Think about this: You’re buying a new laptop online. You add it to your cart, enter your payment details, and hit "submit." But instead of the full payment, only a deposit is charged. You’re told that the balance will be due when the laptop is shipped. The order is confirmed, and you’ve made your commitment, but the full amount hasn't been paid yet. Does this mean the transaction is incomplete? Well, when it comes to GST, the word "payment" doesn’t always mean what you might think.

In fact, under GST rules, the term “payment” has a specific definition, and understanding this can save you a lot of confusion and potentially allow you to claim input tax earlier. Here’s why it matters: GST is heavily reliant on the “time of supply,” which is triggered by either the issuance of an invoice or the receipt of any payment. But what exactly counts as “payment,” and how does this affect the GST obligations? A recent draft statement from Inland Revenue provides clarity. Let’s break it down with three distinct scenarios.

A simple deposit: payment triggered

Let’s start with the basics. If a customer pays a deposit, that deposit is often enough to trigger the "time of supply" for the entire transaction. So, even if the customer hasn’t paid the full amount, that partial payment is sufficient for the supplier to account for GST on the entire amount. It’s an initial commitment that’s enough to set the wheels in motion.

Multiple payments for ongoing services

Next, consider a subscription service like your power bill. If the service is provided continuously over time, each instalment payment can be considered a separate supply. For example, when you make your monthly payment for power usage. You may have an annual contract, but for GST purposes there is not one supply for the year but a series of smaller supplies each month that each require GST to be accounted for at the time. It’s a bit like paying for each drop of water you use, not the whole tank.

When no money changes hands: The complex cases

Now, here’s where things get a little trickier, the draft statement gives a clear explanation. This is a situation many businesses face, especially when payments are made via accounting entries, promissory notes, or loan agreements.

• Journal entries: According to the draft statement, while accounting entries can track payments, they don’t count as actual payments unless there’s clear documentation like a contract, showing a genuine commitment between the parties.
• Promissory notes: The draft statement outlines that a promissory note is sufficient to constitute a “payment”. A promissory note, defined as a promise to pay, is sufficient to trigger the time of supply, as long as the note is genuine. This means GST should be accounted for when the promissory note is issued.

This should be contrasted with the situation where the parties simply agree the amount will remain outstanding until the recipient can pay. In that case, there has not been a “payment” for the supply. There can sometimes be a fine line between these two.

• Loans for payments:

If the supplier agrees to lend the recipient the necessary funds to make the payment, the supplier and the recipient enter into a loan agreement. The recipient uses these funds to make the payment for the supply and is then required to repay the loan according to the terms of the loan agreement. In this case, “payment” is typically considered to have occurred on the date the funds are drawn down under the loan agreement and repaid to the supplier. This is normally specified in the loan agreement.

Legal form vs. Economic reality: Why it matters

While these scenarios might seem economically similar: money is paid, goods are received, the legal form of the transaction determines the GST treatment. This is where strong documentation, such as legal agreements or shareholder resolutions, becomes critical. Proving the structure of the transaction, rather than just its financial outcome, is essential.