Mixed-use assets: GST changes
2013 changes to the GST Act mean owners of mixed-use assets can claim input tax deductions similar way to income tax deductions for the same item.
Sections 20(3JB), 20G, 21B, 21D and 21G of the Goods and Services Tax Act 1985
Summary of proposed amendments
Changes are being made to the Goods and Services Tax Act 1985 consistent with those being made in the Income Tax Act 2007 for mixed-use assets (ie, land (including improvements), aircraft and boats). It is important to note that the GST changes will apply only to GST-registered persons. These changes however do not apply to a widely-held company (see section 20G(8)).
These changes will ensure that mixed-use asset owners that are registered for GST will be able to claim input tax deductions in a similar way as they would be able to claim income tax deductions for the same item.
Some GST-specific rules are required to cater for the fact that:
- GST has always recognised that supplies can be made for below-market value to non-associates.
- An asset will have a GST component that will need to be apportioned over the ownership period (whereas for income tax purposes this would be capital expenditure).
- Some items of expenditure relevant for the income tax calculation will not be relevant for GST (such as interest).
- GST is not calculated on an annual basis.
The GST changes are broadly aligned with the income tax changes. For assets for which the income tax changes take effect from the 2014-15 income year (ie, aircraft and boats), the GST changes will apply from 1 April 2014.
However, for assets for which the income tax changes take effect from the 2013-14 income year (ie, land (including improvements)), the GST changes will only apply from 17 July 2013 (the date of Royal assent of the Act).
Owners of mixed-use assets will, under the proposed changes, be required to apportion their input deductions in a way that reflects their relative taxable and non-taxable use of the asset. This is consistent with the proposed treatment of income tax deductions.
The formula used for calculating GST deductions (contained in new section 20G) incorporates the income tax definitions as far as possible. Having the GST calculations as close as possible to those for income tax is intended to reduce the compliance costs associated with the proposed rules.
The main differences between the income tax and GST definitions relate to:
- the treatment of supplies for less than market value; and
- what constitutes "expenditure".
These differences reflect the different nature of the two taxes. In particular:
- GST has always recognised the right of registered persons to make supplies for lower than market value to non-associates.
- "Expenditure" is not a word generally used in a GST context, so the GST formula replaces "expenditure" with "input tax".
Below market value supplies
The definition of "income-earning days" in the GST formula includes any day on which the person supplies the asset for use and derives consideration, irrespective of whether this supply is above, at or below market value. This allows asset owners to make supplies at below market value if they chose to do so, with these days still being "income earning". This is consistent with general GST principles.
It is important to note that, if the owner supplies the asset to an associated person, section 10(3) will generally require them to treat the supply as being made at market value. This will require output tax to be paid on the supply, but it will also be treated as "income-earning" for the purposes of calculating entitlement to input deductions. Similarly, if the supply is a fringe-benefit, section 21I will apply to deem consideration to have been received - this will also be an income-earning day.
The replacement of expenditure for input tax ensures that GST deductions are based on what the GST Act allows. Expenditure on some assets will be subject to GST, but irrelevant for income tax purposes. The most obvious example is likely to be the main mixed-use asset itself, which may have a GST component (either explicitly or through the secondhand goods rules). It is also to clarify that input tax on durable assets (such as a holiday house) is relevant for each subsequent adjustment period in the same way as it is for the general apportionment rules. On the other hand, interest is a relevant expense for income tax but not for GST purposes.
Rules in practice
Link with apportionment rules
As mixed-use assets are used partly for private and partly for business purposes, the general apportionment rules in the GST Act should also apply to expenditure in relation to these assets. To facilitate this, the definitions used in the apportionment rules: "percentage intended use", "potential actual use" and "percentage difference" in section 21G have been extended to apply to the mixed-use asset formula in section 20G.
The effect of this change is that a GST-registered recipient of a supply in respect of their mixed-use assets will need to perform an initial estimate of their percentage intended use of the supply. This estimate should be done based on the result the person thinks the formula in section 20G would produce. In calculating this, an asset owner will need to be aware that the section does not apply to supplies used solely for income earning days or solely for private days. If a supply is used solely for income earning days, all input tax is deductible and no apportionment is necessary. Conversely, if a supply is used solely for private days, no input tax is deductible.
As with the general apportionment rules and the formula used for income tax, section 20G requires a registered person to perform annual calculations to determine the level to which they can claim input tax deductions. As with the general apportionment rules, section 20G requires the registered person to pay any output tax or allow them to claim input tax on any positive or negative adjustment produced by the formula.
One issue specific to GST is that GST is not generally calculated on an annual basis, so GST-registered owners of mixed-use assets will be required to file returns on a monthly, two-monthly or six-monthly basis. Although the general apportionment rules provide for annual adjustments, section 20G sets put specific rules for the calculation and what to do for intervening taxable periods.
Section 20G requires a person to perform the calculation at the end of an adjustment period, as defined. This is usually an annual period. However, as stated above, the registered person must estimate their taxable use of a supply in the intervening periods and calculate their actual taxable use at the end of each adjustment period. This wash-up calculation will determine the person's true tax position for each of the taxable periods within the adjustment period. To ease the compliance burden on registered persons, the rules require input tax in the adjustment period to be aggregated. Only if the estimated deductions are 10 percentage points or greater than the actual taxable use (or less than 10 percentage points but more than $1,000) is a wash-up necessary (see section 20G(6)).
An alternative approach, which ensures greater accuracy but that might reduce cash-flow, would be for the registered person to delay claiming input deductions in the intervening periods and instead claim their annual entitlement at the end of each adjustment period when the calculation is performed.1
Section 20G(7) provides that the disposal of the relevant asset by a registered person will be a taxable supply and section 21F will apply to it. This means that output tax will be payable on the disposal and a registered person will be able to apply the section 21F formula to claim any input tax not previously claimed.
Some examples used in the legislation do not always reflect the correct amounts. These will be corrected in the tax bill scheduled to be introduced in late October 2013.
1Section 20(3) allows deductions from output tax to be claimed anytime up to the second anniversary of the relevant supply.