PKF Francis Aickin Limited, Far North, New Zealand
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16 Jan 2020
The GST rules provide two occasions when de-registration can take place. The first is if the taxable activity has ceased and there is no intention of undertaking any taxable activity in the next 12 months. The second is if the projected value of taxable supplies for the next 12-month period will not exceed the $60,000 threshold.
The problem with de-registration is that it triggers an output tax liability on any assets held in the taxable activity. Where property is involved, the cost can be substantial as, under normal rules, the value used for calculation of the GST liability is the open market value at the time of de-registration. In many cases the cash requirement to fund de-registration is unaffordable.
However, if an asset was acquired before 1 October 1986 (the original introduction date of GST), the GST liability on de-registration is based on the lower of the original cost and the current market value. There would be GST payable based on market value on other assets acquired after 1/10/86.
A word of caution: An often-overlooked rule, is that IRD can set aside the de-registration if the assets are sold within 12 months of de-registration. The logic is that the sale of assets is a taxable activity. On de-registration the taxpayer states that their taxable supplies will not exceed $60,000 in the next year, or that the business has ceased and there will be no taxable activity in the next year. For example: if the property was originally purchased in 1975 for $2300, $300 output tax would be payable on the property on de-registration. If six months after de-registration the property was sold for $230,000, the IRD may set aside the original de-registration, and reassess the GST due at $30,000.
Also be aware that IRD can force de-registration if no taxable activity is being undertaken by the taxpayer.
The filing of GST returns showing no sales in box 5 for more than 12 months may result in an IRD action.
If a taxpayer is winding down their activity or believes that they may no longer have a taxable activity, consideration should be given to the timing of de-registration. If property acquired after 1/10/86 is to be retained, de-registration while property prices are depressed may be the most cost-effective option.
If you’re in this situation or have any questions, contact your tax adviser to review your GST status and options.
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