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Do you have assets used for making both taxable and non-taxable supplies? Your March GST return may require an adjustment

Tax Alert - April 2018

By Hana Strait

You will have seen us regularly write about complicated aspects of GST - GST is rarely as simple as 15% of supplies made or 15 % of expenditure incurred. One of the more complicated areas of GST relates to claiming input tax credits when an asset is used for making GST taxable and non-taxable or exempt supplies; for example:

  • A sole trader using a work car for personal use
  • Apartments residentially rented above shops (where both are owned by the same person)
  • Properties rented out for short term use via Airbnb (or similar sites) that were historically used for long term residential purposes
  • Properties rented out for short term use only for specific periods during the year and are lived in the rest of the year
  • Properties that are residentially rented while being advertised for sale
  • Financial service providers
  • Properties purchased for development but used for residential rental prior to the development commencing

Where an asset is used for mixed purposes it is necessary to consider whether a GST change of use adjustment is required on an annual basis (subject to the time limits discussed below). This adjustment is required to correspond with the taxpayer’s year end, so with many businesses having a 31 March year end, GST adjustments should be top of mind for the next GST return.

What is the adjustment?

Under the “change in use provisions”, in the simplest form, taxpayers claim GST based on their intended taxable use of the assets at the time they are acquired e.g. if a car will be used for 80% business purposes and 20% private purposes, 80% of the input tax can be claimed.  Each year, in the GST return that aligns with the entity's balance date, a comparison is generally required between the actual use (since the asset was acquired) and the intended use (if the assets were acquired in that year) or the prior period’s actual use.  GST adjustments are then made where the taxable use of the asset varies by more than the lesser of 10 percentage points or $1,000.  These adjustments can result in additional GST to claim or addition GST to pay.

The rules are comprehensive and also include special rules in relation to claiming GST where an asset has been acquired pre-GST registration and is now being used in a GST registered business, or where land was treated as zero-rated on acquisition but is now being used for non-taxable use.

While in theory these rules can sound straight forward, they can be complex, particularly where land is involved, and are often overlooked.  For land there is an unlimited number of adjustment periods, and two different regimes apply depending on whether the land was purchased pre or post-April 2011.

For other assets there are limited adjustment periods depending on the value of the asset (two for assets $5,000-$10,000, five for assets $10,000-$500,000 and ten for assets over $500,000). 

Given the complexity of the rules we recommend you discuss the treatment of assets with your tax advisor.

 

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