GST best practice: a timely reminder
Tax Alert - June 2017
By Robyn Walker and Eddy Carter
GST continues to be a key target on Inland Revenue’s radar. This is unsurprising given the heavy reliance on GST for the Government’s total tax take and the frequency of GST errors that arise. Given the frequency of GST return filing, there can be minimal time to identify GST errors or resolve any contentious GST issues prior to taking a tax position. Contrast this to a tax return, where taxpayers have up to 18 months after year end to fully consider any contentious issues and identify errors.
A recent trend that we have identified is that as part of Inland Revenue’s routine risk reviews, Inland Revenue is reviewing GST reconciliations and GST policy and procedure manuals.
These requests from Inland Revenue serve as a timely reminder that indirect taxes should be proactively managed, as by adopting best practice principles organisations can be well placed to avoid any unexpected GST costs and time consuming audit activity.
What is GST best practice?
In the context of tax governance, best practice is to have in place tax policies and procedures that mitigate the risk of an incorrect tax position being taken. Each organisation is unique, and the policies and procedures that govern the GST return filing process should reflect that. At a minimum, GST best practice would include the following:
Documented GST policies and procedures
A robust GST policy/procedure manual should clearly set out the GST treatment of specific transactions, the return preparation and filing procedures, when issues should be escalated and the process for when errors are identified. This document should be made widely available within the organisation with appropriate training. Crucially, this should be a ‘living’ document that is regularly reviewed and updated as laws and business processes change.
If a business has many people responsible for preparing invoices there should be clear guidance available on when GST should or shouldn’t be charged on a sale. Likewise, if many staff members are able to process expenses (such as by putting through expense claims) it is important they understand what constitutes a valid tax invoice for claiming input tax.
The GST filing procedures should ensure the GST return has a sufficient level of reviews prior to filing with Inland Revenue. The review should also include a ‘sense check’ of the return to avoid making basic errors. This should be done by someone who is close to the return preparation process, but independent from the return preparer.
- GST reconciliations
Broadly, a GST reconciliation reconciles the financial accounts to the GST returns filed. These should be periodically completed each GST return or, at a minimum, annually. The benefits of completing these reconciliations at each GST return is that any variances provide an opportunity to find any errors prior to filing the GST return.
As a general guide, to complete a GST reconciliation you should compare your GST output tax to the level of income earned in the period, plus asset sales. You should compare your input tax amount to expenses incurred, excluding expenses with no GST (e.g. interest, depreciation, salary and wages) and add asset purchases.
Fully reconciling the two amounts may be near impossible for larger and more complex organisations. However, an acceptable level of variance between the two sets of data should be considered in the wider context of the organisations materiality thresholds.
- Periodic GST reviews
GST reviews should be incorporated as part of an organisation’s tax governance framework. A review can be effective way of picking up errors that may have crept into the system. Inland Revenue have stated that if a taxpayer provides them with the outcomes of an independently completed GST review they may cancel or significantly ‘scale-back’ a proposed audit or risk review.
Data analytics should be considered as part of a review as these tests can be an effective way to robustly test GST compliance over large numbers of transactions. Data analytics can also test the health of a business’s GST processes, such as determining whether input tax credits are being claimed later than they should be. Outside of GST they can also be useful for fraud and other internal audit purposes.
With the arrival of Business Transformation within Inland Revenue, it is inevitable that GST audits will change. Expect Inland Revenue to embrace technology more effectively as part of their risk review and audit processes to collect and analyse more data – unfortunately they won’t be looking for areas where GST has been overpaid.
Inland Revenue regularly assesses organisation’s risk of non-compliance. The absence of any of the above checks and reconciliations can be a red flag and these checks and reconciliations should be adopted by any organisation that takes their tax obligations seriously.
Other important GST considerations
Organisations should protect themselves from other GST risks, such as:
- The GST implications of contractual agreements should always be carefully considered. A ‘belts and braces’ approach should be taken to include additional clauses, which can ensure the risk of an incorrect GST treatment is not borne by your organisation. Poorly drafted agreements may result in scenarios where a supply is subject to GST with no contractual entitlement to recover this from the purchaser, or a denied input tax credit with no ability to recover this cost from the supplier.
- Foreign GST/VAT registration obligations where supplies of goods or services are being consumed outside of New Zealand. The global indirect tax landscape is continually evolving at a rapid rate, with Governments around the world becoming increasingly more reliant on indirect taxes as a source of tax revenue. Often where goods or services are being consumed in a foreign jurisdiction, a GST/VAT obligation in that country may exist – even when the supplier has no physical presence. Non-compliance can result in a significant financial cost and reputational damage.
- The cost of foreign indirect taxes which are often not fully considered on international projects. In an increasingly global and mobile workforce, employees will often incur costs with foreign GST/VAT charged on international business travel. Assuming this has been charged correctly, there are often mechanisms for businesses to recover this GST/VAT.
Please contact your usual Deloitte advisor should you wish to discuss the above in more detail.
June 2017 Tax Alert contents
- Material advancement and tangible progress on feasibility expenditure
- New Zealand implications of Australian debt pricing decision
- Good news: resident withholding tax compliance issues relating to dividends are now resolved for companies
- Business Transformation – where are we now?
- GST best practice: a timely reminder
- Mileage rate released by Commissioner of Inland Revenue
- A snapshot of recent tax developments