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Goods and Services Tax Act 1985

Returns and payment of tax - Calculation of tax payable: deductions, apportionment, other adjustments

26: Bad debts

You could also call this:

"Claiming back tax on bad debts when someone doesn't pay you"

Illustration for Goods and Services Tax Act 1985

If you are a registered person and you made a supply for money, you need to follow some steps. You must have given the government a return for the time the supply was made and paid the right amount of tax. If someone did not pay you, you can write off the debt as bad.

You can then claim back some of the tax you paid on that supply, as stated in section 20(3). The amount you claim back is based on how much of the debt was written off. If you sell a debt to someone else and then get it back, you can still claim back tax.

If you get paid back for a bad debt, you have to pay back some of the tax you claimed. This rule does not apply in some situations, such as when a principal sells to an agent, or when a marketplace operator is involved and section 26AA applies.

You also need to consider the rules about insurance contracts and payments to the Earthquake and War Damage Commission, the Fire Service Commission, or Fire and Emergency New Zealand, as stated in the Fire Service Act 1975 or the Fire and Emergency New Zealand Act 2017. In these cases, you can claim back tax on the amount written off as a bad debt, based on the tax fraction.

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This page was last updated on

View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM84318.

Topics:
Money and consumer rights > TaxesMoney and consumer rights > Banking and loans
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26AA: Marketplace operators: bad debts for amounts of tax, or

"Marketplace operators can claim back tax on bad debts for unpaid goods or services."

Part 3Returns and payment of tax
Calculation of tax payable: deductions, apportionment, other adjustments

26Bad debts

  1. Where a registered person—

  2. has made a taxable supply for consideration in money; and
    1. has furnished a return in relation to the taxable period during which the output tax on the supply was attributable and has properly accounted for the output tax on that supply as required under this Act; and
      1. has written off as a bad debt the whole or part of the consideration not paid to that person,—
          1. that registered person shall make a deduction under section 20(3) of that portion of the amount of tax charged in relation to that supply as the amount written off as a bad debt bears to the total consideration for the supply: provided that where goods are supplied under a hire purchase agreement, the registered person shall only make a deduction under section 20(3) of the tax fraction (being the tax fraction applicable at the time that the hire purchase agreement was entered into) of that portion of the amount written off as a bad debt as the cash price bears to the total amount payable under the hire purchase agreement:

        1. Subsection (1) also applies if a registered person sells a debt to a third party and then reacquires the debt.

        2. A registered person who is required to account for tax payable on a payments basis under either section 19 or section 19A must apply this section only to supplies made by the person to which any one of sections 9(2)(b), 9(3)(b) and 26A applies.

        3. Where a registered person has, in respect of the supply by that registered person of any contract of insurance (being a supply charged with tax pursuant to section 8(1)),—

        4. paid any amount to the Earthquake and War Damage Commission pursuant to the Earthquake and War Damage Act 1944 or to the Fire Service Commission pursuant to the Fire Service Act 1975 or to Fire and Emergency New Zealand pursuant to the Fire and Emergency New Zealand Act 2017; and
          1. sought to recover that amount, together with the consideration for that supply, from the recipient of that supply; and
            1. written off as a bad debt the whole or part of that amount not paid to that registered person,—
                1. that registered person shall make a deduction under section 20(3) of the tax fraction of that amount or that part of that amount written off.

              1. Where any amount in respect of which a deduction has been made in accordance with subsection (1) is at any time wholly or partly recovered by the registered person, that portion of the amount of the deduction allowable under subsection (1) as the amount of the bad debt recovered bears to the bad debt written off shall be deemed to be the tax charged in relation to a taxable supply made during the taxable period in which the bad debt is wholly or partly recovered.

              2. This section does not apply when the taxable supply is one made by a principal to an agent as described in section 60(1B)(a) if the agent has been paid for the supply described in section 60(1B)(b).

              3. This section does not apply when the taxable supply is made by an agent to a principal as described in section 60(2B)(b).

              4. This section does not apply when the taxable supply is made by a marketplace operator and section 26AA applies to the bad debt.

              Notes
              • Section 26(1): amended (with effect on 3 December 1985), on , by section 21(1) of the Goods and Services Tax Amendment Act 1986 (1986 No 43).
              • Section 26(1) first proviso: amended, on , by section 139 of the Credit Contracts and Consumer Finance Act 2003 (2003 No 52).
              • Section 26(1) second proviso: repealed, on (applying on 10 October 2000), by section 103(1) of the Taxation (GST and Miscellaneous Provisions) Act 2000 (2000 No 39).
              • Section 26(1AA): inserted, on (applying on and after 10 October 2000), by section 103(2) of the Taxation (GST and Miscellaneous Provisions) Act 2000 (2000 No 39).
              • Section 26(1AB): inserted, on (applying on and after 10 October 2000), by section 103(2) of the Taxation (GST and Miscellaneous Provisions) Act 2000 (2000 No 39).
              • Section 26(1A): inserted (with effect on 3 December 1985), on , by section 21(3) of the Goods and Services Tax Amendment Act 1986 (1986 No 43).
              • Section 26(1A)(a): amended, on , by section 197 of the Fire and Emergency New Zealand Act 2017 (2017 No 17).
              • Section 26(3): inserted, on , by section 135 of the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013 (2013 No 52).
              • Section 26(4): inserted, on , by section 364 of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
              • Section 26(5): inserted, on , by section 31 of the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 (2019 No 33).