IRD has recently issued a Technical Decision Summary TDS 25/05
In this case, a GST-registered company (the “Taxpayer”) owned land leased to a shareholder. After selling the land, the company ceased making taxable supplies but remained GST-registered. Legal fees were incurred in defending shareholder disputes over alleged financial irregularities. Several years later, the company claimed GST input tax deductions for these legal fees, which Inland Revenue (CCS) disputed.
Key Issues:
- Was the Taxpayer entitled to claim input tax deductions for legal fees under section 20(3C) of the GST Act?
- Should the Taxpayer’s GST registration be canceled?
Decision Summary:
- The Taxpayer was carrying on a taxable activity, as defending shareholder claims was deemed part of winding up its taxable activity under section 6(2) of the GST Act.
- However, the Taxpayer was not entitled to input tax deductions because it failed to prove that the legal fees were directly connected to making past taxable supplies.
- The Taxpayer’s GST registration was not canceled, as it was still resolving disputes related to its taxable activity.
Key Takeaways for Businesses:
- Businesses must establish a clear link between expenses and taxable supplies to claim GST input tax deductions.
- The mere existence of GST registration does not automatically allow input tax deductions if taxable supplies are not made.
- Winding up a taxable activity may extend GST obligations, but proving a connection to taxable supplies is crucial for GST claims.
Source: GST – input tax, taxable activity, taxable supplies, registration
Disclaimer: The views and interpretations expressed in this post are solely my own and do not necessarily reflect the opinions or beliefs of any organization or individual.