New Zealand GST Rules for Payment Service Providers

New Zealand's Inland Revenue published an interpretation statement explaining how GST should be applied to businesses that provide payment-related services to merchants, such as payment service providers (PSPs), buy now, pay later (BNPL) providers, and other payment technology or infrastructure suppliers. The main purpose of this interpretation statement is to clarify the criteria for determining whether such activities constitute exempt financial services under the GST framework.

Key Determining Factor for GST Purposes

Financial services are typically exempt from GST, or, in some cases, subject to a 0% GST rate. In either case, the supplier does not charge GST on the supply made to the merchant. However, one factor significantly changes the treatment of these transactions. The key factor for determining whether a transaction is subject to GST revolves around whether the provider delivers settlement services.

For example, if authorising and executing payments, ensuring funds are transferred, and bearing the risk if something goes wrong are part of the transaction, the transaction is generally treated as a financial service and is therefore GST-exempt. In contrast, services that only transmit information between parties, without actually moving money or taking on settlement responsibility, do not qualify as financial services and are typically subject to GST.

Notably, in cases where PSPs do not provide settlement, some additional or incidental services, such as facilitating communication between parties or providing payment gateways and processing technology, may also fall within the financial services category if they are closely connected. Conversely, functions such as administrative support, compliance, reporting, or marketing are generally not considered incidental, although they could still be treated as part of a financial service if they are bundled into a single overall supply.

Another critical issue is determining whether the provider is making one combined supply or several separate supplies. This depends on the facts of the transaction and the contractual arrangements. In cases where there is a single supply, the GST treatment follows the dominant element. 

Generally, settlement is included in the supply, making it the dominant element of the transaction, and resulting in the entire bundled service being treated as a financial service. Nonetheless, if certain elements of the transaction, for example, advertising or promotion services, are sufficiently separate, they may be treated as independent supplies and taxed differently.

Conclusion

The Inland Revenue guidance highlights that when determining GST treatment of transactions relating to financial services, the treatment depends less on labels and more on the substance of the arrangement. More specifically, taxable persons engaged in these types of services should focus on whether settlement is involved and how closely other services are tied to it, to properly determine whether their supplies are subject to GST or exempt.

Source: Inland Revenue