Not Closing the GST Period

Many computerised GST systems give users the opportunity to finalise and close a GST period once the GST return has been completed. However, when a GST period is not closed, some systems allow the user to back date transactions without giving any warnings. This may happen when an invoice or credit note is received late and it is entered with the same date as the original transaction. If this happens, these transactions may not be picked up when completing the next GST return as they do not fall within the specified date-range, which can result in GST inadvertently being under or over paid.

GST Claimed on Exempt Supplies

Exempt supplies are not subject to GST, and therefore GST should not be charged or deducted. The most common types of exempt supplies are:

• Financial services (such as share transfers, interest, dividends),
  
• Residential rental accommodation, and
  
• Life insurance.

A common example is where a farmer has another house on the property and rents it out to a third party. GST cannot be deducted on any expenses incurred in relation to the house or the supply of rental accommodation.

GST Claimed on Instalment Payments

Payments made by instalments may include an amount of interest in each payment. In many cases taxpayers do not separate out the interest and end up claiming GST on the total instalment payment.

As interest is a “financial service” it doesn’t include GST and that portion of the payment shouldn’t be deducted. Taxpayers should obtain all of the relevant documentation for such transactions in order to determine the correct amount of GST that can be claimed for each instalment.

GST on Fringe Benefit Tax (FBT)

In most circumstances, the provision of a fringe benefit under the FBT rules is treated as a supply for GST purposes. The FBT return includes the need to make a GST payment. A common error is to subsequently claim this amount through the next GST return.

GST on Entertainment

If an amount of entertainment expenditure is treated as 50% non-deductible under the entertainment provisions it is deemed to be a supply for GST purposes and a GST output adjustment is required based on 3/23 of the non-deductible amount.

A common error is for the GST adjustment to be calculated at 15% of the non-deductible amount, i.e. on a plus GST basis rather than on an inclusive of GST basis. During the following year, the GST adjustment is (typically) coded to an expense account in the profit & loss statement, but this amount is wholly non-deductible. It is common for this amount to be mistakenly included in that year’s entertainment adjustment and treated as 50% non-deductible.

In the Event of an IRD Audit

It is best practice to have an up-to-date GST manual that is specific to an organisation. A GST manual sets out the process to be applied to prepare the GST return, common transactions and the correct GST treatment of those transactions.

The existence of an up-to-date manual demonstrates to the IRD that due care has been taken in preparing the GST return and can help in mitigating penalties and further scrutiny by the IRD.

It’s better to get it right first time than risk costly scrutiny from the IRD.

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