note: It is important to note here that, like racing, it is the ticket buyer who is the consumer in this situation. Where any selling agent, for example, is paid commission, he too must charge for 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.
Provision of business credit
Financial services are exempt from GST under clause 17. Included in the definition of financial services (in clause 3) is "the provision of credit under a credit contract", a credit contract being as defined in the Credit Contracts Act 1981. The definition in that Act is very broad and essentially encompasses all agreements that provide for the supply of goods of services where payment will occur at a later stage at a price in excess of the "cash price" (ie the price if payment were made at the time the contract is made). The extension of credit for periods of up to 2 months is not included, therefore most common transactions involving a trade discount (eg payment by 20th of month following) are not covered by the exemption.
In general, the definition will encompass (and therefore exempt) any excess charged over the "cash price" for a supply of goods or services where the agreement provides for the extension of credit for a period in excess of 2 months.
Extension of Credit for up to 2 Months
Where a discount is offered for payment prior to a due date, or a penalty/charge will be imposed for payment after that due date, and that due date is within 2 months of the date on which the contract for the supply is made, there will generally be no credit contract exemption. For example, where a purchase is made on terms that impose a charge if payment is not made within 7 weeks, no credit contract exists and the charge received on late payment is taxable in full to the supplier.
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 note will have to be issued to the purchaser showing the adjustment.
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. If no tax invoice is issued, there is no need for any adjustment.
Extension of Credit in Excess of 2 Months
Where a sale is made on terms under which the recipient is obliged to pay an amount in excess of the "cash price" and the imposition of that excess will occur at some time after two months since the contract is made, a credit contract is likely to exist and the credit provided under that contract (ie the excess charged) will be exempt for GST purposes. For example, where a purchase is made from a retailer on terms that if the account is not paid within 10 weeks a 10 percent penalty will be imposed, a credit contract will exist and the penalty charge for the provision of that credit will be exempt from GST.
For traders who provide credit under a credit contract, no GST will be chargeable on the credit charges received, and those traders will not be entitled to a refund of GST paid on inputs purchased for the principal purpose of providing that credit. In determining what input deductions will be denied, regard will be had to the extra inputs that are required as a result of the provision of credits, ie those that would not have otherwise been purchased.
When issuing tax invoices for such transactions it is only the "cash price" that will be subject to GST. If a discount is not taken up or a credit charge imposed, that excess over the cash price is not subject to GST. Provided the tax invoice correctly shows the cash price, no further action is required.
Goods and Services used only partly for taxable purposes
Where the principal purpose of acquiring goods is the making of taxable supplies, a full deduction for the tax included in the price of the goods or services is allowable, by virtue of the definition of "input tax".
If, however, the goods or services are later used for some other purpose, eg making an exempt supply such as rental of a dwelling, or used for the private consumption of the registered person (eg trading stock taken home from the business), the Bill provides that a further supply is deemed to take place. Clause 5(2) also applies to supplies made to employees of the registered person.
The value of these deemed supplies is to be the cost (to the registered person) of the goods or services supplied, or any actual amount paid for them, if greater.
Where the use of the goods is only temporary, or partial, and it is not practicable to establish the "cost" of the goods, or that part of them which has been supplied, the Bill provides for the supply to be valued at its open market value.
Similarly, goods and services may be purchased for private purposes and no deduction for input tax made. However, those goods or services may subsequently be, permanently or temporarily appropriated for the making of taxable supplies. In that case, clause 23(5) of the Bill provides for a deduction to be made. The amount of the deduction is again based on the original cost of the goods or services, or on their open market value, whichever is the lesser.
In any case where the use of the goods is only partially for the purpose of making taxable supplies the "cost" will need to reflect that appropriate proportion of the full cost that is attributable to the period of the use. Such a value should not necessarily be measured by reference to the diminution (if any) in the value of the goods during the period of business usage. The precise method of arriving at the cost is likely to vary according to the nature and use of the goods concerned. It is intended that guidelines will be developed in due course (perhaps in the case of motor vehicles a per kilometre basis will be used). In other cases if similar goods are commonly hired out commercially, the normal hiring charge might provide a useful indicator.