Common GST Mistakes

Getting the GST treatment wrong on high value transactions or making systematic GST errors on an ongoing basis can be very costly. This article highlights several common mistakes.

Incorrectly claiming secondhand goods credits


The main error in claiming secondhand goods input credits is when the purchase is from an associated person. The general position is that the amount of secondhand credit that can be claimed is the lower of:


  1. The GST paid by the vendor;
  2. The tax fraction of the purchase price; and
  3. The tax fraction of the market value of the supply.


Note, there are slightly different rules for supplies made by the vendor after having deregistered.


A further potential error is that a secondhand goods claim can only be made if consideration has been provided. Generally, this will be by payment or through vendor loan.


If no payment is made, no secondhand good claim can be made. Similarly, if only part payment has been made, the secondhand good claim is limited to the tax fraction of that part payment.


Failing to make change of use adjustments


A classic example is bare land acquired for a taxable activity, such as farming or leasing for grazing, and subsequently the owners decide to build a dwelling for residential purposes. An adjustment must be made to reflect the change in use of that part of the land from a taxable use to an exempt use.


Deemed supplies


When a registered person deregisters from GST there is a deemed supply of assets used in the registered person’s taxable activity. This should be accounted for in the registered person’s final GST return.


Returning GST on a payments basis on supplies made to an associated person


The time of supply rules are modified for taxable supplies made to an associated person. The time of supply is the earlier of:


  1. Where goods are to be removed, the time of supply is when the goods are removed – e.g., livestock and trading stock;
  2. Where goods are not to be removed, the time of supply is when the goods are made available to the recipient – e.g., the lease of land;
  3. Where services are provided, the time of supply is when the services are provided – e.g., management fees that are provided throughout the year, but payment is made annually.


The above rules do not apply if an invoice is issued, or any payment is made in respect of the supply on or before the last day for filing the GST return in which the supply would have otherwise been included. 


Assuming neutrality of a GST position when correcting past errors


This generally happens with supplies made between associated persons (see above). I’ll illustrate with an example:


Tom leases a commercial property to Tom & Jerry Limited. Both parties are registered for GST. Tom neglects to issue a tax invoice to Tom & Jerry Limited and no payment is made. The parties’ tax agent identifies the error.


Tom believes that there is no real issue as the liability to account for GST and the entitlement to claim GST are the same. Tom has overlooked that:


  1. His time of supply on the rent is each return period; and
  2. The company can only claim GST once it has received a tax invoice (if registered on an invoice or hybrid basis) or when a tax invoice is received, and payment made (if registered on a payments basis).


Not only is Tom’s liability to account for GST earlier than the company’s ability to claim, but Tom may also have liability for UOMI and penalties.


Ongoing personal liability where Inland Revenue is not notified of a change in trustees


Where a trust is registered for GST, the liability for paying any GST rests with the trustees. A retiring trustee must inform Inland Revenue of his or her, or in the case of a corporate trustee, its retirement. Failure to do so will result in a continuing joint and several liability for future GST liabilities.


The application of tax law can be very fact specific. The comments above are of a general nature only and are not intended as tax advice.

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