110289 Topic 2: Goods & Services Tax

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110289 Topic 2: Goods & Services Tax
2015-10-25 23:57:37
110289 Topic2 GST

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  1. What is GST?
    • • A value-added tax which is indirect
    • • On consumption (tax base)
    • • Of goods and services in New Zealand
    • • Credit offset basis
    • • Ultimately borne by the end consumer
  2. How does a value added tax work?
    Susie buys some beads and thread for $115. She makes them into necklaces, which she sells for $575. The difference between cost price and sale price is $460. The “value added” portion includes 15% GST.
    To work out how much GST there is in the value add, multiply $460 by 3/23.

    $460 * 3/23 = $60

    Alternate version = 460-(460/1.15) = $60
  3. How does a value added tax work? Version 2:
    Suzie buys some beads and thread for $115. Cost is $100, GST is $15. The vendor pays $15 over to the government.

    Suzie makes them into necklaces, which she sells for $500 total, plus $75 GST
    • Suzie is required to pay $75 over to the government, but she can deduct the GST paid first, so she only pays the net value over. $75 - $15 = $60.
    • Suzie pays $60 GST over to the government.
    • The “value added” was $400.
    • $400 * 15% = $60
  4. What gets caught in the GST net?
    - Literal meaning and includes all types of real and personal property e.g. motor vehicles, home appliances, books, etc.

    BUT, excludes

    - Choses in action (e.g. debts, copyrights, mortgages), which are rights to bring action, in a court of law to recover debt, chattel, etc.
  5. What gets caught in the GST net?
    Anything which is not goods or money and includes choses in action;

    - Generally performed for a client or customer.
  6. Taxable Activity, GST Act, Section 6
    (a) any activity which is carried on continuously or regularly by any person, whether or not for a pecuniary profit, and involves or is intended to involve, in whole or in part, the supply of goods and services to any other person for a consideration; and includes any such activity carried on in the form of a business, trade, manufacture, profession, vocation, association, or club: (BTMPVAC)

    (b) without limiting the generality of paragraph (a), the activities of any public authority or any local authority.
  7. Who is subject to GST?
    Registration - "Requirements"
    • - A taxable activity must first exist;
    • - Registration COMPULSORY if at the end of any month and the preceding 11 months, turnover > $60,000 (GST exclusive);
    • - Registration COMPULSORY if over the next twelve months, turnover > $60,000 (GST exclusive);
    • - Registration OPTIONAL if the above thresholds are not reached;
    • - Compulsory registration must be within 21 days;
    • - Registered person can apply for deregistration when (or will be) the turnover drops below the threshold.
  8. Who is subject to GST?
    - Registered person
    • - Effectively the supplier of goods and services.
    • - Could be an individual, company, partnership, unincorporated body, local and public authorities, etc.
    • - Only registered persons can charge GST on a taxable supply and eligible to recover the GST charged on making taxable supplies.
    • - Registered persons are entitled to deduct GST paid (input) on goods and services received in relation to making such supplies against GST collected (output)
  9. Zero-rated Supplies
    - If you are making zero-rated supplies, then you can register for GST.

    - You are still collecting GST. It just happens to be at 0%. Because you are collecting GST and paying it over to government (at 0%), you can claim GST deductions for any input tax paid.
  10. Exempt supplies
    - They do not have to be accounted for;

    - No credit is allowed to be claimed for GST paid (input) on the purchases in making the supply;

    • - Six categories of exempt supplies:
    • -  financial services;
    • - supplies of residential accommodation
    • - supplies of fine metal;
    • - donated goods and services sold by non profit body;
    • - sale of rental dwelling rented for at least 5 years before;
    • - renting of leasehold land.
  11. How much is GST?
    What is the value of a supply?
    • Value of supply
    • "Amount of the consideration excluding GST” = Consideration x 20/23

    • Consideration
    • = Value + 15% (GST)
  12. Value of supply example
    "A registered person sells goods for $115 cash"
    • Value = 115 X 20/23        = 100 (GST incl)
    • GST = 100 X 15%(3/20)  = 15 GST
    • Consideration                    = 115 (GST incl)
  13. Accounting for GST:
    - Output, Input tax
    Output tax = GST received/collected on ordinary or deemed taxable supplies

    Input tax = GST paid on purchases and expenses.
  14. Accounting for GST
    -Taxable periods
    Basically time intervals when GST have been collected and charged for;

    End of this period registered person to account for the net GST to IRD;

    • Four categories
    • - Categories A/B – two-monthly intervals ending on last day of odd/even months e.g. Dec-Jan/March-April at RP’s choice
    • - Category C – six-monthly interval
    • - Category D – one-monthly interval

    Categories C and D apply to specific circumstances. Note: Threshold for Category C is $500,000
  15. Accounting Basis - "Three methods"
    Invoice basis - Automatic allocation unless registered person requests otherwise.

    Payments basis – available only to registered persons

    • - Whose taxable supplies during previous 12 months are $2.0 m or less;
    • - Whose taxable supplies during the next 12 months are $2.0m or less;
    • - Such as local authorities listed in an Order in Council, and nonprofit bodies;
    • - For whom this basis would be appropriate, eg corner dairy

    Hybrid basis – available to any registered person.
  16. Accounting for GST
    "Invoice, Payments, Hybrid" & Output Tax
    InvoiceEarliest of invoice issued or any payment received

    Payments = Taxable period in which payment is received

    HybridEarliest of invoice issued or any payment received
  17. Accounting for GST
    "Invoice, Payments, Hybrid" & Input Tax
    Invoice = Earliest of invoice or payment made.

    Payments = Taxable period in which payment is made

    Hybrid = Taxable period in which payment is made
  18. Accounting for GST - Invoice basis
    • • Claim GST (input) when a tax invoice is received;
    • • Account for GST (output) when an invoice is issued or payment is received, whichever is earlier.
    • • In most cases payment will be made or received after invoices are issued / received.
    • • Date of the invoice will therefore usually be relevant
  19. Accounting for GST - Payments basis
    • • GST (input and output) accounted for in the taxable period when a payment is received or made.
    • • Date of payment / receipt will therefore be relevant
  20. Accounting for GST - Hybrid basis
    • • Sales on a Invoice basis; Purchases on a Payments basis
    • • A “cash flow” disadvantage
  21. Time of Supply
    GENERAL RULE - Time of Supply is the earlier of:

    • - The time an invoice is issued by supplier; or
    • - The time any payment is received by the supplier

    SPECIAL RULES - GST on Fringe Benefit, second-hand goods, hire purchases etc.
  22. Payment and Return Due Dates
    Net GST payable and return must be filed by the 28th day of the month following the end of the taxable period, except for:

    • - December’s filing date (for November taxable period) => 15 January
    • - April’s filing date (for March taxable period) => 7 May
  23. Special Rules - "Second-hand goods"
    A registered person can claim 3/23 of the purchase price of second hand goods as an input tax deduction, even if the seller is unregistered, if:

    • - The dealer is registered
    • - The supply isn’t a taxable supply
    • - The goods are in NZ
    • - The goods are supplied by an NZ resident
    • - An input tax credit hasn’t been claimed on previous importation
    • - The goods are acquired for the purpose of making taxable supplies.
  24. Imported Goods and Services
    GST chargeable on taxable supplies of goods and services which are supplied in NZ

    GST is imposed at 15% on goods imported, and is collected by the NZ Customs Services. The amount paid can be claimed as input tax.

    GST is imposed on certain recipients of imported services

    • - Affects NZ resident recipients who does not predominantly makes taxable supplies;
    • - Where the (imported) services, if supplied by a registered person in NZ, would be liable for GST;
    • - Requires persons to self-assess, i.e. add GST to the price of the services and return the tax to IRD => recipients treated as supplier. (Reverse charge approach)
  25. Imported Goods and Services - Reverse charging:
    Applies to management fees and cost allocations on NZ subs + branches of overseas companies => attract GST

    Treats digitized products (software, programming, etc.) as “services” (not “goods”)

    May require private consumers importing such services (Turnover greater than $60,000) to register for GST
  26. GST and Income Tax
    GST and income tax are separate taxes, and for GST registered persons, GST is excluded from income tax calculations.

    If a person is not GST registered, then she or he can claim the full GST inclusive price as an expense
  27. Adjustments and Apportionment - New rules for expenditure from 1 April 2011
    Expenditure may need to be apportioned where it is not fully incurred for making taxable supplies

    On acquisition the portion of deduction that can be claimed must correspond with intended use

    In subsequent years, deduction adjusted if difference between actual use and intended use is 10% or more (or adjustment is more than $1,000)

    No subsequent adjustment if GST-exclusive value is less than $5,000

    Number of subsequent adjustments is limited and depends on GST-exclusive value
  28. Example of Apportionment Test

    - Hans acquired a car for $23,000 (included
    GST of $3,000) on 1/4/11, which will be used in his business and privately.
    - Old car used 80% for business purposes, so
    Hans uses this as an indicator of intended use and can claim at input tax credit for :
    $3,000 X 80% = $2400

    (a) Actual use is 75% after one year. No adjustement required (less than 10%)
  29. Example of Apportionment Test
    (b) After one year, actual use is 60%
    • 20% difference between actual and intended use, so adjustment required:
    • $3,000 x 60% is $1,800.
    • Hans has to return to IRD the output tax of the difference $2,400-$1800= $600 for the adjustment period ending on 31 /3/12
    • If the actual use was greater than expected (and more than 10%) Hans could claim an input tax credit for the difference
  30. Example of Apportionment Test (cont’d) - Adjustment on disposal:

    Hans sells car for $12000 on 31/3/13
    Tax fraction X consideration X (1-actual deduction/full deduction)

    3/23 X 12000 X (1-1800/3000) = $626

    Hans can claim a further $626 input tax credit in calculation for taxable disposal of the vehicle as follows
  31. Example of Apportionment Test (cont’d) - Sale Proceeds are subject to output tax:
    • 3/23 x 12,000 =   1,565
    • Less input tax adj.   626 (previous slide)
    • Net further tax        939

    • Net effect is to collect GST on the taxable supplies proportion of the sale proceeds:
    • $12,000 x 3/23 =1,565 x 60% = 939
  32. Adjustments and Apportionment
    Effect on Income Tax
    For GST purposes input and output tax on capital items are treated similarly to revenue items.

    • - Apportionment test applies for expenditure which has a mixed use when acquired after 31 March 2011
    • - Full input tax credits (on purchases and expenses) may therefore may not be able to be set off against output tax
    • - If part of input tax does not qualify for a deduction against output tax, then that part becomes of the cost of the asset / expense for income tax purposes, provided it meets the income tax deductibility rules,