Funeral expenses paid by funeral directors in connection with funeral arrangements

Goods and Services Tax Act 1985 - section 60(2) - supply to an agent

 The service provided by funeral directors to their clients is the making of arrangements for funerals.  That service would necessarily include arrangements for the burial or cremation.  Funeral directors may also enter into contracts with third parties for goods or services (including arrangements for newspaper advertisements, flowers, the printing of the order of service, purchase of burial plots, the minister or organist's services) but normally these arrangements would be made only at the request of the clients.  Funeral directors generally make payments to the third parties (who may in some cases be non-registered persons) and recover the costs from their clients. We have been asked whether funeral directors act as agents of their clients in respect of the supply of goods or services such as:

•  advertising of funeral notices
• flowers for the funeral service
• printing of the order of service
• purchase of burial plots
• and minister or organist's services

and what is the correct GST treatment of such transactions.

Are funeral directors agents?

The same criteria apply in all situations where it is necessary to decide whether a person has acted as an agent on behalf of another person for GST purposes.  Unless there are specific arrangements to the contrary, such goods or services would be acquired from third parties by funeral directors as agents for their clients as:

• The goods or services would not be supplied unless requested by the clients; and
• The clients would be aware that the goods or services will be supplied by third parties; and
• The funeral directors would be authorised (expressly or implicitly) to acquire the goods or services on behalf of the clients.

What is the correct GST treatment

Section 60(2) deems a supply of goods or services to an agent on behalf of a principal to be made to the principal.  The effect of section 60(2) is that the agent "drops out" of the transaction.  For GST purposes the supply of goods or services by a third party to a funeral director as agent for a client would be treated as a supply to the client and not to the funeral director.  The correct GST treatment of the transactions would be:

• The funeral director would not add GST to the disbursement paid on behalf of a client as the disbursement would not be paid for a supply made by the funeral director: Section 8(1). 

However, if a funeral director required payment of an amount exceeding the disbursement paid on behalf of the client, the amount charged in excess of the costs paid (however described in the invoice) would normally be considered to be part of the fee for services supplied by the funeral director.  This presumption would be subject to the terms of the agreement between the funeral director and the client so that if the agreed fee is a specific amount, GST would be chargeable by the funeral director on that amount.   A written quotation accepted by the client would be evidence of the agreed fee for the funeral director's services.

• The funeral director would not be entitled to an input tax credit on the supply of goods or services acquired on behalf of a client as the supply would not be made to the funeral director and would not relate to goods or services "acquired" by the funeral director: Sections 3A and 20(3). 

Even if funeral directors acquired services as principals, input tax credits are not allowable on services supplied by non-registered persons.  An input tax credit may be allowable on the sale of "secondhand goods" by non-registered persons to funeral directors as principals.  "Secondhand goods" are goods which have been previously owned and used for their intrinsic purpose by a previous owner: Case N16 (1991) 13 NZTC 3,142; L R McLean & Co Ltd v CIR (1994) 16 NZTC 11,211.  For example, flowers would not be "secondhand goods" for GST purposes since their previous use for their intrinsic purpose would normally result in their no longer being regarded as new.  Therefore, an input tax credit would not be allowable to funeral directors on flowers acquired from a non-registered person, whether acquired by funeral directors as a principal or agent.