Do you know what GST year-end adjustments you need to make?

While typically only applicable to sole-traders, the GST apportionment rules can also apply to other non-corporate entities, for example, trading trusts. 

Those taxpayers who made a GST apportionment at the time they purchased an asset need to calculate if they subsequently need to make a GST adjustment at year-end. 

These GST apportionment rules have been in place for a number of years, since 1 April 2011 to be exact, though that doesn't mean taxpayers have a good handle on when the rules apply and in fact how to actually apply the rules.

Corporates are generally not affected by these GST apportionment rules as the GST is taken care of with the fringe benefit tax returns.

The old rules

Prior to 1 April 2011 how GST was applied to assets used partly for business use and partly for private use was reasonably clear cut.  If the asset was used principally (ie, more than 50%) for business then 100% input tax could be claimed when the asset was purchased.  Subsequent adjustments were then done if there was a change in use from business to private, albeit with the complication of whether the adjustment was a one-off adjustment or a period by period adjustment.

The new rules

The GST apportionment rules introduced on 1 April 2011 removed this principle purpose test and replaced it with the apportionment rule.  That is, input tax was claimed based on the proportion that the asset was used for business purposes.  For example, a car used 80% for business and 20% privately would have only 80% input tax claimed on acquisition.

But that was not the end of GST in relation to the asset.  If the asset cost more than $5,000, at the end of each 'adjustment period' the taxpayer needs to review whether there has been a change in the split between business and private use.  If there has, and that change is more than $1,000 and 10%, a GST adjustment needs to be done (either allowing more input tax to be claimed or requiring output tax to be paid).

An 'adjustment period' ends on the taxpayer's balance date.  Therefore if the car, for example, was purchased in Nov 2014, the first adjustment period would be 31 March 2015 (assuming a 31 March balance date).  Similarly, non-standard balance date taxpayers would have their adjustment period ending on their next balance date.

Complexity in the new rules

There is some flexibility with the first adjustment period.  The Inland Revenue allows the first adjustment period to either be the balance date immediately following the date of purchase, or the second balance date following the date of purchase.  The rational being that not enough time may have elapsed between the purchase of the asset and the first balance date to be able to ascertain if there has been a change in the use of the asset.

So if there has been a change and the 10% and $1,000 thresholds are exceeded, then the resulting GST adjustment (either input or output) needs to go in the GST return that corresponds with the taxpayers balance date. (ie, the 31 March GST return for standard balance date taxpayers).

There is also the complication with the rules that depending on the type of asset and the cost of the asset, the number of adjustment periods a taxpayer has can vary from 2 adjustment periods to indefinitely (as is the case for land).

One-off adjustments

From 30 June 2014 a new rule was introduced to try to simplify the adjustments such that where an asset has had a 100% change in use, and that 100% change is sustained for two adjustment periods, then the taxpayer can wait until the end of the second period and make a final wash-up adjustment.

Concurrent adjustments

There is further complexity in the rules for dealing with those assets which are being used simultaneously for both business and private purposes (referred to as 'concurrent use').  This is typically the case for land developers who rent out a property while advertising it for sale.

Mixed use assets

As if that wasn't enough, there are also new GST adjustment rules for 'mixed-use assets' (eg, holiday homes, boats and planes), similar to the income tax adjustment applied to these mixed-use assets, although the adjustment calculations do not run on the same basis.  For example, while a private day is ignored for the income tax adjustment calculations that is not the case for the GST adjustment calculation.

Disposals

And what happens when the asset is sold?  Well if 100% input tax has not been claimed to date (under the apportionment rules and subsequent adjustments) then 100% output tax on the sales price needs to be included in the GST return that spans the sale.  In the same return, there is an input tax adjustment done (via a rather complex calculation) to offset the 100% output tax - in effect, a wash-up calculation.

While the adjustments on disposal are not necessarily a year-end issue, it is a timely reminder to check and make sure the wash-up was done during the year when the asset was sold otherwise the taxpayer will be out of pocket.

In summary

Overall, the new GST apportionment rules were intended to simplify the previous rules, however I am not convinced this has occurred.  The GST apportionment rules are complex and create a high level of compliance hassle for what is in effect typically very low value adjustments.  Perhaps the Inland Revenue should take a more practical approach and increase the $5,000 asset value and the 10% and $1,000 thresholds such that only high value items, or significant changes in use, need to have these rules applied.

For more information, contact the Hayes Knight Knowledge Shop tax team direct:

Phil Barlow
Tax Director
T + 64 9 414 5444
E phil.barlow@hayesknight.co.nz

Shelley-ann Brinkley
Associate - Tax Consulting
T +64 9 414 5444
E shelley-ann.brinkley@hayesknight.co.nz