Downside of de-registering for GST may not be so clear

By DENHAM MARTIN

I own and operate a small market garden. The turnover isn't very great but in the past it's always been high enough to cause me to register for GST. I recently read that people who have turnover of less than $40,000 will soon be able to deregister for GST. Is this true? If it is true, I would love to deregister as keeping up with GST has caused me many headaches in the past.

I. E. Kumeu


Yes, it is true. The compulsory registration threshold for GST will increase from $30,000 to $40,000 on October 1 provided that the relevant bill is passed. Anyone whose taxable supplies in a 12-month period do not exceed $40,000 will not be required to register for GST.

The Government believes 25,000 small businesses will fall below the compulsory registration threshold as a result of the change. It is likely that many of these small businesses, like you, may be contemplating deregistering. However, you need to think carefully before you do.

The upside of deregistering is obvious.

The biggest burdens small businesses face as a result of registering for GST are compliance costs and cash-flow problems.

Deregistering for GST means you will not have to collect GST on future supplies that you make and not have to return GST to the IRD. It could even make you more competitive if many of your supplies are made to private consumers.

However, the downside may not be so obvious. Deregistration means you will loose your entitlement to claim an input tax credit for the GST component in the price of items you acquire for making supplies in your market garden business. In theory, your market garden business will be treated as an end consumer and will bear the burden of GST in its cost base.

A further downside is that on deregistration the IRD will treat you as having made a supply of all assets used in your taxable activity (your market garden business) and retained at the date of deregistration. You are treated as having made a supply to yourself, the supply is deemed to be in the course or furthering of your taxable activity and the supply will be subject to GST.

The result is that you will be required to pay an amount of GST to the IRD.

At present, the amount of GST payable as a result of deregistration is calculated on the lesser of cost or the open market value of the assets retained. Where the assets retained have appreciated it is beneficial to calculate the GST on the basis of cost.

However, proposed amendments to the GST legislation include a change to how you calculate the GST payable on deregistration. It is proposed that on assets acquired after the introduction of GST and retained as at deregistration, the GST payable will be calculated on the basis of their open market value.

The GST payable on assets acquired before the introduction of GST and retained at deregistration will be calculated on the lesser of cost and open market value.

The change could lead to a significantly greater GST liability where the assets retained on deregistration include appreciating assets acquired after the introduction of GST.

If you sold those assets before deregistration, you would be required to calculate GST on the basis of the sale price as opposed to the open market value (with the exception of certain sales to associated persons).

If the enactment is not made by October 1, you may still have the opportunity to deregister and to account for GST at the lesser of cost and open market value.

You should approach the opportunity to deregister with some caution as there is both an upside and downside to deregistration.

* Denham Martin is the principal of Denham Martin & Associates, lawyers specialising in advice on taxation and related matters.