GST and agency, are you doing it right or is there a hidden cost?
Tax Alert - March 2021
By Jonathan Doraisamy and Nathan Lardner
Do you have someone selling your products or incurring costs on your behalf? Inland Revenue have identified that taxpayers have been facing difficulties understanding and applying the agency rules in the Goods and Service Tax Act 1985 (‘the GST Act’). In a bid to provide some clarity, Inland Revenue have released an interpretation statement that dives into all the details of when you may be a party to an agency relationship and what this means for GST purposes.
From a GST perspective it is important to be certain whether an agency relationship exists to ensure all parties involved have a clear understanding of who has to return or claim GST. Getting this wrong can be costly. Sometimes the position can look to be GST neutral, but without proper documentation, technical issues can arise. In other areas, an outright cash cost can occur.
While considering your current agency relationships you may want to ask yourself:
Do you have someone selling products on your behalf? How much GST should you return?
Where you have someone else selling your products on your behalf, it is important that you know whether they are a re-seller, or acting as your agent. Where they are acting as your agent, the responsibility to return and pay the GST on the full gross sale price will normally fall on you. The agent would be required to return GST on the commission charged and you (as the principal) would be able to claim the corresponding input credits, provided you have a valid tax invoice from the agent. Therefore, you will ultimately be paying GST on the net cash (after commission) you receive – however you can’t short-cut this in your GST return, the full gross sale needs to be included as a sale (and output tax) and the commission claimed as an expense (and input tax).
Further, Inland Revenue has confirmed that it is your responsibility to ensure you have the correct processes in place to be returning GST at the right time. For example, if your agent receives a deposit or issues an invoice this will trigger the GST obligation for you as the principal. As a result, you may have a liability to return the GST on the sale well before you actually receive the cash.
Do you have someone who incurs costs on your behalf? What GST can you claim?
Similar to the above, an agent can incur costs on your behalf and still give you the ability to claim the input tax credits. One of the most common examples we see is when an employee will incur business costs that are subsequently reimbursed by their employer. The statement confirms that an employee can act as agent for their employer and incur costs for which the business is able to claim the GST portion even when the invoice or receipt is in the employee’s name. It is important however to remember to keep all supporting documentation and invoices to meet standard record keeping requirements.
What if you have an overseas agent, is there a risk of real GST cash costs?
If you have an overseas agent (such as an overseas web based sales platform) who is taking a commission from sales made in New Zealand, we recommend you review your processes to ensure that the correct amount of GST is being returned to Inland Revenue. The commission being charged by the non-resident does not generally have any GST on it, so the commission cannot be offset for GST purposes against the gross selling price.
For example, an overseas agent that is not registered for New Zealand GST will make a supply of hotel accommodation on behalf of the New Zealand based principal and take a commission on the payment. The principal needs to ensure that the GST is being returned on the full price of the hotel accommodation (not the net amount after commission).
Can the agent be responsible to return GST? Overrides to the default rules.
There may be instances where it is more practical for the agent to be the deemed supplier and therefore be responsible for returning the GST on the supply. This could be due to accounting system constraints or because the underlying supplier is situated outside New Zealand.
In these situations, it is possible to make an election to split the underlying supply into two separate supplies (one being from the principal to the agent, and another from the agent to the third party). It is important if this election is made that the appropriate steps are taken such as a written agreement between the agent and principal that the supplies will be split and that two separate invoices will be raised.
If you are not sure whether an agency relationship exists
If you’re unsure whether an agency relationship exists, we recommend taking the time to read through Inland Revenue’s interpretation statement. The document provides useful guidance on how to step through determining whether an agency relationship exists, and how this overlays with the GST rules.
Inland Revenue have confirmed that the following need to exist before any legal agency relationship can be created:
- Authority: the agent must be authorised to act on behalf of the principal to create or affect the legal relations between the principal and a third party, for the relevant supply; and
- Consent: the agent and the principal must both have consented to the conferral of such authority on the agent.
Therefore, the crucial aspect to determine whether an agency relationship exists is that an agent must have the ability to create the legal relationship between the principal and the third party. It is important to understand that the written contractual terms are not definitive. It could be possible for a contract to have a clause that purports to remove any agency relationship. However, if the actions taken by each party evidence that an agency relationship exists (such as the transfer of ownership not flowing through the agent and the agent receives a commission), then the common law definition could prevail and deem an agency relationship to exist.
Agency is a difficult area of tax law, if you have any questions about this article or GST generally, please get in touch with your usual Deloitte advisor.
March 2021 Tax Alert contents
- What are the tax obligations which come with claiming COVID-19 Government support?
- The tax cost of your fringe benefits is about to increase
- The new 39% tax rate puts tax structuring back into the spotlight – why it may be time to talk about tax avoidance
- GST and agency, are you doing it right or is there a hidden cost?