Adjusting the consideration on a supply
IR has issued draft QWBA PUB00352 for feedback, providing the Commissioner’s view on the correct application of section 25 of the GST Act.
For those of you familiar with the more frequently used sections of the GST Act, you will appreciate that section 25 is the provision which deals with the issue of debt or credit notes, when post the issue of a tax invoice (for which there should only ever be one in respect of a particular supply) the supplier wishes to amend the previous consideration charged on the supply, for whatever reason may necessitate that adjustment being required – for example, a calculation error resulting in customer being under-charged, a discount offered due to a customer’s displeasure with the quality of a supply, or perhaps the initial GST treatment of the supply being found to be incorrect (standard-rated when it should have been zero-rated).
The draft QWBA is relatively short, clarifying first that as long as one of the ‘events’ in section 25(1) has occurred, then an adjustment should be made in the period where it becomes apparent that the output tax accounted for was incorrect.
The primary point to understand about the correct application of section 25 however, and one stressed by the QWBA, is that an adjustment made in accordance with section 25, can only amount to the GST component on the difference between the original consideration charged and that amended. So for example, if the original consideration was $115, and the amended is $100, the difference in GST is $1.96, and it is only this amount that can be adjusted for in the relevant GST return by using the section 25 provision.
If you have a scenario, therefore, where the reason for making the adjustment is one of incorrect characterisation of the initial supply (standard-rated instead of zero-rated/exempt for example), then in IR’s opinion, you should not be using section 25 to make an adjustment, but instead utilising the Tax Administration Act’s section 113 process (requesting the Commissioner’s discretion to amend a previous return filed) to correct the error (unless the monetary concessions for making adjustments in subsequent GST returns apply – section 113A(1) or 113A(4) of TAA).
The basis for the Commissioner’s view is due to the wording of section 25, which only permits an adjustment for the GST component on the difference in the two considerations charged for the particular supply – even if the original GST treatment itself was wrong because the reason for the adjustment in consideration is irrelevant.
The draft QWBA includes two examples to clearly illustrate the point.
Note that if you wish to make a section 113 adjustment request, guidance on the Commissioner’s likely approach can be found in SPS 16/1.
Feedback on PUB00352 is requested to be received no later than 12th November.
