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Inland Revenue

Tax Policy

Reverse charge rules

(Clauses 138 and 139)

Summary of proposed amendments

Changes are being made to the reverse charge rules in the Goods and Services Tax Act 1985 to ensure that they operate as intended and with minimal compliance costs to business. They will:

  • amend section 8(4B)(b)(ii) of the GST Act to change the reverse charge threshold from 90 percent to 95 percent; and
  • amend section 9(2)(h) to change the time of supply from the first day of the relevant adjustment period to the last day of that period.

Application date

The new rules will apply from 1 April 2011, being the date the amendments to the reverse charge rules took effect.

Key features

The reverse charge rules in section 8(4B)(b) are in two parts. The main rule applies on acquisition if the intended taxable use of the service is less than 95 percent. The second rule applies if the original acquisition estimate was higher than 95 percent, but the actual taxable use of the services drops below 90 percent. It is this second rule that is at issue. The 90 percent figure was set to tie in with the rule in section 21(2)(c) that only requires adjustments to be made when the percentage of taxable use deviates by more than 10 percent. In other words, the 90 percent "built in" the difference between 100 percent and 90 percent when no adjustment is generally required.

However, the 90 percent figure does not take into account the other limb of section 21(2)(c), which requires an adjustment if the difference in GST is greater than $1,000. It may therefore be possible for a taxpayer to avoid making an adjustment if it was less than 10 percent, even if the GST at stake was considerably more than $1,000. To address this concern, the second reverse charge threshold in section 8(4B)(b)(ii) is being changed to 95 percent. This will mean that, once the percentage of non-taxable use of the service exceeds 5 percent, the reverse charge rules will apply and the change-in-use adjustments will automatically follow in appropriate circumstances. This will also make the secondary rule consistent with the threshold applied to the main reverse charge rule.

Time of supply for reverse charge

Under sections 8(4B)(b)(ii) and 9(2)(h), a registered person that imports services for a taxable purpose, but later applies those services for a non-taxable purpose, is treated as supplying those services to themselves on the first day of the adjustment period that their non-taxable use becomes greater than 10 percent (soon to be 5 percent, as above). However, an “adjustment period” is always approximately a year in length. The rule may therefore produce difficulties for a registered person that returns GST on, for example, a monthly basis. This would occur because the first day of the adjustment period would be in a different GST filing period − meaning that previous returns may need to be adjusted.

Section 9(2)(h) is therefore being amended so that the supply is treated as occurring on the last day of the relevant adjustment period. This should prevent the taxpayer having to incur compliance costs through amending previous returns.