Should commercial landlords change their GST accounting basis in response to COVID-19?

07 April 2020

Many commercial landlords will be paying GST on an invoice (accruals) basis. This is generally fine when tenants are paying their rent on time, but many tenants are now deferring or simply cancelling all or some of their rental payments due to Covid-19. If the landlord is registered on an invoice basis for GST, GST will become payable to Inland Revenue even when the actual GST amount has not been received from the tenant.

There is however some possible relief simply by changing the GST accounting basis from an invoice to a payments (cash received) basis. This will ensure that GST payments to Inland Revenue will match GST received from tenants.

Predicted turnover under $2 million

The invoice basis is the default method that applies to most taxpayers. However, if annual turnover is less than $2 million, it is possible to apply the payments basis. The turnover is determined either by looking backwards to determine the actual turnover during the last 12 months or forward to determine the likely turnover in the next 12 months. Some landlords who had turnover just exceeding $2 million in the past may now find that their forecast turnover in the next 12 months is less than $2 million, thereby allowing a change in the accounting basis.

Turnover exceeding $2 million

Even landlords who have an annual turnover over $2 million may be able to apply to change to a payments basis. The Commissioner of Inland Revenue has a discretion to allow taxpayers to file returns on a payment basis if she is “satisfied that, due to the nature, volume, and value of taxable supplies made by the registered person and the nature of the accounting system employed by the person, it would be appropriate for the person to furnish returns under this Act on a payments basis.”

Given the unprecedented nature of Covid-19 and its economic impact, it seems reasonable that the Commissioner would exercise her discretion favourably to allow commercial landlords affected by Covid-19 to change to a payments basis for GST. However, to date the Commissioner has had a restrictive interpretation of the three criteria as follows:

        -the “nature” of taxable supplies-this broadly requires that 80% or more of the supplies be made for cash
        (rather than on credit)

        -the “volume and value” of taxable supplies—this requires that the business have a high turnover of low per-unit
        value items, and

        -the “nature of the accounting system”—this envisages that the business uses a payments-accounting basis
        and would have administrative difficulties in switching to, and using, the invoice basis.

Cash businesses, such as dairies, supermarkets and medium-sized retailers may be approved whereas tradespeople and builders will not because they generally do not make cash sales and do not have a high number of low value supplies.

There would need to either be a substantial change in the Commissioner’s current policy or legislative change to allow a change to a payments basis for commercial landlords with a forecast annual turnover exceeding $2 million. We suggest that landlords in this category make an application in any case as we are seeing more generous exercise of discretionary powers by the Commissioner at this time.

Application of Change

Generally, Inland Revenue will apply a change in GST accounting basis to the next GST period but there is discretion to apply the change to “the commencement of such other taxable period as the Commissioner considers equitable, where the Commissioner and the person so agree.” Thus, there is at least the possibility to apply for the change to take effect from the beginning of the current period rather than the next GST period.

In either case, an adjustment is made to account for the GST paid on debtor’s balances and claimed on creditor’s balances at the end of the GST period preceding the change in accounting basis. This could result in a substantial refund for some landlords where rent due in the preceding period has not yet been received.

How to Apply

Applications can be made through MyIR or in writing. We would suggest that additional information is provided if the application is to apply to the current, rather than the next GST period, or annual turnover will still exceed $2 million.

Disclaimer:This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

Roger Thompson

Roger Thompson
Phone: +64 9 600 3902

Stay in touch. Please do not hesitate to contact your client advisor.

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