New Zealand: Inland Revenue clarifies GST treatment for input deductions
The Inland Revenue of New Zealand published clarifications for the eligibility rules for input deductions. First is Technical Decision Summary no. 21/05 that was issued on 18 November 2021 where the taxpayer carried on taxable activity entitled for deductions but was rejected by New Zealand’s tax agency. Second is Interpretation Statement no. 21/06 FS 1 posted on 26 November 2021. The fact sheet covers GST treatment of meal expenses incurred by self-employed people.
I: Technical Decision Summary 21/05
Brief
A GST registered company imports and distribute goods filed four GST returns, three of which are subject to input tax deductions. One period opened an audit investigation due to lack of documentation.
Issue
The company show on the balance of probabilities that it was carrying on a taxable activity entitled for deductions.
Result of the audit
The tax agency cancelled the company’s (or the Taxpayer’s) GST registration.
Under the GST Act 1985 52(5), the Commissioner may cancel a person’s GST registration if the Commissioner is satisfied that the person is not carrying on a taxable activity.
Reason the tax agency disallowed the input tax deductions
1.The Taxpayer can no longer claim refund as it not a registered person.
2.The Taxpayer did not show that it paid input tax for goods or services used or available for use in making taxable supplies.
The only evidence to support the existence of any input tax paid are the bank transactions which was not enough proof that the taxpayer carried on taxable activity during the relevant period. It was outside the relevant periods.
3.The Taxpayer failed to provide tax invoices to support the input tax deductions claimed.
The company did not also comply with its record-keeping obligations (i.e., invoices presented were three years after the relevant periods). The indicates a level of negligence that supports the Ruling that the company was grossly careless in filing the returns.
Penalty
- Evasion or a similar act – 150% of the resulting tax shortfall
- Gross carelessness – 40% of the resulting tax shortfall
GST registered companies in New Zealand may be eligible for GST input tax deductions only if:
- The goods or services are used for making taxable supplies.
- The tax invoices show the input tax deductions that should be claimed. The Commissioner may determine that no input tax deduction is available if sufficient records are not kept.
- The Tax invoice is complete and complies with the requirements.
- The tax invoice provides sufficient particulars of the supply that was made to the taxpayer.
The requirement for a tax invoice is an evidential requirement of the GST Act to ensure real supplies are being made which are within the GST base.
II: Interpretation Statement no. 21/06 FS 1
Inland Revenue has confirmed that the expenses of self-employed person registered for GST purpose (e.g., coffee or meal during client meetings) are not eligible for input tax deduction. Under the GST Act, goods and services used for private and domestic purposes are not used to make taxable supplies. This means that you are not allowed to deduct input tax on the expense of consuming meals in one’s private capacity even if the meal has business-driven purpose.
Input tax may only be deducted to the extent to which the goods or services are used for, or are available for use, in making taxable supplies. One example is entertaining a client. The meal cost for entertaining a client is subject to 50% non-deductibility for the GST registered self-employed person if it is in accordance with the entertainment rules. If you are registered for GST, the entertainment expenses in your income tax return must be GST-exclusive. If you’re not registered, your expenses are GST-inclusive.
| Sample scenario for self-employed persons | Is the expense eligible for deduction? |
| He incurs cost for his own meals. | No |
| He incurs costs for his meals for and employees | Only the costs relating to the employees are deductible, entertainment rules may also apply. |
| He incurs costs for meals for self and a client | Private element may be incidental and all costs deductible but subject to the entertainment rules |
| He pays for meals of employee while employee working out of town | Yes |
| He pays for meals for self while working out of town | No. However, the cost may be deductible in very rare cases where there are no practical or realistic alternatives for meals (e.g., the supermarket is too far away, and it is unrealistic to prepare his own meals). |
| A company incurs costs for meals for employees, shareholders, and clients | Yes, entertainment rules may also apply. |
To ensure that expenses can be classified for GST purpose, it is crucial for taxpayers to keep detailed records of the purpose of any costs relating to food, drinks, telecommunication, travel for home to work travel, and accommodating. Keeping good records makes tax time a lot easier. We recommend you seek advice from our experts if you need you want to know whether you are treating expenses correctly.
Source: Inland Revenue NZ (TDS 21/05, IS 21/06 FS 1)