Navigating GST on Secondhand Goods: What New Zealand Businesses Need to Know
When it comes to GST and secondhand goods, many New Zealand business owners find themselves in a grey area. What exactly qualifies as “secondhand”? How do you claim input tax deductions? And what happens when you’re dealing with borderline cases?
At CMK Accountants, we regularly help clients navigate these tricky waters. The good news is that with the right knowledge, you can confidently handle GST on secondhand goods while maximizing your legitimate deductions.
Understanding Secondhand Goods for GST Purposes
Inland Revenue New Zealand (IRD) defines secondhand goods as items that have been used for their intended purpose. However, this definition isn’t as straightforward as it might seem. The concept of “secondhand” is deliberately flexible, allowing for various scenarios that businesses encounter in the real world.
Key characteristics of secondhand goods include:
- Items that have been previously owned and used
- Goods that show signs of wear or age
- Products that have been returned by customers (in some cases)
- Items that may have been repaired or refurbished
What’s NOT considered secondhand:
- New goods, even if they’ve been handled or displayed
- Damaged goods that haven’t been used for their intended purpose
- Goods returned immediately after purchase without use
The Grey Area: Borderline Cases
This is where many businesses get stuck. Consider these scenarios:
Scenario 1: The Display Model Sarah runs an electronics store in Auckland and sells a laptop that’s been on display for six months. Customers have handled it, but no one has actually used it for computing purposes. Is it secondhand?
In this case, the laptop likely remains “new” for GST purposes because it hasn’t been used for its intended function, despite being handled.
Scenario 2: The Returned Item Mark’s furniture business in Wellington receives a dining table back from a customer who used it for two weeks before deciding it didn’t fit their space. The customer wants a refund, and Mark plans to resell the table.
This table would typically be considered secondhand because it was used for its intended purpose (dining) in someone’s home.
Scenario 3: The Refurbished Phone A mobile phone repair shop in Christchurch buys broken phones, fixes them, and sells them. Are these secondhand goods?
Yes, these would be considered secondhand because they were originally used for their intended purpose before being repaired.
Input Tax Deduction Requirements
When you purchase secondhand goods for your business, you may be eligible for input tax deductions, but there are specific requirements you must meet under New Zealand’s GST system.
The fundamental rule: You can claim input tax deductions on secondhand goods purchases, but you need to calculate the GST component yourself since the seller typically isn’t registered for GST or doesn’t charge GST.
Key requirements include:
- Documentation: You must have a tax invoice or receipt showing the purchase price
- Calculation: You need to calculate the GST component (3/23rds of the purchase price for the 15% GST rate)
- Business purpose: The goods must be purchased for business use
- Timing: You can only claim the deduction in the GST period when you purchase the goods
Practical Examples for New Zealand Businesses
Example 1: Restaurant Equipment Tony’s Restaurant in Hamilton buys a secondhand commercial oven for $23,000 from a non-GST registered seller. Tony can claim an input tax credit of $3,000 (being 3/23rds of $23,000), provided he has proper documentation and the oven is for business use.
Example 2: Construction Tools BuildRight Constructions in Tauranga purchases secondhand tools worth $11,500 from various sources. Even though the sellers didn’t charge GST, BuildRight can claim input tax credits of $1,500, assuming all requirements are met.
Example 3: Office Furniture A law firm in Dunedin buys secondhand desks and chairs for $6,900. They can claim $900 in input tax credits, but they need to ensure they have receipts and the furniture is genuinely for business use.
Common Mistakes to Avoid
Mistake 1: Assuming all used items are secondhand Just because something appears used doesn’t automatically make it secondhand for GST purposes. The item must have been used for its intended purpose.
Mistake 2: Incorrect GST calculations Remember, it’s 3/23rds of the total purchase price for New Zealand’s 15% GST rate. Many businesses make this calculation error or use outdated rates.
Mistake 3: Poor documentation Without proper receipts or invoices, you cannot claim input tax deductions, regardless of whether the goods qualify as secondhand.
Mistake 4: Mixing personal and business purchases You can only claim deductions for goods purchased for business purposes. Personal purchases don’t qualify, even if you occasionally use items for work.
When to Seek Professional Help
Given the complexity and flexibility of secondhand goods rules, it’s worth consulting with tax professionals when:
- You’re dealing with high-value purchases
- The “secondhand” status is unclear
- You’re making regular secondhand purchases as part of your business model
- You receive conflicting advice about specific items
The IRD provides guidance through various publications and factsheets, but professional interpretation can save you from costly mistakes.
Best Practices for Managing GST on Secondhand Goods
- Keep detailed records: Document every purchase with receipts, photos, and notes about the item’s condition
- Create a system: Develop a consistent approach for evaluating whether items qualify as secondhand
- Calculate carefully: Double-check your GST calculations using the 3/23rds rule
- Review regularly: Periodically review your practices to ensure compliance
- Stay informed: Keep up with IRD updates and changes to GST rules
Understanding New Zealand’s GST Environment
New Zealand’s GST system has some unique characteristics that affect secondhand goods transactions:
- The current GST rate is 15%
- GST registration is mandatory for businesses with turnover exceeding $60,000
- Many sellers of secondhand goods operate below the registration threshold
- The calculation method (3/23rds) reflects the 15% rate embedded in prices
The Bottom Line
Managing GST on secondhand goods doesn’t have to be overwhelming. By understanding the flexible nature of the “secondhand” definition, meeting the input tax deduction requirements, and maintaining proper documentation, you can confidently navigate these rules while maximizing your legitimate deductions.
Remember, when in doubt, it’s better to seek professional advice than risk non-compliance. The investment in proper guidance often pays for itself through accurate deductions and peace of mind.
At CMK Accountants, we specialize in helping New Zealand businesses navigate complex GST situations. Whether you’re dealing with borderline cases or need assistance with regular secondhand purchases, we’re here to help you stay compliant while optimizing your tax position.
For personalized advice on your specific situation, contact CMK Accountants today. Our experienced team can help you develop systems and processes that ensure GST compliance while maximizing your legitimate deductions