Four-year limitation period for claiming GST credits

The Tax Laws Amendment (2009 GST Administration Measures) Bill 2009 was recently introduced into Federal Parliament. It proposes some important changes to GST laws and, although it will not be debated and passed until next year, SMEs should be aware of what is proposed.

The Bill proposes a 4-year limitation period to claim input tax credits (ITCs). The law will be changed to provide that a taxpayer will cease to be entitled to an ITC if the credit has not been claimed within 4 years.

What is important for SMEs to note is that these amendments will apply to GST returns and assessments lodged or issued from 7:30 pm AEST on 12 May 2009. That was the date of the 2009-10 Federal Budget when the changes were originally announced.

The 4-year period commences from the day on which a taxpayer is required to give the Tax Commissioner a return for the tax period to which a credit would be attributable under the basic attribution rules in the GST Act.

The proposed amendments will not affect the entitlement of taxpayers to ITCs where the credits have been taken into account in a taxpayer’s earlier return or assessment but the relevant liability or entitlement has not been paid. In addition, the proposed amendments will only apply to ITCs for fully and partially creditable acquisitions. This is because other entitlements and liabilities (eg ITCs for creditable importations and adjustments) are subject to separate attribution rules that do not allow deferral.

Exceptions to the 4-year period

There are 3 exceptions to the proposed 4-year limitation period:

• the 4-year period will not apply to a liability if the Commissioner provides notice within the period to a taxpayer requiring payment of an amount;
• the second exception applies to credits linked to liabilities avoided as a result of fraud or evasion; or
• the third exception applies where a taxpayer notifies the Commissioner of their entitlement to a credit.

However, a notice only preserves a pre-existing entitlement to a credit. Where the taxpayer has already ceased to be entitled to an ITC, the issue of the notice will not restore this entitlement.

Where any of the 3 exceptions outlined above apply, taxpayers can generally disregard the 4-year limit on claiming credits. For one of those exceptions to apply, the credit must have arisen from the same circumstances that gave rise to a liability or entitlement that is not subject to the limitation period.

For a credit to arise from the same circumstances, the credit must stem from both the same events and same reason that gave rise to an amount in a notice or an amount avoided by fraud or evasion.

An entitlement to an ITC will not be preserved beyond the 4-year limitation period notwithstanding the exceptions applying if:

• the Commissioner is no longer able to obtain payment of the GST from the supplier of the taxable supply which relates to an entity’s ITCs sought to be claimed; and
• a tax invoice was not issued for the supply within 4 years.

Adjustments for payments and gross-up clauses

The Bill also seeks to amend the GST Act to create an extra adjustment rule. The rule will require taxpayers to adjust their net amount where they are contractually required to provide payment as a result of a supplier being liable to pay GST after the taxpayer has ceased to be entitled to the relevant ITC.

The proposed adjustment rule will address the situation whereby a gross-up clause in a commercial contract results in a recipient of a supply bearing the burden of the GST. This will be achieved by providing that where the recipient must pay more as a result of the gross-up clause, and they have ceased to be entitled to the input tax credit for the acquisition, the taxpayer will have a decreasing adjustment, reducing their GST liability.

The amount of a decreasing adjustment will be equal to the difference between the amount of the ITC claimed and the amount which a taxpayer would have been entitled to claim (had the taxpayer held a relevant tax invoice).

Where a gross-up clause in a contract allows a supplier to seek an extra payment if a supply is potentially taxable even where the supplier can no longer be required to pay tax on the supply, the matter is purely a contractual one between the supplier and recipient and no adjustment will be available. There will also be no adjustment if the underpayment occurred for some reason unrelated to tax.

As with all matters tax, there is some complexity involved here, but SMEs should note that, once the amendments become law (sometime next year), the 4-year ITC claim clock will effectively run from 12 May 2009. SMEs should check with their tax advisers about the details.