Standard practice statements: General statements

GNL-420 Six-monthly GST return threshold (Dec 01)

Introduction

This Standard Practice Statement (SPS) provides guidelines on how Inland Revenue will exercise the discretion to allow registered persons to remain, or become, six-monthly return filers (category C return filers) for goods and services tax (GST) purposes where the value of annual taxable supplies exceed $250,000.

The SPS outlines the principles behind the legislation and how they will be applied by Inland Revenue when considering applications from registered persons.

Application

This SPS applies from 1 January 2002.

Summary

Inland Revenue will exercise the discretion to permit registered persons to remain, or become, category C return filers providing they meet the three cumulative tests as follows.

• Have a good compliance history,
• Have satisfactory record keeping practices and the cost of more regular filing would be excessive,
• The value of annual taxable supplies is subject to seasonal or low volume/high value cashflow peaks.

Background

The Government recognises that filing on a two-monthly basis once the value of taxable supplies exceed $250,000 may involve significant compliance costs for registered persons. These costs can be disproportionately high when balanced against the cost to the Government in revenue terms. Registered persons will be permitted to remain, or become, category C return filers where their compliance history and the nature and volume of the supplies do not warrant them filing GST returns on a more regular basis.

For the purpose of this SPS

Compliance costs are broadly described as time and expense borne by registered persons complying with their obligations under the GST Act 1985. Compliance costs include time spent collecting GST on behalf of the Crown, associated record keeping requirements, and time spent completing returns where such time could have been spent elsewhere by registered persons. Compliance costs also include organising business practice to cater for GST obligations and disruption to operations when persons are required to attend to GST administrative matters.

Compliance risk is an evaluation by Inland Revenue as to the performance by registered persons with meeting their GST obligations; such as their ability to provide complete and accurate returns on time, pay related GST liabilities by due dates and have adequate business records and controls in place.

Legislation

Section 15A(1AA) of the GST Act 1985 provides:

'The Commissioner may, on written application by a registered person who falls within any one of categories A, B or D, direct that the registered person be placed within category C after considering the following factors:

1. the person's history of filing and paying tax:
2. the person's record keeping practices:
3. whether the person has been placed within category C before:
4. the nature and volume of the person's taxable supplies.'

Section 2(1) of the GST Act 1985 defines "Tax" as being goods and services tax.

Standard Practice

Section 15A(1AA) factors

Four factors are prescribed under section 15A(1AA) of the GST Act 1985 which Inland Revenue is required to consider when deciding applications. The four factors are:

1. The registered person's history of filing and paying tax.
   
   Performance by registered persons in filing completed returns and making payments of their GST liability by due dates will be instrumental indicators as to whether they pose a compliance risk.
   
   Where compliance by registered persons meets the standard of reasonable care, Inland Revenue will view this factor as having been met. As the word "tax" is to be read as GST as defined under section 2 of the GST Act 1985, a registered person's compliance history for other tax types is not relevant when considering this factor.
   
   Registered persons who:
   
   
   • have not met their tax obligations e.g. they are in arrears for GST, and/or have outstanding GST returns, regularly file late or file incomplete or inaccurate GST returns, and
   • do not have an arrangement in place to rectify their compliance obligations, prior to Inland Revenue receiving an application from them to remain, or become, a six-monthly return filer,
   
   are likely to have their application declined due to the future compliance risk.
   
2. The registered person's record keeping practices.
   
   Inland Revenue will look at the quality of current record keeping practices to gauge the compliance risk related to registered persons being able to prepare accurate six-monthly returns. In addition, Inland Revenue will have regard to compliance costs registered persons are likely to incur should they be required to change to, or remain in, a more regular return filing category.
   
   Features Inland Revenue will consider are:
   
   
   • the standard of current record keeping systems
   • the ability of the registered person to compile accurate GST returns from those records, and
   • the potential compliance costs to upgrade systems to file more regular returns
   Note- Some costs in changing to a more regular return filing category will usually be necessary. Where costs likely to be incurred as a proportion to the overall business operational costs are excessive, or likely to cause unreasonable disruption to the operation of a taxable activity, Inland Revenue will look at whether registered persons should be allowed to remain, or move to, the six-monthly return filer category. Where persons have not maintained adequate business records, Inland Revenue will require them to upgrade their accounting system and is likely to place them on a more regular return basis having regard to the compliance risk.
   
   Inland Revenue may refer to observations by staff of record keeping practices during previous contact with a registered person, or may perform brief enquiries in the absence of such information being held, prior to deciding applications.

3. Whether the registered person has been placed within category C before.
   
   This factor considers whether registered persons have previously been on a six monthly filing basis. This factor is looking at the compliance cost of changing to a more regular return filing category, or for persons to remain in such a category. Where previous category C return filers, who currently file monthly or two-monthly returns, can demonstrate they experience significant additional compliance costs by having to provide more frequent returns, applications to shift back to the six-monthly category will be considered.
   
   The provisions under section 15A refer to change in registered person's taxable period and by implication, apply to established registered persons. New registration cases, which have no established GST compliance history, will generally not be allowed by Inland Revenue to commence as category C return filers where their projected value of taxable supplies for the following 12 month period exceed the $250,000 threshold.
   
   
4. The nature and volume of the registered person's taxable supplies.
   
   Inland Revenue will look at the nature and volume of annual taxable supplies that exceed the $250,000 threshold.
   
   Where the breach of the threshold is due to a steady uplift in the value of taxable supplies made through much of the year, and the future supplies are likely to remain at a static level over the $250,000 threshold, registered persons are likely to be directed to shift to a more regular return filing category.
   
   Where the breach of the $250,000 threshold is due to a seasonal fluctuation of taxable supplies, or low volume/high value taxable supplies (for example: a computer software developer who may not produce many products during any twelve month period) which peak at the end of a return period and/or within a 12 month period to create a distortionary effect on the regular cashflow pattern, Inland Revenue is likely to allow registered persons to remain, or move to, the six-monthly return filer category.

Applications

Applications from registered persons are to be in writing, giving reasons why they should remain, or become, a category C return filer. Applications should specifically address the following criteria:

• that they have a good compliance history;
• their record keeping practices must have adequate capability to cope with the filing of six monthly returns;
• the cost of remaining or changing to a more frequent return basis would be excessive when compared to the overall business structure; and
• the value of annual taxable supplies is largely influenced by seasonal or low volume/high value taxable supplies which create a distortionary impact on regular cashflow trends of the taxable activity.

Confirmation

Decisions on whether persons can remain six-monthly return filers will be conveyed by letter.

Where applications have been declined, reasons will be given for not allowing registered persons to remain, or become, six-monthly return filers. Further, where registered persons are directed to file GST returns on a more regular basis, they will be given the option of returns ending either on odd or even month periods.

Examples

The following examples aim to provide an understanding of how Inland Revenue will generally consider the factors in the following case scenarios.

Example One

Jack B. is an apple grower who has purchased a neighbouring orchard to expand his taxable activity. Jack B. travels overseas extensively as part of promoting his goods to potential overseas markets and as a consequence is absent from the office much of the time. Having regard to the seasonal aspect of growing apples, Jack B. would like to remain on the six-monthly return filing basis. With the upturn in sales from his direct marketing activities, the value of taxable supplies has increased to $1.2 million and is likely to be sustained in future years. Jack B. applies to Inland Revenue to continue as a six-monthly GST return filer.

Jack B.'s application is considered by Inland Revenue as follows:

• The registered person's history of filing and paying tax
  
  Jack B. has a good compliance history of filing returns on time (two late returns since registered for GST back in 1985) which were completed and processed as self calculated. Jack B. has income tax arrears which are being repaid by an instalment arrangement with Inland Revenue.
  
  Two late returns over 15 years of registration does not present Jack B. as a compliance risk. Jack B.'s income tax position has no relevance to the factors Inland Revenue is required to consider; arrears for other revenues do not have any bearing on applications received. Compliance for GST purposes is very good and the application satisfies this factor.
  
  
• The registered person's record keeping practices
  
  The present record system is organised using a PC program package designed to produce GST return figures on a six-monthly basis, although the system can also produce monthly financial cash flow reports. Jack B. looks after the tax and financial reporting duties and employs an office clerk to look after the day to day needs using a petty cash float for unforeseen or minor expenses. The majority of sales are from exports for which Jack B. maintains the book work. To require him to employ an accountant or an experienced accounts clerk to prepare GST returns on a more regular basis would be an unnecessary expense and an unfair burden on his business as Jack B. can attend to such matters when he is present in New Zealand. In addition, Jack B. is reluctant to provide cheque signing authority to an employee or agent in his absence as he wants to maintain direct control over the business finances.
  
  Inland Revenue will consider the nature and volume of supplies related to his taxable activity, in determining whether systems and practices should change to provide more frequent GST returns. Regard will also be given to any potential disruption to Jack B.'s business schedule and associated compliance cost. For current return purposes, the present record practice is adequate for Jack B. to comply with his obligations as a six-monthly return filer.
  
  
• Whether the registered person has filed on a six-monthly basis in the past
  
  Jack B. is on a six-monthly return basis and would like to remain so.
  
  
• The nature and volume of the registered person's taxable supplies
  
  Jack B. enters his goods for export directly to overseas markets around the months of March to May each year. Jack B. wants to remain a six monthly filer to avoid disruption to his business activities and minimise time spent attending to GST matters during the peak of his export season.
  
  Conclusion
  
  Jack B. satisfies the criteria to remain on a six-monthly return filing basis. His compliance record is good and his current record keeping practices or systems are sufficient to enable him to comply with his GST obligations without presenting any significant risk as to future compliance. To require him to shift to a more frequent return filing basis would cause considerable disruption to the operation of the taxable activity, so Inland Revenue will exercise its discretion to allow Jack B. to remain a six-monthly return filer. A pertinent factor is also the seasonal nature of his business. Allowing Jack B. to remain a six-monthly filer avoids any extraordinary disruption to the arrangement of his business operation and seasonal export activities.

Example Two

Anne G. operates a craft shop selling gifts and homeware goods to her local community. With the development of tourism in the community, coaches regularly stop at her craft shop for souvenirs and as a result Anne G. has expanded her activity to include a licensed café. Anne G. phones the Inland Revenue Call Centre to advise the value of her annual taxable supplies is likely to be $300,000 plus and asks Inland Revenue to permit her to remain a six-monthly return filer.

Anne G. is advised by the Call Centre of the factors that will be looked at by Inland Revenue and is asked to place her request in writing as required by legislation. Upon receipt of the written request, Inland Revenue considers her case as follows:

• The registered person's history of filing and paying tax
  
  Anne G.'s compliance history with her GST obligation to file returns and pay GST by due date is impeccable. Her application satisfies this factor.
  
  
• The registered person's record keeping practices
  
  The expansion of the craft shop activity to include a licensed café requires Anne G. to upgrade her business records to keep track of the diversified activities under the one business structure. Anne G. has automated her sales system with the introduction of the café service so she can keep track of the increased volume of sales and minimise her time in maintaining records. The computerised cash book software has the ability to provide roll-up figures on command, of sales, purchases, and adjustments for goods taken for own use. Inland Revenue is satisfied the revised accounting system is adequate for business purposes and no significant issues arise in regard to future compliance ability.
  
  The application satisfies this factor.
  
  
• Whether the registered person has filed on a six-monthly basis in the past
  
  Anne G. has been a six-monthly return filer to date.
  
  
• The nature and volume of the registered person's taxable supplies
  
  While the tourism industry may be subject to seasonal fluctuations, the development of the licensed cafe has a projected steady monthly value of taxable supplies in excess of $25,000 for the taxable activity over the next twelve months.
  
  As there is no marked seasonal fluctuation and the average projected monthly value of taxable supplies exceeds the $250,000 threshold, Anne G's application will not satisfy this factor.
  
  Conclusion
  
  Anne G. has upgraded her record system to facilitate the introduction of her expanded business activities and has the ability to provide information for GST returns on a more regular filing basis without incurring any significant additional compliance costs. As the higher value of taxable supplies stem from increased regular monthly sales, and do not represent a seasonal or low volume/high value taxable supply situation, the application would be declined. Anne G. will be directed to adopt a more regular return basis.

Example Three

Peter and Sue Y. left the busy city lifestyle to settle into semi retirement at a secluded part of the country. To supplement the Ys' income, Peter and Sue operated a bed and breakfast homestay with fishing excursions and bush walks for visitors. In year two of their activity, they established a web site to attract overseas visitors and increase their retirement income. Demand from overseas tourists was such that the homestay developed into a lodge for tourists that are more affluent. Peter and Sue Y. predict that the value of annual taxable supplies from bookings will exceed $250,000 in the next twelve months and have made an application to register for GST. The partnership seeks Inland Revenue's permission to file six-monthly GST returns to minimise time and cost related to record keeping requirements.

• The registered person's history of filing and paying tax
  
  The partnership is a new GST registration and has no compliance history for GST purposes. Any compliance history for other tax types is not relevant to the application for GST.
  
  This factor is not able to be ascertained in the absence of any history.
  
  
• The registered person's record keeping practices
  
  There is no established record keeping practice as the previous homestay activity was treated as a hobby rather than a business. Inland Revenue may enquire as to what accounting system will be used and how they propose to retain business records.
  
  Whether they meet this factor will depend on whether Inland Revenue is satisfied the registered person has adequate systems in place to meet their future GST obligations.
  
  
• Whether the registered person has filed on a six-monthly basis in the past
  
  The partnership is a new GST registration and has not filed returns on a six-monthly basis.
  
  
• The nature and volume of the registered person's taxable supplies
  
  While the lodge is open for business throughout the year, bookings by overseas tourists are heaviest for the warmer climatic period of November to February. The predicted value of annual taxable supplies is largely influenced by a seasonal fluctuation of guests.
  
  The partnership application would meet this factor.
  
  Conclusion:
  
  The legislation provides Inland Revenue some flexibility to make a compliance cost concession where existing registered persons do not represent any compliance risk. In the absence of an established GST compliance history, Inland Revenue will need to be satisfied there will be adequate accounting and record keeping systems in place to enable the partnership to comply with its future GST obligations. While the seasonal nature of the taxable activity would generally meet the last factor, the provisions of section 15A apply to established registered persons seeking change. On this basis, Inland Revenue would direct the registered person to commence on a more frequent return basis. Should the partnership seek to change the return filing category once they have established a return filing and compliance history, Inland Revenue will consider the application.
  

Margaret Cotton
National Manager
Technical Standards

Dated: 18 December 2001

Other pages in: General statements

• SPS 08/04 - Elections to change a balance date
• SPS 08/03 Income Tax Act 2007 - Penalties and interest arising from unintended legislative changes
• SPS 05/08 - Section 17 Notices (July 2005)
• SPS 07/05 - Transfer of depreciable property between associated persons - section EE 33 of the Income Tax Act 2004 (September 07)
• SPS 07/04 - Discretions to be exercised by the Commissioner of Inland Revenue under the KiwiSaver Act 2006 (July 07)
• SPS 05/12 - Loss offset elections between group companies (Feb 06)
• SPS 05/09- Income equalisation deposits and refunds (October 2005)
• SPS 05/07 - Non-disclosure right for tax advice documents (July 2005)
• SPS 05/02 - Income Tax Act 2004 - Penalties and interest arising from unintended legislative changes (Jun 05)
• SPS 05/06 - Non-standard balance dates for managed funds and "as agent" returns (May 05)
• SPS 05/05 - Retrospective adjustments to salaries paid to shareholder-employees (May 05)
• GNL-430 Retention of business records by electronic means (Dec 03)
• GNL-170 Release of information (Sep 01)

Date published: 21 Dec 2004

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