New apportionment rules
Taxation (GST and Remedial Matters) Act 2010 amends the GST rules on apportionment, reducing compliance costs for businesses and requiring fewer adjustments.
For GST purposes, the amount of an input tax deduction that can be claimed by a GST-registered purchaser for acquired goods and services should relate to the taxable use of the goods and services.
This is achieved by allowing GST-registered persons to claim a full input tax deduction for GST paid on goods and services acquired for the principal purpose of making taxable supplies.
If the goods and services acquired for the principal purpose of making taxable supplies are used partly or entirely for another purpose, for example, for private and exempt purposes (non-taxable purposes), the GST Act treats the non-taxable use of goods and services as a taxable supply by the registered person, and output tax is charged accordingly.
Conversely, goods and services acquired principally for a non-taxable purpose (for which the GST-registered person is not entitled to an input tax deduction) could be partly or entirely used to make taxable supplies. In these circumstances, the GST Act allows a deduction to reflect that taxable use.
This approach of taxing the "self supply" of goods and services ignores the original input tax deduction claimed by the GST-registered person as the change-in-use adjustments do not relate to the amount of the deduction claimed on acquisition. This is because the use of goods and services for a non-principal purpose is deemed to be a supply which is separate from the purchase transaction.
Another aspect of the GST rules is that there is no statutory limit on the maximum number of adjustments that have to be made, so the number of adjustments required can be excessive relative to the amounts involved. In addition, since change-in-use adjustments do not relate to the amount of the initial input tax deduction, the value of adjustments that a person is required to make can potentially amount to more than the original GST paid on the purchase. Conversely the value of the deduction received by means of change-in-use adjustments can sometimes exceed the amount of GST originally paid.
Because of the detachment between the initial input tax claimed on acquisition and the subsequent change-in-use adjustments, the rules for imposing GST on mixed use assets have not been sufficiently clear for many taxpayers.
Other issues concerning the current approach were raised by the Court of Appeal decision in Lundy (2005) 22 NZTC 19 at 637, which involved land being used concurrently for taxable (advertised for sale) and non-taxable (generating rental income) purposes.
Proposals to reform the change-in-use adjustments rules were initially outlined in an officials' issues paper, Options for strengthening GST neutrality in business-to-business transactions, released in June 2008. In the 2009 discussion document, GST: Accounting for land and other high-value assets, the Government proposed to replace the change-in-use adjustment approach with one that would apportion input tax deductions in line with the actual use of the goods and services. The new apportionment rules contained in the Taxation (GST and Remedial Matters) Act 2010 have therefore been the subject of extensive consultation and incorporate various amendments that arose during the policy development process.
Overall, the new rules are intended to reduce compliance costs for businesses by being simpler and requiring fewer adjustments.
The new rules replace the current adjustment approach with an approach that apportions input tax deductions in line with the actual use of the goods and services. In summary, the rules operate as follows:
- On acquisition, unless an exclusion applies, the portion of a deduction that a registered person can claim must correspond with the portion of the asset's use that is intended for taxable purposes.
- In subsequent years, a person may be required to adjust the deduction claimed if the extent to which the asset is used for taxable purposes is different from the intended taxable use of the asset. A number of exemptions have been introduced to relieve a person from the requirement to make an adjustment if the amount of tax involved in the adjustment is low.
- The maximum number of adjustments that a person may be required to make varies according to the asset's value or estimated useful life.
- Special "wash-up" rules apply when goods and services that have been subject to the apportionment rules are sold or the person deregisters.
- Special rules also apply to assets used concurrently for taxable and non-taxable purposes.
The new rules will apply to goods and services acquired after 1 April 2011.
For goods and services acquired before 1 April 2011, registered persons will be required to continue making change-in-use adjustments under the current rules. The obligation to make adjustments will, however, be limited by new section 21H for all supplies other than those that wholly or partly consist of land:
- For goods or services whose market value or book value on 1 April 2011 is $5,000 or less, no adjustment under the old rules may be made after 1 April 2011.
- For goods or services whose market value or book value on 1 April 2011 is more than $5,000 but not more than $10,000, no adjustment under the old rules may be made after 1 April 2013.
- For goods or services whose market value or book value on 1 April 2011 is more than $10,000, no adjustment under the old rules may be made after 1 April 2016.
Once the time limit for an asset is reached, the person must stop making any adjustments for change-in-use in respect of that asset.
Apportionment of input tax on acquisition
Acquisition of standard-rated goods and services
Under new section 20(3C), a purchaser can deduct input tax on the acquisition of goods and services to the extent to which the goods or services are used for, or are available for use in, making taxable supplies.
In determining the extent to which goods or services are used for making taxable supplies, a person must estimate on acquisition how they intend to use the goods or services, and choose a determination method that provides a fair and reasonable result (new section 20(3G)). The estimate could be made on the basis of any records that are available, previous experience, business plans or other suitable methods. The method of working out the extent of intended taxable use will largely depend on the nature of the goods and services in question. For example, if the asset is a car which is intended to replace an existing car used in the business, the logbook for the previous car could be a reasonable method of stipulating the intended use of the purchased car provided patterns of use were largely unchanged.
The estimated intended taxable use of the goods or services will determine the proportion of the input tax that can be deducted (new section 20(3H)).
New section 20(3D) is a de minimis provision to relieve recipients from the obligation to apportion input tax on the acquisition of goods or services in certain circumstances. In a similar way to the current rules, recipients will not be required to apportion input tax if they make both taxable and exempt supplies and have reasonable grounds to believe that the total value of their exempt supplies in the first adjustment period will be no more than the lesser of $90,000 or 5% of the total consideration for all taxable and exempt supplies.1
Acquisition of zero-rated goods and services
The Taxation (GST and Remedial Matters) Act 2010 introduces new rules that require suppliers of land, or supplies that include land, to charge GST on the supply at the rate of zero percent in certain circumstances.
New section 20(3J) provides special rules that will allow recipients of zero-rated supplies to determine the GST component of a zero-rated acquisition and account for any non-taxable use of the goods. In the absence of the special rule, any non-taxable use of the land would remain unaccounted for.
Thus, on the acquisition of a zero-rated asset, the purchaser will be required to perform the following steps:
Identify the nominal amount of tax
First, the purchaser must identify the nominal amount of tax (the "nominal GST component") that would be chargeable on the value of the supply if the zero-rating rules did not apply and the supply was subject to the standard rate of GST.
Determine the intended use of the supply
The purchaser must then determine as a percentage the extent to which they intend to use the goods for making taxable supplies.
Account for output tax, if any
If the person estimates that they will not use the asset solely for making taxable supplies, the person must account as output tax for the proportion of the nominal GST component that is attributable to the non-taxable use of the goods.
Subsequent adjustments for change-in-use
The new rules seek to achieve as much "first instance" accuracy as possible by requiring taxpayers to make fair and reasonable estimates on the intended taxable and non-taxable uses of acquired goods and services. In an "adjustment period" following the initial input tax deduction claim, taxpayers may, however, be required to make further adjustments if the actual taxable use of an asset is different from its intended taxable use.
An "adjustment period" (described in new section 21G(2)) is a period at the end of which a person is required to estimate whether an adjustment for a subsequent change-in-use is required. The first adjustment period is a period that starts on the date of acquisition and ends on the date as the person chooses that either corresponds to the person's first balance date that falls after the date of acquisition or to the person's first balance date that falls at least 12 months after the date of acquisition. All subsequent adjustment periods will be annual periods that start on the day after the end of the earlier adjustment period and end on the last day of the equivalent taxable period in which the first adjustment period ended.
Number of adjustment periods
There will be a maximum number of adjustment periods for which adjustments will be required to be made. The default method for identifying the maximum number of adjustment periods is in new section 21G(4)(a) and requires the taxpayer to apply the following GST-exclusive bands of goods and services:
- $5,001 to $10,000 - two adjustments
- $10,001 to $500,000 - five adjustments
- $500,001 or more - ten adjustments.
Alternatively, taxpayers will be able to select the maximum number of adjustments by reference to the estimated useful life of the asset as specified in the Tax Depreciation Rates Determinations set by the Commissioner under section 91AAF of the Tax Administration Act 1994 (new section 21G(4)(b)).
There will be no limit to adjustment periods in relation to land (new section 21G(5)).
Exclusions from the obligation to make adjustments in an adjustment period
No subsequent change-in-use adjustment will be required for goods and services acquired for the GST-exclusive value of $5,000 or less (new section 21(2)(b)).
For assets with a value of more than $5,000, no adjustment will be required in the relevant adjustment period if the recipient makes both taxable and exempt supplies and the total value of their exempt supplies in the adjustment period to which the adjustment relates is no more than the lesser of $90,000 or 5% of the total consideration for all taxable and exempt supplies for that adjustment period (new sections 21(2)(a) and 20(3D)).
Identifying whether there is substantial change in the use of the goods and services
If the above exclusions do not apply, new sections 21, 21A and 21B provide that, at the end of an adjustment period, a person must compare the percentage actual use of goods or services with:
- the percentage intended use of the goods or services (if no previous adjustment has been made); or
- the previous actual use (if the goods or services have been subject to a previous adjustment).
The "percentage actual use" is defined in section 21G(1)(a) as the extent to which the goods or services are actually used by the person for making taxable supplies. It is calculated from the date of acquisition to the end of the relevant adjustment period. The estimate must be expressed as a percentage.
The "percentage intended use" is defined in section 21G(1)(b) as the extent to which the goods or services are intended to be used by the person for making taxable supplies, estimated at the time of acquisition. The estimate must be expressed as a percentage.
The "previous actual use" is defined in section 21C(b)(i) as the percentage actual use in an earlier period that is the most recent period in which an adjustment has been made.
If the percentage intended use or previous actual use of goods or services is equal to the percentage actual use, the person will not be required to make an adjustment in the relevant adjustment period.
If the percentage actual use of goods or services differs from the percentage intended use or previous actual use, the person will be required to make an adjustment in an adjustment period only if the difference between the amounts is 10 percentage points or more, or the monetary value of the adjustment is more than $1,000 (new section 21(2)(c) and (d)).
If none of the exclusions mentioned above apply, the person will need to account for a change in use.
New section 21D sets out how to calculate the amount of a change-in-use adjustment for the adjustment period. This will be done by applying the formula:
- full input tax deduction × percentage difference
The "full input tax deduction" is the total amount of input tax on the supply. In situations where goods were acquired subject to the zero-rating rules, "full input tax deduction" will include any nominal GST component as calculated under section 20(3J).
The "percentage difference" is defined in section 21G(1)(c) as the difference between the percentage actual use and either the percentage intended use or the previous actual use if the person has already made an adjustment in respect of the asset in an earlier adjustment period.
The reverse charge rules for imported services, in section 8(4B), have been amended. This amendment ties the use of imported services to the defined terms "percentage intended use" and "percentage actual use" to ensure that appropriate apportionment of imported services takes place following the introduction of the new rules. A new time of supply rule has been added to clarify that the supply is deemed to be made in the adjustment period in which the reverse charge rules first apply to the supply.
It is not anticipated that these changes will have a great impact on the primary users of the reverse charge rules. While the rules have changed from a test that looks at the overall business to one that focuses on individual supplies, the application of the revised rules should produce the same overall result as the change-in-use rules.
Special rule for concurrent use of land
Under the new apportionment approach, the portion of a deduction that a person should be entitled to must correspond with the extent to which the asset is used for taxable purposes. In most situations, an asset may only be used for either taxable or non-taxable purposes at one point in time. For example, at any given time a motor vehicle may be used by a person for making deliveries of goods and services or for taking the person's children to school - but usually not both at the same time.
In some circumstances, however, an asset may be used for taxable and non-taxable purposes at the same point in time, for example, a property developer may supply a house as a dwelling for a few months while advertising the house for sale. Thus, for the duration of the rental period, the asset is not only fully committed to the taxable activity (the sale), but is also simultaneously fully committed to the exempt activity (residential rental income).
Section 21E provides a formula that will assist taxpayers in apportioning between concurrent uses of land. It also allows taxpayers to apply to the Commissioner for an alternative approach should the formula not be workable in their circumstances.
Section 21E(3) requires a registered person to calculate the extent to which the land is used for making taxable supplies by using the formula:
|consideration for taxable supply||×||100%|
|total consideration for supply|
The "consideration for taxable supply" is defined in section 21E(4)(a) as either the amount derived on a disposal of the land or, if the land has not been disposed of, the market value of the land at the time of the adjustment.
The "total consideration for supply" is defined in section 21E(4)(b) as the sum of the amount of the "consideration for the taxable supply" described above and:
- the amount of all rental income derived from the supply of a dwelling since the land was acquired; and
- if no rental income is paid or payable in relation to the non-taxable use of land, the market value of rental income that would have been derived from the time of acquisition of the land if rental had been charged.
New section 21E(5) specifies that the market value must be used in determining "consideration for the taxable supply" and/or "total consideration for supply" if amounts derived under those definitions are by associated persons or are not arm's-length amounts.
New section 21E(6) provides that if the market value of the land or rental income is not readily identifiable, the person may use another method to provide a fair and reasonable estimate of the market value.
An additional formula (section 21E(7)) estimates the extent of taxable use of the land if the land has, at any time, been used solely for making non-taxable supplies. The formula is:
* as calculated under the formula in section 21E(3)
"Months" is defined in section 21E(8)(a) as the number of months since acquisition in which all or part of the land is used to some extent for making taxable supplies.
"Total months" is defined in section 21E(8)(b)as the total number of months since acquisition.
By taking into account the solely non-taxable use of the land, the formula will reduce the extent of the taxable use of the land calculated under the formula in section 21E(3).
Adjustment on disposal
When a registered person disposes of, or is treated as disposing of, goods or services in the course of a taxable activity and has not claimed a full input tax deduction, new section 21F allows them to claim an additional amount of input tax.
The amount of deduction available on disposal of goods or services will be calculated under the formula:
|tax fraction||×||consideration||×||(||1||−||actual deduction||)|
|full input tax deduction|
For the purposes of the formula, section 21F(3) provides that:
- "Tax fraction" has the meaning given in section 2(1). For the purposes of the 15% GST rate, the tax fraction is 3/23.
- "Consideration" is the amount of consideration received, or treated as received, for the supply.
- "Actual deduction" is the amount of deduction already claimed, taking into account adjustments made up to the date of disposal.
The amount calculated under the formula, when added to any deduction already claimed, must not be more than the total amount of the input tax on the supply (or the nominal GST component, if the supply was zero-rated).
Entitlement to input tax deduction for goods and services acquired before registration
New rules have also been introduced that may allow a registered person to claim input tax deductions for goods and services purchased by them before registration.
These will apply in the following circumstances:
- before becoming a registered person, the person acquired goods or services that were chargeable with GST at the standard rate; and
- at the time of the registration or at a later time, the person used the goods or services for making taxable supplies; and
- the original cost of the goods or services, excluding GST, was more than $5,000.
If these conditions are met, a registered person will be able to claim a deduction for the goods and services purchased by them before registration if they hold a tax invoice in relation to the supply as required by section 20(2) or have adequate records that enable the identification of the particulars of an invoice as required by section 24(3).
To claim a deduction, the registered person must make an adjustment for change-in-use under sections 21 and 21A. The ordinary rules for apportionment of input tax would, however, be modified to treat the first adjustment period as the period that starts on the date of the acquisition of the goods or services and ends on the first balance date that falls after the person becomes registered for GST and uses the goods or services for making taxable supplies.
Following the determination of the length of the first adjustment period, the person must identify the percentage actual use of the goods or services in that period, using a method that provides a fair and reasonable result. This percentage actual use would then be compared with the percentage intended use (which will be 0% as the person will not have claimed any deduction on the acquisition). The resulting "percentage difference" will be used to claim an adjusted amount of the deduction under section 21D.
This rule allows goods and services acquired by a person before their registration to enter the apportionment regime. As a consequence, the asset will become subject to the same apportionment rules as any other asset purchased by the registered person.
Application to acquisitions from associated persons
New section 3A(3C) amends the application of section 21B for goods or services acquired from an associated person. In these situations, the amount of input tax on goods or services that may be claimed by the person must not be more than the amount accounted for as output tax by the associated supplier of the goods or services.
1 "First adjustment period" is defined in section 21G(2)(a) as a period that starts on the date of acquisition and ends on the date as the person chooses that either corresponds to the person's first balance date that falls after the date of acquisition or to the person's first balance date that falls at least 12 months after the date of acquisition. See more on "adjustment periods" later in this report.