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.

Key features

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.

Application dates

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.

Detailed analysis

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

Example 1

John acquires a car for $23,000 (including GST of $3,000) to replace his existing car. The car will be used both in John's business as a sole trader and for private purposes.

The logbook kept by John for his old car shows that in the previous year he used the car 70% of the time for business purposes. Since John does not expect this ratio to substantially change in the future, he estimates that he will use the new car 70% for taxable purposes. Consequently, on acquisition John claims 70% of the available input tax using the formula in section 20(3H):

  • $3,000 × 70% = $2,100

Example 2

Safe Life Ltd (SL) is an insurance company that provides mostly life insurance policies (exempt supplies), but also provides a range of other insurance covers (taxable supplies). SL purchases 100 computers for a total consideration of $240,000 (including GST of $31,304).

On acquisition, SL may only claim the portion of the input tax that corresponds with the intended taxable use of the computers. SL estimates that in the 12 months prior to the purchase, 70% of all its supplies were exempt supplies of life insurance policies and 30% of its supplies were taxable supplies of other insurance covers. As a result, SL determines that the computers will be used 30% of the time for the purpose of making taxable supplies and claims 30% of the input tax paid in respect of the computers:

  • $31,304 × 30% = $9.391

Example 3

A corner dairy spends $6,000 (exclusive of GST) on renovations.

The major part of the dairy's business involves making taxable supplies. However, the dairy also runs a debtors' account and charges interest on any late payments (exempt supplies). Since the total value of the interest charged (exempt supplies) in the first adjustment period is expected to be no more than the lesser of $90,000 or 5% of the total consideration for all taxable and exempt supplies made by the dairy, the dairy is not required to apportion the input tax in relation to the renovations.

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.

Example 4

Safe Life Ltd (SL) from Example 2 acquires new headquarters for $30 million. There was no GST included in the supply as it is subject to the new zero-rating rules.

On acquisition, SL has to apply the rules in section 20(3J) as follows:

  1. Identify the amount of tax that would be chargeable on the value of the supply if the supply was subject to the standard rate of GST (the nominal GST component):
    ($30m × 15% = $4,500,000)

  2. Determine the extent to which they intend to use the headquarters for making taxable supplies.

SL estimates that 30% of its activity involves making taxable supplies.

  1. Account for the proportion of the nominal GST component that is attributable to the non-taxable use of the goods as an output tax:
    $4,500,000 × 70% = $3,150,000

SL has to account for output tax of $3,150,000 on acquisition of the new headquarters.

Example 5

Eric purchases a building for $3 million. The supply to Eric is zero-rated.

Eric intends to rent the ground floor of the building to commercial tenants, and the upper floors of the building to residential tenants.

On acquisition, Eric has to apply the rules in section 20(3J):

  1. Identify the amount of tax that would be chargeable on the value of the supply if the supply was subject to the standard rate of GST (the nominal GST component):
    $3m × 15% = $450,000

  2. Determine the extent to which he intends to use the building for making taxable supplies.

Eric determines that he intends to use the building 60% in making taxable supplies (rent to commercial tenants) and 40% in making exempt supplies (rent to residential tenants).

  1. Account for the proportion of the nominal GST component that is attributable to the non-taxable use of the goods as output tax:
    $450,000 × 40% = $180,000

Eric has to account for output tax of $180,000 on acquisition of the building.

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.

"Adjustment period"

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.

Example 6

Mary purchases a car on 1 February 2012. Mary's balance date falls on 31 March.

The first adjustment period in respect of the car is, at Mary's option, either:

  1. the period from 1 February 2012 to 31 March 2012; or

  2. the period from 1 February 2012 to 31 March 2013.

If Mary has chosen option 1 as her first adjustment period, the second adjustment period will run from 1 April 2012 to 31 March 2013.

If Mary has chosen option 2 as her first adjustment period, the second adjustment period will run from 1 April 2013 to 31 March 2014.

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)).

Example 7

Sherry, a graphic designer, purchases a computer for $3,999 (including GST of $522) to use both for business and private purposes. She estimates that she will use the computer 80% for taxable purposes and claims a deduction of $418 (80% of $522).

Since the GST-exclusive value of the computer is less than $5,000, Sherry will not be required to make any adjustments for change-in-use in any of the subsequent adjustment periods.

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)).

Calculating adjustments

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.

Example 8: Identifying percentage actual use and percentage intended/previous actual use

Peter acquires a luxury boat for $500,000 plus GST. On acquisition, Peter estimated that the boat would be used 100% for chartering - a taxable purpose - and claimed the full input tax deduction. However, in later periods Peter uses the boat partly for private purposes.

Based on the value of the boat, Peter determines that there will be five adjustment periods. In those adjustment periods, Peter uses the boat as follows:

  • in the first adjustment period - 100% for taxable purposes;
  • in the second adjustment period - 80% for taxable purposes;
  • in the third adjustment period - 83% for taxable purposes;
  • in the fourth adjustment period - 50% for taxable purposes; and
  • in the fifth adjustment period - 90% for taxable purposes.

The first adjustment period is a period of six months. All subsequent adjustment periods are periods of 12 months.

None of the exclusions apply to this situation. The question is: what are the use percentages that Peter has to compare at the end of each adjustment period?

First adjustment period

Percentage intended use - 100%

Percentage actual use - 100%

Second adjustment period

Previous actual use - 100%

Percentage actual use - 86.6%

  • (100% × 6/18) + (80% × 12/18)

  • = 33.3 + 53.33 = 86.6%

In the above calculations, figures "6" and "12" represent, respectively, the length of the first and second adjustment periods expressed in months. The figure "18" represents the total number of months since the acquisition of the boat.

Third adjustment period

Previous actual use - 86.6%

Percentage actual use - 85.2%

  • (100% × 6/30) + (80% × 12/30) + (83% × 12/30)

  • = 20% + 32% + 33.2% = 85.2%

Fourth adjustment period

Previous actual use - 85.2%

Percentage actual use - 75.2%

  • (100% × 6/42) + (80% × 12/42) + (83% × 12/42) + (50% × 12/42)

  • = 14.3% + 22.9 + 23.7% + 14.3% = 75.2%

Fifth adjustment period

Previous actual use - 75.2%

Percentage actual use - 78.4%

  • (100% × 6/54) + (80% × 12/54) + (83% × 12/54) + (50% × 12/54) + (90% × 12/54)

  • = 11.1% + 17.8% + 18.4% + 11.1% + 20%

  • = 78.4%

It should be noted that Peter will be required to account for adjustments to Inland Revenue in the second, third, fourth and fifth adjustment periods as in each of those periods either the percentage difference is more than 10 percentage points or the monetary value of the adjustments is more than $1,000. Hence, Peter may not rely on the exclusion in section 21(2)(d).

Imported services

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.

Example 9

Sandy, a property developer, constructed two similar residential houses, House A and House B, next to each other. The construction cost of each house is $230,000 (including GST of $30,000). Sandy intends to sell both properties on completion (a taxable use) and therefore claims a full deduction on the GST incurred on construction.

Sandy is unable to sell the property immediately on completion. Therefore, while still advertising the houses for sale, she:

  • rents out House A and receives rental income of $26,000 in the first adjustment period; and
  • moves into House B and lives there rent-free.

At the end of the first adjustment period, Sandy sells House B for $360,000.

Adjustment at the end of the first adjustment period - House A

Since Sandy used the house concurrently for taxable (advertising for sale) and exempt (supplying a residential dwelling) purposes, she uses the formula in section 21E(3) to identify the actual taxable use of the property in the first adjustment period.

The "consideration for taxable supply" is 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. Sandy has not disposed of House A, but ascertains that the market value of the house is approximately the same as for House B - $360,000.

The "total consideration for supply" is the amount of the "consideration for the taxable supply" ($360,000) and the amount of all rental income ($26,000) derived from the supply of the dwelling since the land was acquired - $386,000.

Therefore, Sandy's taxable use of the house is:

$360,000 × 100 = 93%
$386,000

Sandy has therefore deducted 7% more input tax than she should have and has to account for this to Inland Revenue:

  • $30,000 × 7% = $2,100

Adjustment at the end of the first adjustment period - House B

Since Sandy used the house concurrently for taxable (advertising for sale) and private (residential) purposes, she has to use the formula in section 21E(3) to identify the actual taxable use of the property in the first adjustment period.

The "consideration for taxable supply" is the amount derived on a disposal of the house - $360,000.

Since Sandy did not rent out House B, but still used it for non-taxable purposes, the "total consideration for supply" is the amount of the "consideration for the taxable supply" ($360,000) and the market value of the rental income that she would have derived if she had rented out the property. Sandy estimates that she would have received $26,000 of rental income.

Therefore, Sandy's taxable use of the house is:

$360,000 × 100 = 93%
$386,000

Sandy has therefore deducted 7% more input tax than she should have and has to account for this amount to Inland Revenue:

  • $30,000 × 7% = $2,100

In both cases it should be noted that Sandy may be able to recover some or all of the unclaimed input tax if she later disposes of the houses in the course of her taxable activity. (See the section below "Adjustment on disposal".)

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:

months × result*
total months

* 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).

Example 10

The facts are the same as in Example 9. Assume that the length of the first adjustment period was 12 months.

In the second adjustment period, Sandy continues both letting out and advertising for sale House A. However, six months after the start of the second adjustment period, Sandy stops advertising House A for sale as she decides to permanently rent it out.

In the second adjustment period, she receives rental income of $30,000. The market value of House A at the time of the adjustment is still $360,000.

At the end of the second adjustment period, Sandy uses the formula in section 21E to identify the taxable use of the house. For the purposes of the second adjustment period, the "total consideration for supply" is the sum of the market value of the house and all rental income received since the land was acquired:

$360,000 × 100 = 86.5%
$416,000

However, because the house has been used for six months solely for making non-taxable supplies, she has to apply the formula in section 21E(7):

18 × 86.5% = 64.8%
24

Sandy's percentage actual use of House A in the second adjustment period is 64.8%. The percentage actual use must be compared with the "previous actual use", that is with the percentage actual use as determined in the most recent period in which an adjustment has been made. For Sandy, the previous actual use will be 93%. Sandy has therefore deducted 28.2% more input tax than she should have and has to account for this to Inland Revenue:

  • $30,000 × 28.2% = $8,460

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).

Example 11: Appreciating asset

Same facts as in Example 10.

The total input tax on the construction costs that relate to House A is $30,000. Sandy claimed 64.8% of the total input tax - $19,440.

At the beginning of the third adjustment period, Sandy sold the house to Nigel for $320,000 inclusive of GST.

Since Sandy has not claimed the full input tax in respect of the construction cost incurred in respect of the property, she may use section 21F to make a final adjustment of the input tax:

3 × $320,000 × ( 1 $19,440 ) = $14,692
23 $30,000

The resulting amount of $14,692, when added to the deduction already claimed ($19,440), is more than the total amount of the input tax on the supply ($30,000). Therefore, the amount of the adjustment that may be claimed by Sandy will be limited to $10,560.

Example 12: Depreciating asset

Charles acquired a car for $46,000 (inclusive of GST of $6,000) and claimed 70% of the input tax ($4,200). Having used the car for the intended purpose for three years, Charles sells it for $30,000 inclusive of GST.

Since Charles has not claimed the full input tax in respect of the car and the car was sold in the course of the taxable activity, he may use section 21F to make a final adjustment of the input tax:

3 × $30,000 × ( 1 $4,200 ) = $1,174
23 $6,000

The amount of the adjustment to be claimed in respect of the taxable disposal of the vehicle is $1,174.

Example 13: Master example

John, the sole trader in Example 1, acquired a vehicle for $20,000 plus $3,000 GST. On acquisition, John claimed 70% of the input tax - $2,100.

Since the GST-exclusive value of the car falls between $10,001 to $500,000, he has to monitor the use of the car for five adjustment periods.

In the first adjustment period (a period of 12 months), the entries in the logbook kept by John indicate that he used the car 55% in his business (taxable use).

In the second adjustment period (also a period of 12 months), John used the car 65% in his business.

In the third adjustment period (a period of 12 months), John withdrew the car from use in the business and used it solely for private purposes.

In the fourth adjustment period, John sold the car for $10,000 inclusive of GST.

First adjustment period

At the end of the first adjustment period, John has to determine whether he may rely on the exclusions in either section 21(2)(a) (minimal exempt supplies) or section 21(2)(b) (the value of the supply) to avoid any change-in-use adjustments. John determines that the exclusion does not apply.

John therefore has to determine whether the use of the car in the first adjustment period corresponds with the intended taxable use of the car as estimated on acquisition. To do this he must compare the percentage actual use of the car with the percentage intended use of the car.

The logbook kept by John in respect of the car indicated that the taxable use of the car accounted for 55% of its total use. On acquisition, John predicted that he would use the car 70% for taxable purposes. Since the difference between the intended taxable use and the actual taxable use is more that 10%, John may not rely on the exclusion in section 21(2)(c) and has to make an adjustment for change-in-use.

Using the formula in section 21D, John calculates the amount of the deduction that he has to return to Inland Revenue as output tax:

  • $3,000 × 15% = $450

Second adjustment period

For the purposes of the adjustment in the second adjustment period, the percentage actual use must be calculated from the date of acquisition to the end of the relevant adjustment period. John used the car for taxable purposes 55% in the first adjustment period of 12 months and 65% in the second adjustment period of 12 months. Overall, over two years, John used the car 60% for taxable purposes:

  • (55% × 12/24) + (65% × 12/24) = 60%

The percentage actual use must be compared with the "previous actual use", that is, with the percentage actual use as determined in the most recent period in which an adjustment has been made. For John, the previous actual use will be 55%, as this was the actual use of the car at the end of the first adjustment period.

Since the difference between the percentage actual use (60%) and the previous actual use (55%) of the car is less than 10 percentage points, John will not be required to account for the amount of the adjustment if the monetary value of the adjustment is less than $1,000.

John calculates that the value of the adjustment is less that $1,000 using the formula in section 21D:

  • $3,000 × 5% = $150

Third adjustment period

John calculates the percentage actual use of the car after three adjustment periods:

  • (55% × 12/36) + (65% × 12/36) + (0% × 12/36)

  • = 18.3% + 21.7% + 0 = 40%

The percentage actual use is 40%. This percentage has to be compared with the previous actual use. Since John did not make an adjustment in the previous (second) adjustment period, the "previous actual use" will be the percentage actual use in a period that is the most recent period in which an adjustment has been made. John made an adjustment in the first adjustment period when his percentage actual use was 55%. This percentage will therefore become John's previous actual use for the purposes of the adjustment in the third adjustment period.

Since the difference between the percentage actual use (40%) and the previous actual use (55%) of the car is more than 10 percentage points, John has to account to Inland Revenue for the over-claimed amount of the deduction. The amount of the output tax to be accounted for is:

  • $3,000 × 15% = $450

Fourth adjustment period

In the fourth adjustment period, John sold the car in the course of his taxable activity for $10,000. As John has not claimed the full deduction in respect of the car, he may claim an additional amount of the adjustment on disposal under section 21F calculated as follows:

3 × $10,000 × ( 1 $1,200 ) = $783
23 $3,000

John may claim a deduction of $783 in respect of the taxable disposal of the car.

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.

Example 14

On 1 January 2012, Craig, an unregistered person, acquires a car for $23,000 (including GST of $3,000). For the next two years Craig uses the car solely for private purposes.

On 1 January 2014, Craig registers for GST and starts using the car solely for business purposes. Craig's next balance date is 31 March 2014.

Craig has retained the tax invoice received on the purchase of the car. Since the value of the car on the acquisition was more that $5,000, Craig may claim a deduction for the car under section 21B.

Craig's first adjustment period in respect of the car will be treated 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, that is, from 1 January 2012 to 31 March 2014.

During that period (a total of 27 months), Craig used the car 0% for taxable purposes for 24 months (1 January 2012 to 31 December 2013) and 100% for taxable purposes for three months (1 January 2014 to 31 March 2014). Therefore, his total taxable use in the first adjustment period will be:

  • (0% × 24/27) + (100% × 3/27) = 11%

At the end of the first adjustment period, Craig can claim $330 (11% of the initial input tax of $3,000).

Subsequent adjustment periods

The maximum number of adjustments that have to be made for goods and services of value between $10,000 and $500,000 is five.

Therefore, if Craig continues owning the car he may be required to make four additional adjustments. If he sells the car in the course of his taxable activity, he may be entitled to an additional deduction under the wash-up mechanism in section 21F.

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.