Article by Rozelle van Schaik, Tax Senior Manager, BDO Auckland.
There are many valid reasons for receiving regular GST refunds. However, regular refunds might also be an indication that a taxable activity does not exist or that there are errors in the GST return.
Inland Revenue announced earlier in November 2023 that it will be sending letters to the following two categories of registered persons who are regularly claiming GST refunds:
Registered persons will be required to respond to the letter with a description of their taxable activity and an explanation for the regular GST refunds.
If required, a voluntary disclosure should be filed to correct errors in the GST return.
If the registered person no longer carries on a taxable activity, the GST registration should be cancelled. The final GST return should be filed with a GST adjustment for unsold goods. Any unsold goods are treated as disposed of immediately prior to the deregistration and GST needs to be accounted for on the market value of the goods.
Do you have a taxable activity?
The existence of a taxable activity is a fundamental GST concept since it is one of the requirements to be a registered person and GST is imposed on taxable activities. Once registered, only supplies made in the course or furtherance of the taxable activity attract GST. Input tax can also only be claimed if the goods or services were purchased for making taxable supplies that will be liable to GST.
In the paragraphs below we provide an overview of the following main features of a taxable activity:
The existence of an activity.
The activity is carried on continuously or regularly.
The activity involves, or is intended to involve, the supply of goods and services to another person for a consideration.
The meaning of ‘activity’
An ‘activity’ is a broad concept that involves a combination of tasks undertaken, a series of acts, or course of conduct pursued by a person.
The meaning of ‘continuously or regularly’
An activity is carried on ‘continuously’ if it is carried on all the time, while an activity is carried on ‘regularly’ if it is carried on at reasonably short intervals. An intermittent or occasional activity is not a taxable activity. An activity must be repeated over time to be carried on continuously or regularly.
A temporary delay in an activity does not prevent it from being a taxable activity, provided the registered person commenced the activity with the intention of seeing it through to completion.
It is the activity itself that must be carried on continuously or regularly. It was held that an activity does not have to be broken down into a series of sequential steps to determine if it is carried on continuously or regularly. As an example, the process of selling a car could be broken down into several steps. However, if the activity of selling cars is not taking place continuously or regularly, it does not meet the requirements of a taxable activity.
While it is the activity that must be continuous or regular and not the supply of goods, the number of supplies made is still relevant when determining whether an activity is a taxable activity. As an example, it was held in Newman v CIR, based on the specific facts on the case, that a single subdivision was not a taxable activity. The facts in Wakelin v CIR were distinguished from Newman v CIR and the activity was held to be taxable activity, since the land was subdivided into six residential lots which resulted in five supplies.
A supply of goods or service for a consideration
An activity that does not result in the supply of goods or services to another person for a consideration is not a taxable activity. An example would be subdivided land that is not supplied to another person but rather kept for private use.
The activity must involve the supply of goods or services for a consideration and does not need to be carried on for a profit.
A hobby is not a taxable activity
An activity carried on essentially as a private recreational pursuit or hobby is not a taxable activity. It was held that an activity carried on essentially as a private recreational pursuit or hobby is a private pastime or pursuit carried on for the personal refreshment, pleasure, or recreation of the person or persons concerned. An activity that is coherently organised for the purpose of making a profit will not necessarily be a recreational pursuit or hobby if those involved derive private and personal enjoyment from the activity. The dominant purpose of the person is relevant when determining whether the activity is a private recreational pursuit or hobby.
Businesses, professions, associations, clubs, and charities often meet the criteria of a taxable activity. An employee, certain company directors, the provision of exempt supplies (for example financial services, residential accommodation, and precious metals) and hobbies are non-taxable activities that are unable to register for GST.
The existence of a taxable activity is based on the facts and circumstances of each registered person or person intending to register. The tax team at BDO can advise whether a taxable activity exists and can assist with the drafting of a response to Inland Revenue’s queries in this regard.
To learn more about tax in New Zealand, read more of our Tax Insights or reach out to your local BDO adviser.