The relationship between section 113 of the TAA and the proviso to section 20(3) of the GST Act

We have been asked to clarify the relationship between section 113 of the Tax Administration Act 1994 ("section 113") and the proviso to section 20(3) of the Goods and Services Tax Act 1985 ("the proviso to section 20(3)") when a registered person ("taxpayer") has not claimed a goods and services tax ("GST") input tax deduction in an earlier taxable period.

In particular, we have been asked whether the Commissioner is required to amend a GST assessment under section 113 to allow a deduction in an earlier taxable period when, under the proviso to section 20(3), the taxpayer can claim a GST input tax deduction in a later taxable period.

We have also been asked to explain the effect of the two-year limitation period specified in paragraph (a) of the proviso to section 20(3).

While the Commissioner is not prevented from exercising the discretion under section 113, the Commissioner's practice is generally not to do so. This is because the proviso to section 20(3) provides a specific mechanism by which taxpayers can correct the failure to claim the input tax deduction themselves. It is the Commissioner's view that a general provision such as section 113 should not be used when a specific provision is available.

However, in certain circumstances the Commissioner will consider exercising the discretion under section 113 and amend the earlier GST assessment, notwithstanding that the taxpayer can alternatively claim a GST input tax deduction in a later period.

Background

The proviso to section 20(3) allows a taxpayer to include a GST input tax deduction not claimed in an earlier return period in a later return period without having to issue a notice of proposed adjustment ("NOPA") to the Commissioner.

The proviso to section 20(3) reads:
...

• Provided that a registered person who is entitled to deduct an amount from the output tax attributable to a taxable period may deduct that amount from the output tax attributable to a later taxable period if the amount has not previously been deducted from the output tax of the registered person and -
  
  
  1. the later tax period begins on or before the date that is the 2nd anniversary of the earlier of the following:
     1. the date on which the registered person makes the payment for the taxable supply to which the deduction relates:
     2. the date on which a tax invoice is issued for the taxable supply to which the deduction relates:
  
  
  2. the failure of the registered person to make the deduction in the earlier taxable period arises from -
     1. an inability of the registered person to obtain a tax invoice:
     2. a dispute over the proper amount of the payment for the taxable supply to which the deduction relates:
     3. a mistaken understanding on the part of the registered person that the supply to which the deduction relates was not a taxable supply:
     4. a clear mistake or simple oversight of the registered person.

Paragraphs (a) and (b) of the proviso to section 20(3) set out the criteria that apply if a registered person who has not claimed a GST input tax deduction in one taxable period seeks to claim the input tax deduction in a later taxable period. Paragraphs (a) and (b) are not cumulative requirements. They are separate criteria and they apply independently.

Under paragraph (a) a taxpayer has an unqualified two-year period within which a GST input tax deduction omitted from an earlier taxable period can be claimed in a later taxable period. Paragraph (a) sets out the mechanism for determining the two-year limitation period. That is, the period that ends on the second anniversary of the earlier of the payment date or date that the tax invoice was issued for the taxable supply to which the omitted input tax deductions relate.

Paragraph (b) prescribes four potential circumstances when a taxpayer could have failed to claim a GST input tax deduction in an earlier taxable period. If any of the circumstances specified in paragraph (b) apply, the taxpayer will have an unlimited time to claim the input tax deductions in a later taxable period.

The four circumstances specified in paragraph (b) apply independently. That is, the taxpayer does not have to prove that their failure to claim an input tax deduction in an earlier GST period arises because all the circumstances specified in paragraph (b) have occurred.

On the other hand, section 113 gives the Commissioner the discretion to amend an assessment to ensure its correctness when it contains an error.

Section 113 reads:

1. Subject to sections 89N and 113D, the Commissioner may from time to time, and at any time, amend an assessment as the Commissioner thinks necessary in order to ensure its correctness, notwithstanding that tax already assessed may have been paid.
2. If any such amendment has the effect of imposing any fresh liability or increasing any existing liability, notice of it shall be given by the Commissioner to the taxpayer affected.

Discussion

We have been asked whether the proviso to section 20(3) takes precedence over section 113 when a taxpayer has not claimed a GST input tax deduction in an earlier taxable period.

Inland Revenue's practice for exercising the Commissioner's discretion to amend an assessment under section 113 is set out in SPS 07/03: Requests to amend assessments.

SPS 07/03 states that:

• The discretion to amend assessments under section 113 enables the Commissioner to act fairly towards all taxpayers including those who get their tax returns or assessments correct the first time and those who have made genuine errors. This also promotes integrity in the administration of the tax system.
• It is important, however, to recognise that Inland Revenue does not have unlimited resources to undertake lengthy verification processes to determine whether assessments should be amended. When meeting the obligation to collect over time the highest net revenue that is practicable within the law under section 6A(3), the Commissioner must consider:
  1. the resources available to the Commissioner,
  2. promoting compliance, especially voluntary compliance, by all taxpayers, and
  3. taxpayers' compliance costs.
• Accordingly, it is consistent with the obligation under section 6A(3) for the Commissioner to limit the amount of time and other resources that will be spent investigating amendment requests. Therefore, at times not all requested amendments will necessarily be corrected. Ensuring a balance between time spent considering amendment requests and other activities is also consistent with the obligation to protect the integrity of the tax system under section 6(1).

Although the Commissioner is not prevented from exercising the discretion under section 113, if the taxpayer can alternatively claim a GST input tax deduction pursuant to the proviso of section 20(3), the Commissioner's practice is generally to not exercise the discretion under section 113.

This is because the proviso to section 20(3) provides a specific mechanism by which the taxpayer can correct the failure to claim the input tax deduction themselves. As such, it is not necessary for the taxpayer to request that the Commissioner amends the assessment under section 113 to claim the input tax deduction.

However, in certain circumstances the Commissioner will exercise the discretion under section 113 notwithstanding that the taxpayer can alternatively claim a GST input tax deduction in a later period. Examples of circumstances where the Commissioner will consider amending the GST assessment under section 113 include if:

• the tax position taken by the taxpayer that input tax was not deductible in the earlier period was adopted on the basis of incorrect advice given by Inland Revenue; or
• the Commissioner is already investigating the earlier period to which the GST input tax deduction relates.

Any request for an amendment to the original GST assessment made under section 113 must be considered in terms of Inland Revenue's practice for exercising the Commissioner's discretion to amend assessments under that section, as set out in SPS 07/03: Requests to amend assessments.

If a taxpayer is unable to claim the input tax deduction in a later period due to the elapse of the two year limitation period specified in paragraph (a) of the proviso to section 20(3) and paragraph (b) of the proviso does not apply, the Commissioner will consider a request to amend the original GST period under section 113. However, any such request must also comply with the requirements set out in SPS 07/03: Requests to amend assessments.

SPS INV 490: Correcting minor errors in GST returns

The question of correcting minor GST errors in subsequent GST returns was previously considered in SPS INV 490: Correcting minor errors in GST returns. SPS INV 490 has now been withdrawn. Taxpayers seeking to correct errors made in GST returns should now refer to this item and to SPS 07/03: Requests to amend assessments.