Liquidators wound up over GST change

Continued from page 1 Invoice-based accounting allows them to claim a GST credit on all supplies received and invoiced to the firm they are administering, even though these invoices have not been paid, and quite possibly never will be.

Inland Revenue says in a note explaining the proposed law change that such GST changes have become ‘‘standard practice’’ among liquidators and insolvency practitioners.

IRD analysis indicates that between 1 January 2009 to 30 July 2010 liquidators requested a change from the payments to invoice accounting basis for 627 companies. This produced $4.5 million in refunds, whereas the GST returned was approximately $550,000.

A proposed new section of the GST Act will prevent administrators applying to change a GST registered entity’s accounting basis to time of invoice.

‘‘Changing the accounting basis often results in refunds being made to the liquidator or receiver despite in many cases there being no realistic prospect that the debt, to which the input credit relates, will ever be paid,’’ IRD said. ‘‘The current practice does not seem to have a commercial purpose other than to generate GST refunds.’’

Shaun Adams, KPMG’s head of restructuring and insolvency and a committee member of the insolvency industry body Insol, said the issue was debated and there was discord between the Insol comittee and some of the members.

Insol chose not to make any representations to the government about the proposed changes, as they would be seen to be self-serving.

Adams said the change would adversely affect some practitioners, but IRD’s view was that using GST this way was inappropriate and the change was protecting the integrity of the GST system.

Webb said one possible result was qualified liquidators choosing not to take certain jobs, raising questions about how low value liquidations will be funded.

‘‘What is the state’s role?’’ Webb asked. ‘‘Is there an asset administration fund to allow wind-up and a stipend paid for initial investigations?’’

Webb said 80 per cent of the Official Assignee’s work is personal bankruptcies. The challenge it faces is workload. One solution could be outsourcing any extra work to qualified practitioners.

According to the IRD, about 80 per cent of all GST registered persons account for GST on a payments basis. To do so they must make less than $2 million of taxable supplies a year, otherwise invoice basis is required.