Amendments to the Goods and Services Tax Act 1985

A technical change to the formula in section 20C of the Goods and Services Tax Act 1985 has been made to ensure it produces the correct amount.

Background

In 2005, changes were made to the GST Act which zero-rated certain business-to-business supplies of financial services. The changes allowed suppliers of financial services to deduct input tax when previously such supplies were treated as exempt from GST (input tax deductions were not allowed).

Financial services supplied between financial services providers (such as banks) cannot, however, be zero-rated under the 2005 changes because most recipient financial services providers (the "direct supplier" in section 20C) will not satisfy the specific requirements of the zero-rating rules in sections 11A(1)(q) and (r). Financial services providers are therefore unable to deduct input tax in connection with these transactions because they are still treated as exempt from GST.

The deduction calculated by the formula in section 20C replaces the denied input tax deduction. The formula applies in connection with supplies of financial services between financial services providers. The amount deductible is the product of the formula:

The formula is based on two fractions which measure the mix of taxable and exempt supplies made by the supplier and the direct supplier in a taxable period. The product of the two fractions is applied to the amount of input tax that cannot be claimed by the supplier for the taxable period.

A problem with the formula was that the denominator in the first fraction (element"c") was the amount of total supplies of financial services made by the supplier. This had the effect of reducing the amount that could otherwise be deducted.

Key features

Section 20C has been amended so that denominator in the first fraction (element"c") is defined as the amount of total exempt supplies made by the supplier.

Application date

The change applies from 1 January 2005, the date that section 20C first had effect.