Chapter 2 - General Operation of GST
2.1 This chapter discusses the design principles underlying the operation of GST. The collection of GST in New Zealand is modelled on the “credit-invoice” method. Under this model, a liability for GST arises every time goods and services are supplied by a GST-registered person in the course of a taxable activity. GST is also imposed on imported goods and services. Tax is therefore paid throughout the production and distribution chain, but because GST-registered persons are able to deduct GST paid, the tax is ultimately passed on to the final consumer.
2.2 The deduction of GST (by way of a refund or credit) ensures that GST does not cascade as goods and services are supplied between GST-registered persons, and does not impose a cost on business. Therefore, unless the GST paid is connected with the supply of GST exempt goods or services, it does not directly tax the intermediate production of goods and services in New Zealand.
2.3 Other reasons why the credit-invoice method has been adopted over other alternative indirect tax systems are:
- It allows all goods and services to be included in the tax base.
- It is transparent.
- It requires businesses to maintain accounting records detailing sales and purchases, which helps improve financial management and managerial decisions.
- It provides a robust revenue stream for the government by taxing each stage of the production and distribution chain. As imports are taxed, it ensures that the tax is secured at the earliest stages of production.
- The requirement to issue tax invoices means that the tax generates its own audit trail, which assists in its administration and enforcement.
Accounting for GST
2.4 Because GST is a tax based on transactions, its operation, including input tax entitlements, depends on the contractual relationships between the supplier and the recipient.[9] Accounting for GST therefore requires an understanding and knowledge of:
- when a supply occurs (or is deemed to occur);
- when an entitlement to an input tax deduction arises; and
- when (and how) the calculation of GST less input tax needs to be made using the various accounting bases and filing frequencies allowed under the GST Act.
Time of supply and output tax
2.5 The GST Act contains a number of rules that determine the point in time when a GST-registered person must recognise a supply of goods and services that gives rise to an output tax liability. In the majority of cases, this will be when the supplier issues an invoice or receives payment.
2.6 The rules attempt to approximate when a transaction has been concluded and economic control of the goods and services has passed from the supplier to the recipient. When GST was being developed, a number of rules were considered necessary to reflect this concept.[10] Following the recommendation of the Advisory Panel on Goods and Services Tax,[11] which considered public submissions on the White Paper, the then government agreed to simplify the time of supply rules to the earlier of invoice or payment.
2.7 In situations when the application of the general “earlier of invoice or payment” rule is not appropriate – for example, agreements for hire or regular periodic supplies of goods and services, the GST Act contains a range of supplementary rules.
Deduction of input tax
2.8 GST paid on purchased taxable supplies can be deducted as input tax when the GST-registered person holds a valid “tax invoice”.[12] Unlike output tax, input tax is not generally subject to timing rules.[13] The point in time when input tax can be deducted is largely determined by the taxpayer holding evidence that tax has been paid. If the registered person does not hold a tax invoice or other documentation to support the purchase,[14] no deduction can be made.
2.9 In each taxable period, GST-registered persons aggregate the total output tax deemed to arise either under the time of supply rules or the accounting rules for that period and deduct from that amount any input tax invoiced or paid. The net of these two amounts is either the tax payable owed by the GST-registered person or, if input tax exceeds output tax, a refund.
The accounting bases
2.10 The accounting bases available in the GST Act determine how output tax and input tax should be attributed to a particular taxable period. Although the time of supply rules determine when GST-registered persons are required to recognise a liability for GST, the accounting basis adopted can alter the taxable period in which that liability needs to be disclosed to Inland Revenue.
2.11 The GST Act allows for three bases of accounting for GST, as described in Table 1. The current choice of accounting bases is largely a response to compliance cost concerns.
| Accounting basis | Description |
|---|---|
| The invoice basis | The standard basis of accounting for GST is the invoice basis. Output tax is accounted for at the time of supply. Input tax deductions may be claimed on the basis of payment or invoice – subject to the deduction being supported by a valid tax invoice. The invoice basis is similar to the accrual basis for financial accounting. |
| The payments basis | GST-registered persons may use the payments basis if they have annual taxable supplies of less than $1.3 million or are a non-profit body. Output tax is accounted for to the extent that payment is received. Input tax deductions can be claimed to the extent to which payment has been made – subject to the deduction being supported by a valid tax invoice. Inland Revenue has a discretion to allow GST-registered persons who have a turnover of greater than $1.3 million to account for GST using this basis after taking into account the nature, volume and value of the supplies made. |
| The hybrid basis | GST-registered persons may choose to use the hybrid basis if they do not qualify to account for GST using the payments basis and do not want to use the invoice basis. No turnover limitations are imposed on who may account for GST using the hybrid basis. Output tax is accounted for in a similar manner as under the invoice basis. Input tax deductions are claimed in a manner similar to the payments basis. |
2.12 Table 2 shows the general distribution of GST-registered persons over the three accounting bases.[15]
| Annual taxable supplies | Payments | Invoice | Hybrid |
|---|---|---|---|
| Up to $1.3 million | 458,520 | 99,942 | 3,299 |
| Over $1.3 million | 13,230 | 24,145 | 462 |
Return filing
2.13 The last factor in accounting for GST is the frequency for calculating tax payable (including any refund) and filing the related return with Inland Revenue.[16]
2.14 For administrative convenience, the activities of GST-registered persons are broken down into periods of time, or “taxable periods”. Depending on their size, as measured by annual taxable supplies, GST-registered persons generally have the choice of one of three taxable periods or filing frequencies.[17] The standard taxable period is two months, although shorter (monthly) and longer (six-monthly) periods may apply. At the end of every taxable period, GST-registered persons must assess whether they have GST to pay or are entitled to a refund.
9 Wilson & Horton v Commissioner of Inland Revenue (1995) 17 NZTC 12,325.
10 White Paper on goods and services tax: Proposals for the administration of the goods and services tax, New Zealand Government, March 1985, p. 17.
11 Report of the Advisory Panel on Goods and Services Tax to the Minister of Finance, June 1985, p. 12.
13 Subject to the proviso applicable to section 20(3).
14 Subject to the application of section 24(6).
15 Source: Inland Revenue. Information was compiled from GST 101 returns for the year end 31 December 2007.
16 The obligation to file a GST return and calculate the amount of “tax payable” is imposed under section 16. The calculation of “tax payable” (as defined in section 2 includes any refund) is done by reference to section 20.
17 The GST Act also requires other returns subject to the application of special supply rules, such as those in section 5(2).