Deductions from GST output tax for subsequent changes to taxable use (April 2005)

We have been asked to clarify the tests that must be met before a registered person can make deductions from GST output tax for change from non-taxable to taxable use under section 20(3)(e) of the Goods and Services Tax Act 1985 ("the GST Act"). This includes discussion of the requirements under section 21E, amount of deductions under section 21F and timing of deductions under sections 21G and 21H.

(Note: All legislative references in this item are to the GST Act.)

Introduction

In 2000, sections 21E to 21H were inserted into the GST Act. Section 20(3)(e) allows registered persons to make deductions from GST output tax, provided that the tests in section 21E are met and the amount of deductions can be determined under section 21F. Sections 21G and 21H set out when the deductions can be claimed. The policy statements on these legislative provisions were originally set out in Tax Information Bulletin Vol 12, No 12 (December 2000).

This item clarifies some issues surrounding the application of sections 21E through to 21H. In particular, for section 21F to apply, sections 21E(2) and 21E(3) are no longer considered to be cumulative requirements.

The following application of the legislation represents the current practice of the Commissioner.

Application of the legislation

The purpose of section 21E is to specify the deductions from GST output tax allowed under section 20(3)(e) for changes from non-taxable to taxable use for:

1. goods and services acquired or imported by the registered person on which GST has been charged; and
   
   
2. some acquisitions of secondhand goods.

Where the tests in section 21E are met, section 21F applies to determine the amount of deduction from GST output tax allowed under section 20(3)(e).

The requirements for claiming deductions from GST output tax under sections 21E and 21F will apply in relation to changes to taxable use from 1 October 1986, unless a claim for deduction under section 20(3) has been made (whether in a GST return or under the disputes procedures under Part IVA of the Tax Administration Act 1994) and the Commissioner:

1. has not been notified of the claim, other than by way of inclusion in the registered person's return, and on this basis has not queried the claim in writing before 16 May 2000; or
   
   
2. has not queried the claim in writing before 16 May 2000 but has agreed in writing to the claim before 16 May 2000; or
   
   
3. has queried or considered the claim in writing before 16 May 2000 but has agreed in writing to the claim before 16 May 2000.

Change of use in respect of services and non-secondhand goods

A registered person who has acquired services and non-secondhand goods can make deductions from GST output tax under section 20(3)(e) of the amount allowed under section 21F, if the following requirements in sections 21E(1)(a), 21E(1)(b) and 21E(2) are met:

1. The goods and services were acquired on or after 1 October 1986 for a principal purpose other than that of making taxable supplies. (See section 21E(1)(a))
   
   Pursuant to section 21E(4), some goods and services are treated as if they were acquired for the principal purpose other than that of making taxable supplies. Generally, section 21E(4) applies if:
   
   
   1. section 21 or 21I have treated goods and services (including fringe benefits and entertainment under section 21I) as being supplied by the registered person; or
      
      
   2. goods and services are deemed to have been supplied by a person who ceased to be registered for GST under section 5(3) and the goods or services are subsequently applied by that person for a purpose of making taxable supplies; or
      
      
   3. goods and services are deemed to have been supplied by a person who ceased to be registered for GST under section 5(3) and the goods or services are subsequently applied by a partnership of which the person is a partner for a purpose of making taxable supplies.
   
   
2. The goods and services are then applied for a purpose of making taxable supplies by the registered person, being either the taxpayer or a partnership of which the taxpayer is a member. (See section 21E(1)(b))
   
   This means that section 21F may apply if a partner, on behalf of a partnership, acquires or imports the goods and services for non-taxable purposes and then applies them in the partnership for a purpose of making taxable supplies.
   
   
3. The goods or services when acquired by the person must have been subject to GST under section 8(1). (See section 21E(2)(a))
   
   Alternatively, in the case of imported goods, GST must have been levied under section 12(1) on the importation of the goods by the person. (See section 21E(2)(b))

Change of use in respect of secondhand goods

Where a registered person acquires secondhand goods and changes the use of the goods from non-taxable to taxable, the registered person can claim deductions from GST output tax under section 20(3)(e) in relation to the secondhand goods of the amount allowed under section 21F, if all of sections 21E(1)(a), 21E(1)(b) and 21E(3) are met.

Sections 21E(1)(a) and 21E(1)(b) are discussed above. There are four requirements under section 21E(3):

1. The secondhand goods were supplied to the registered person by way of sale;
   
   
2. The secondhand goods that were sold to the registered person have always been situated in New Zealand, or in the case of imported goods, have been subject to GST under section 12(1) when imported.
   
   
3. The supply to the registered person was not a taxable supply (that is, GST was not charged on that supply).
   
   
4. The goods have not been supplied to another GST registered person who is the importer of the goods.

Amount of deduction under section 21F

If the requirements under section 21E are met, the person or partnership to whom the goods and services are supplied will be allowed to make a deduction from GST output tax under section 20(3)(e) of the amount allowed under section 21F. The amount of the deduction equals the product of the tax fraction of the lesser of:

1. The cost of the goods and services, including any tax charged or input tax deduction claimed for the goods and services; and
   
   
2. The open market value of the supply of the goods and services, multiplied by the percentage extent to which the goods or services are applied for the purpose of making taxable supplies.

Timing of deduction from output tax as calculated under section 21F

Section 21G sets out when a registered person can make a deduction from output tax, as calculated under section 21F. In general, a registered person may make the deduction in each taxable period or in each year in which goods and services are applied for a purpose of making taxable supplies (at the registered person's election).

However, this general timing rule is subject to some exceptions:

1. Where the goods are capital assets with a cost of less than $18,000, the registered person may make a single deduction from output tax in the taxable period in which the goods are applied for a purpose of making taxable supplies.
   
   
2. Under section 21H, where the goods and services cost $18,000 or more the registered person may apply to the Commissioner to make a single deduction from output tax in the taxable period in which the goods and services are wholly applied for a purpose of making taxable supplies. Acceptance of the registered person's application is at the Commissioner's discretion, although in making his determination the Commissioner must have regard to the factors set out in section 21H(3).