The IRD’s latest draft Interpretation Statement (PUB00327) looks at “GST and Agency”. For GST purposes, where an agent makes a supply on behalf of a principal, the agent’s role in the process is ignored – the supply is treated as being made by the principal, who is then responsible for returning the GST. However, whether someone is an agent, or a principal is not always clear.
The term "agent" is used in a variety of ways which do not necessarily match up to the definition of agency for GST purposes. Importantly, the GST Act does not define the term, so the definition we have is compiled from prior case law.
For example, a real estate agent is not normally an “agent” for GST purposes. Strictly speaking they are an intermediary – they do not have the legal capacity to bind either party to a transaction.
Another kind of non-agency relationship is what is known as “vicarious performance”. This is what happens when a party contracts with another party for a performance of their obligation to a customer. For example, a smash repairer may arrange for a specialist to repair a certain part of a damaged car, but they remain liable to the original customer for the specialist’s work. No relationship is formed between the specialist and the customer.
Fundamentally, whether someone is an agent depends on the legal nature of their relationship with the other party. Authority and consent are considered essential features of an agency relationship – the agent and the principal must both agree that the agent has the authority to create or alter the legal relationship between the principal and a third party for the purposes of a supply of goods or services.
Other factors can strongly indicate, but not automatically prove, an agency relationship. Payment of a commission is one such factor, as is legal responsibility for the actions of and debts incurred by the other. Agents normally have no legal interest in the principal’s property. The more of these factors that exist, the more likely it is that it is an agency relationship.
There are further factors that may indicate an agency relationship, but these depend on the circumstances. If one party controls the actions of the other, such as the sale price, or requires notification of the details of sales completed by the other, an agency relationship may exist. Treating the other party’s property or funds as separate to their own may also indicate agency.
The GST Act can also override common law to deem an agency relationship to exist (or not). For example, if a non-resident principal supplies distantly taxable goods or remote services, the agent is treated as the principal under section 60(1A) and 60(1AB). Conversely, under section 60(5), an auctioneer and a non-GST-registered principal may also agree that the auctioneer will be treated as making the supply, even though the auctioneer would normally be considered an agent.
Critically, someone saying they are an agent does not in itself prove an agency relationship exists – other factors will be relevant. As is often the case, substance is more important than form, so remember to look past the ‘labels’ to the reality of the relationship.