Poor records foil GST credit claim

Under the GST law, input tax credits can be claimed on tax invoices that have been paid. Sounds simple enough, but if the Tax Office checks up and denies a claim for the credits, the taxpayer has to be able to prove the relevant invoice has been paid.

That too sounds simple enough, but it requires the keeping of good records – and not all records kept by SMEs qualify as good records.

A recent case before the Administrative Appeals Tribunal (AAT) has highlighted this area and is a useful reminder for SMEs about the legal requirements for claiming the credits, including the keeping of accurate records.

In the case, the AAT partially allowed the input tax credit (ITC) claims of a husband and wife partnership in relation to three invoices for work undertaken in the development of a service station in western Sydney. The Tribunal also removed the administrative penalty that had been imposed by the Tax Office.

The husband and wife were registered for GST purposes as a partnership, and accounted for GST on a cash basis. They claimed ITCs in relation to three invoices totalling $53,910 issued between August and September 2008 for work in relation to a development of a service station. The invoices were issued by companies associated with the husband and related to:

The first invoice – professional services in relation to supervising, requesting the order and arranging for soil contamination reports to be completed in accordance with the EPA guidelines;
The second invoice – professional services in obtaining and documenting leases for the service station; and
The third invoice – professional fees and charges for the preparation of all working drawings, survey, council requirements.

The Tax Commissioner disputed whether the acquisitions for services were actually made and disallowed the claim for ITCs. Further, he imposed an administrative penalty of 50% ($26,955) for recklessness. The taxpayers argued that they made and paid for the acquisitions in question and therefore they were entitled to ITCs claimed.

The Tribunal held that the services described in the first and second invoices were supplied and paid for during the September 2008 tax period based on the evidence presented by the taxpayers. Hence, it held the ITC claims of $23,910 in relation to the first two invoices were valid.

However, in relation to ITC claimed based on the third invoice (totalling $30,000), the Tribunal held that even though the taxpayers held a tax invoice, the credit claim was not justified as they had not provided evidence of payment for the invoice. Documents before the AAT showed some confusion by the taxpayers in describing what the payments concerning the third invoice were for.

In a spreadsheet, the husband had labelled each of the 14 entries comprising the third invoice as “short-term loan”, but the AAT heard that the entries “might have been” a “short-term loan” or “an investment” or ice cream money”. The taxpayer said he wasn’t sure and would “leave that to the accountants to allocate what it actually is”.

The AAT said it could not comfortably conclude that amounts represented payment for the services described in the third invoice. Therefore, it held that services related to that invoice were not a creditable acquisition for the purposes of the GST law.

In relation to the 50% penalty imposed by the Commissioner for “recklessness”, the Tribunal held that in the circumstances, the taxpayers’ ITC claims did not result in recklessness. The AAT also rejected the Commissioner’s alternative submission that the taxpayers had failed to take reasonable care.

So, the Tribunal allowed the ITC claims in relation to the first two invoices which revised the tax shortfall to $30,000 instead of $53,910. The AAT also removed the administrative penalty imposed by the Commissioner as it held the taxpayers were neither reckless nor failed to take reasonable care.

This case graphically illustrates the need for SMEs to keep clear and accurate records relating to their businesses. Good record keeping is fundamental to complying with tax and GST laws and can quickly provide a taxpayer with the proof needed to satisfy Tax Office queries. On the flipside, poor records can cost a business dearly.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions .