Second Hand Goods: GST and Depreciation explained

Second Hand Goods: GST and Depreciation explained

Michael Levertoff

Today we're exploring second hand goods introduced into your business and second hand goods purchased for use by your business.

Change of use in respect of second hand goods

Often in the course of business items that you own are used in the business activity. Bringing these assets onto the books is important.

1. Using assets not officially on the books is not a true reflection of your business. Your assets will wear out eventually - and at that point who will replace them? You or your business?

2. Expenses like depreciation can be claimed on assets on the books. This is a legitimate claim that you are missing out on if your assets are not on the books.

3. Repairs and maintenance to your asset cannot be accepted unless the asset is on the books. Again this is a legitimate business expense that you are missing out on if you don't have your assets on the books.

4. If you are GST registered, you are entitled to claim back GST on the asset you are introducing to the business.

Coming to a value of the second hand goods

When introducing second hand goods into your business, you'll need to establish a current market value. The easiest way to achieve this is to find three similar items that have sold recently. TradeMe is a good place to find this kind of information. The average of these three items is an acceptable method of valuing for Inland Revenue's purposes.

GST and change of use

Bringing your assets on the books is covered by rules issued by Inland Revenue. The tests that must be met before a registered person can make deductions from GST output tax for change from non-taxable to taxable use can be found under section 20(3)(e) of the Goods and Services Tax Act 1985 ("the GST Act").

Where a registered person acquires second hand goods and changes the use of the goods from non-taxable to taxable, there are four requirements under section 21E(3) of the Goods and Services Tax Act 1985.

a. The second hand goods were supplied to the registered person by way of sale;

b. The second hand goods that were sold to the registered person have always been situated in New Zealand, or in the case of imported goods, have been subject to GST under section 12(1) when imported;

c. The supply to the registered person was not a taxable supply (that is, GST was not charged on that supply);

d. The goods have not been supplied to another GST registered person who is the importer of the goods.

Second hand goods purchased by your business

At times you may purchase a second hand item for the business. There are special rules that apply to second hand goods purchased.

For GST, second hand goods are goods previously used and paid for by someone else. It doesn't include:

· new goods

· primary produce (unless previously used)

· goods supplied under a lease or rental agreement

· livestock

· second hand goods consisting of any fine metal of any degree of purity.

Land is considered to be second hand goods. However generally speaking land is exempt for GST.

The same rules for GST and tax invoices apply to second hand goods as for all other goods liable for GST.

Second hand goods and GST

Second hand goods if seller is not GST-registered

If the seller is not registered for GST or the goods are private (exempt), there will be no tax invoice or GST charged. However, if the purchaser is GST registered they can claim a credit for GST purposes.

Regardless of the accounting basis you use, you must make a payment before you can claim the credit for the purchase.

In these cases the purchaser must record:

· the name and address of the supplier

· the date of the purchase

· a description of the goods

· the quantity of the goods

· the price paid.

You'll also need to keep details of the transaction if you are going to make a claim for income tax purposes.

Second hand goods if seller is GST registered

The standard GST rules apply.

Second hand goods and depreciation

Depreciation allows for the wear and tear on a fixed asset and must be deducted from your income. You must claim depreciation on fixed assets used in your business that have a useful lifespan of more than 12 months. Not all fixed assets can be depreciated. Land is a common example of a fixed asset that cannot be depreciated.

Accounting for depreciation

In your income tax return, you must claim depreciation - or "wear and tear" - on most fixed assets (unless you elect not to depreciate). A fixed asset is something that your business owns and that you expect to use for business purposes for more than a year. There are some assets that do not depreciate, for example, land or trading stock.

You cannot claim the cost of an asset as a business expense against your income.

-ENDS-

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