GST and late payment fees

(Clause 137)

Summary of proposed amendment

The Goods and Services Tax Act 1985 is to be amended to clarify that late payment fees charged by businesses to customers are subject to GST. The proposed amendment is a result of a recent interpretation of the law which concluded that no GST is chargeable on late payment fees. This interpretation is inconsistent with the policy of a broad-based tax, and with Inland Revenue’s public interpretation which has been that late payment fees are subject to GST whereas penalty interest is not.

Application date

The amendment will apply for taxable periods ending on or after 1 April 2003. As the purpose of the amendment is to clarify the current law, the application date has been aligned, as closely as possible, with the statutory time-bar for claiming GST refunds – specifically, with the last possible year in which taxpayers could possibly seek a refund of overpaid GST.

The amendment also contains a “savings” clause which preserves the past GST treatment of late payment fees by taxpayers who have, before the date of introduction of this bill, adopted a regular practice of not charging GST on the fees. For these taxpayers, the amendment will apply from 1 April 2012.

Key features

A new provision is being inserted into section 5 of the GST Act to clarify that GST is chargeable on late payment fees. The provision will apply retrospectively for taxable periods ending on or after 1 April 2003.

The new provision contains a savings clause which will preserve, up until 1 April 2012, the past GST treatment of late payment fees by some taxpayers. The purpose of the savings clause is to ensure that the retrospective amendment does not penalise taxpayers who have, in good faith, taken an interpretation of the law that was open to them at the time. It would apply to taxpayers who, before the date of introduction of this bill, relied on the provisions of the GST Act as they were before this amendment, and who adopted a regular practice of not charging GST on late payment fees. Taxpayers who fall within the savings clause will have until 1 April 2012 to make any necessary systems changes in order to comply with the amendment.

Background

Under the GST Act, GST is only charged on taxable supplies of goods and services. The term “supply” is defined very broadly in keeping with the policy of GST having the broadest base as is practically possible.

Late payment fees are fixed fees charged by a business to customers who are late in paying their accounts. These fees are common across a range of sectors and charging GST on these fees is common practice. The fees are different from penalty and default interest payments which are specifically GST-exempt in the same way as other financial transactions. A recent interpretation of the law, however, has concluded that no GST should be imposed on late payment fees as there is an insufficient connection between the fee and the underlying supply of goods and services, even though the fee may represent the cost of administering the late payment. This is inconsistent with the policy of a broad-based tax, and with Inland Revenue’s public interpretation which has been that late payment fees are subject to GST but penalty interest is not.

The interpretation may create scope for businesses to restructure similar fees and charges to take advantage of this interpretation, thereby raising base maintenance concerns. Late payment fees should be treated in the same manner as prompt payment discounts, for example, where the intention of the legislation is that amounts with or without discount are fully subject to GST. The lack of clarity around application of the rules also gives rise to an ongoing fiscal risk, as a result of taxpayers, many of whom currently charge GST on late fees, no longer charging it.

Applying the measure retrospectively will avoid the possibility of refunds being claimed to take advantage of the recent interpretation, with potential windfall gains to the supplier.