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A cautionary tale of why it’s important to have correct GST documentation

Inland Revenue recently published a Technical Decision Summary (TDS 23/08) looking at the GST returns of a Taxpayer providing tax advisory and accounting services. A Technical Decision Summary (or TDS) is a summary of adjudication or private ruling decisions made by the Tax Counsel Office (TCO). They are intended to provide a little more guidance as to Inland Revenue’s legal interpretation process. More about TDSs can be found in our December 2021 Tax Alert article.

In the facts covered by TDS 23/08, the Taxpayer claimed GST input tax deductions relating to goods and services provided to it in connection with a client that had been removed from the Companies Register when the Taxpayer worked on the client matters. The Taxpayer also claimed input tax deductions relating to goods and services for which the Taxpayer did not hold tax invoices and for goods and services provided to it in relation to leased property. Inland Revenue’s Customer and Compliance Services (CCS) team disallowed the claimed input tax deductions as well as an additional claim for an amount the Taxpayer had received as consideration for a taxable supply of which the Taxpayer was accountable for output tax.

TCO found that some of the input tax deductions were not allowed and the Taxpayer was liable to return the output tax. Much of the decision to deny the deductions rested on the Taxpayer having insufficient supporting documentation. The decision acts as a cautionary tale that Inland Revenue can and does check whether taxpayers hold the relevant tax invoices (or from 1 April 2023 taxable supply information), to support their GST returns.

GST input tax can be claimed where goods and services are acquired and have been used in or are available to be used in the making of taxable supplies. Tax invoice requirements applied up to 31 March 2023. From 1 April 2023, the rules changed to allow taxpayers to hold ‘taxable supply information’. This change relaxes the rules somewhat, allowing information to be aggregated across systems. This change does not reduce the importance of holding relevant information or change Inland Revenue’s powers to check that taxpayers do so.

The TCO found that the Taxpayer was entitled to some of the input tax deductions claimed in connection with their taxable activity. These were where the Taxpayer either held valid tax invoices or where they were not required to, due to the supplies being for $50 or less (this threshold has now increased to $200 for taxable supply information). Deductions were denied by CCS and upheld by the TCO where the taxpayer did not hold tax invoices or where the taxpayer was not identified on the invoice as the recipient of the supply (a requirement for tax invoices up to 31 March 2023).

Deductions were also denied for some goods and goods and services in connection with the Taxpayer’s clients where the Taxpayer had no evidence that they were acting as an agent on behalf of the clients. Agents may claim an input credit where they have sufficient documentation to demonstrate the agency relationship or where it is obvious from the relationship that they are acting as an agent on behalf of the recipient of the supply. The TCO also found that the agency relationship could not be demonstrated, and these expenses were insufficiently connected to the making of taxable supplies since the companies the Taxpayer was supplying had been removed from the Companies Register so did not exist at the time of supply.

Finally, the Taxpayer had claimed input credits in relation to a property that they leased. TCO found that the Taxpayer used a portion of the leased property to make taxable supplies and that they were required to acquire the goods and services under the lease. However, as the Taxpayer was also using the property for activities other than making taxable supplies, they were only entitled to claim a portion of the GST on these invoices and should have held documentary evidence to substantiate the apportionment used.

GST output tax must be charged and paid on supplies made by a person in the course of undertaking a taxable activity. CCS claimed the Taxpayer had to return output tax on an amount the Taxpayer received. The Taxpayer claimed the amount was exempt from GST as it was repayment of a loan. TCO supported CCS’s decision on the grounds that the Taxpayer had no documentation demonstrating that a loan had been extended to the payer. This is a further example of the need for documentation to substantiate positions taken.

The taxpayer’s lack of tax invoices and other documentation was also considered when penalties were imposed. Gross carelessness penalties were applied as the TCO considered that a reasonable person would have known that evidence was required to support the GST positions. Keeping appropriate records to support positions taken is vital for both defending those positions and showing that care has been taken in determining them.

If you have any queries regarding your GST, please contact your usual Deloitte adviser.

July 2023 - Tax Alerts

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