GST: Adding an opt-out provision to agency rules

(Clauses 88 and 93)

Summary of proposed amendments

The amendment will allow principals and agents to agree to “opt-out” of the agency rules in the Goods and Services Tax Act 1985. A new subsection is being consequently added to the bad debts rules in section 26.

Application date

The amendments will apply from the date of enactment.

Key features

The proposed amendment will allow principals and their agents to agree to “opt-out” of the agency rules in the GST Act, and permit each to issue a tax invoice in relation to what will be treated as two separate supplies. The principal will return output tax in respect of the tax invoice issued to the agent, and the agent will return output tax in respect of the tax invoice to the recipient and claim input tax in respect of the output tax charged by the principal.

The proposed amendment also requires a principal who normally accounts for tax payable on a payments basis to account on an invoice basis in respect of their supply to the agent. A new subsection will also be added to the bad debts rules to prevent a principal from claiming a bad debt deduction when they use the new opt-out provision if the agent has received payment for the supply.

The subsection which requires a principal to account on an invoice basis is not limited to situations where the recipient does not pay the agent. Such a limitation would require the principal to know in advance whether the agent would be paid for their supply to the recipient, and so would be unworkable.

The requirement for a principal to account for the tax payable on the first supply on an invoice basis is intended to prevent a revenue loss to the Government if the agent defaults on their GST obligation.

Background

The GST Act currently only allows one tax invoice to be issued when an agent makes a taxable supply for, and on behalf of, a principal. Some accounting systems, however, automatically issue invoices when goods and services are supplied. The principal’s accounting system might therefore issue a tax invoice when goods and services are provided to the agent, and the agent’s accounting system might also issue a tax invoice when goods and services are provided to the recipient. There is therefore a technical breach of the legislation. Without this amendment, taxpayers will have to adapt their accounting systems to avoid this situation, and are likely to incur significant compliance costs in doing so.