A standard data policing check completed by Inland Revenue is to review taxpayer GST filing patterns to identify taxpayers that are GST registered, but perhaps shouldn’t be.
In order to qualify for GST registration, a taxpayer needs to be conducting a “taxable activity”. This comprises a continuous or regular activity that involves making a supply of goods or services for consideration. This is a different test to whether a person is operating a “business” for income tax purposes, as it does not require an intention to make a profit.
A person is required to register for GST when the value of their sales exceed or are expected to exceed $60,000 in a 12 month period. But this issue is not about sales volume, because a taxpayer can voluntarily register for GST if sales are below this threshold.
The issue is whether the activity has stagnated to the point there is either no or very low activity levels, or sales have declined to the point where it suggests the activity has stagnated.
On deregistration, assets retained are deemed to be sold, which can give rise to a cash cost. But if reviewed by Inland Revenue there is a risk they may determine the GST registration should be cancelled at a past date or that the entity never qualified for GST registration – thereby requiring past GST refunds to be paid back.
Knowing that a ‘knock on the door’ might be coming, it is worthwhile to pre-emptively consider whether an entity you are responsible for should not be GST registered.