Input tax and change-in-use adjustments
(Clauses 4, 5, 13, and 14)
Summary of proposed amendments
The GST legislation is to be amended to replace the existing change-in-use adjustment provisions that deal with the mixed use of goods and services with an approach that reflects their relative use and apportions related input tax deductions. The proposed approach is expected to be easier to use and understand than the current rules.
The amendments will apply to goods and services acquired after 1 April 2011 with a transitional rule to allow goods and services held before 1 April 2011 also to be subject to the new rules.
Apportionment of input tax on acquisition
It is proposed that the GST Act 1985 be amended by a new section 20(3A) that will allow a GST-registered recipient to apportion GST incurred on the acquisition of goods and services and claim an input tax deduction for goods or services that are used for making taxable supplies.
In determining the extent to which goods or services are used for making taxable supplies, a person must estimate how they intend to use the goods or services, and choose a determination method that provides a fair and reasonable result (new section 20(3F)). The estimated intended taxable use of the goods or services will then be used by the person to claim the proportion of the input tax that corresponds with the estimated intended taxable use (new section 20(3G)).
New section 20(3I) will also require an apportionment of input tax when a supply that includes land is zero-rated under the zero-rating rules proposed in clause 10. Since, technically, the input tax under a zero-rated transaction is zero, the provision will require the purchaser to identify the nominal amount of tax that would be chargeable under section 8(1) in relation to the supply if the zero-rating rules did not apply. The purchaser will then be required to estimate the intended non-taxable use of the goods or services and account for this amount as output tax.
As a consequence of the proposed input tax regime not relying on the “principal purpose” test as the current regime does, the definition of “input tax” in section 3A will be amended to exclude references to the “principal purpose” test.
When apportionment on acquisition is not required
New section 20(3D) will relieve recipients from the obligation to apportion the input tax on acquisition of goods or services if a recipient makes mainly taxable supplies. These 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 will be no more that the lesser of $90,000 or 5% of the total payment for all taxable and exempt supplies for the period beginning at least 12 months from acquisition and ending on the date that corresponds to the person’s balance date.
Subsequent adjustments of input tax deductions
In an “adjustment period” following the initial input tax deduction claim on acquisition, taxpayers may be required to make further adjustments if the actual taxable use of an asset is different from its intended taxable use.
An “adjustment period” will be 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 will start on the date of acquisition and end at least 12 months after the acquisition on the date that corresponds to the person’s balance date. All subsequent adjustment periods will be annual and start the day after the end of the previous adjustment period (new section 21F(2)).
There will be a maximum number of adjustment periods during which adjustments will be required to be made. The default method for identifying the maximum number of adjustment periods is in new section 21F(3)(a) and requires the taxpayer to refer to 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 Commissioners Table of Depreciation Rates (new section 21F(3)(b)).
There will be no limit to adjustment periods in relation to land (new section 21F(4)).
When subsequent change-in-use adjustments will not be required
No subsequent change-in-use adjustment will be required for goods and services that fall under a minimum threshold of $5,000 (new section 21(2)(b)).
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 has reasonable grounds to believe that the total value of their exempt supplies will be no more than the lesser of $90,000 or 5% of the total amount payable for all taxable and exempt supplies for that adjustment period (new section 21(2)(a)).
If none of the above exclusions apply, new sections 21A and 21B provide that, at the end of an adjustment period, a person must compare the percentage of the actual taxable use of goods or services with:
- the percentage of the intended taxable 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 new section 21F(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 estimates must be expressed in percentages.
The “percentage intended use” is defined in new section 21F(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 estimates must be expressed in percentages.
The “previous actual use” is defined in new section 21B(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 of intended taxable 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 actual taxable use of goods or services differs from the intended taxable use of goods or services as estimated on acquisition, the person will still not be required to make the adjustment in an adjustment period if the difference between the amounts is less than 10% and the monetary value of the adjustment is less than $1,000 (new section 21(2)(c)). If, however, the actual taxable use of goods or services exceeds either of these thresholds, the person will be required to make an adjustment and will not be able to use the exclusion in section 21(2)(c) in any of their subsequent adjustment periods (new section 21(3)).
If none of the exclusions mentioned above apply, the person will need to account for a change in use.
New section 21C sets out how to calculate the amount of a change-in-use adjustment for the adjustment period. The formula provided in this section will identify the amount of the adjustment by applying the difference between the actual and intended taxable uses or the previous actual use of goods or services to the amount of the full input tax deduction. The resulting amount will be then either accounted for by the person as output tax (if there has been a decrease in taxable use) or claimed as input tax (if there has been an increase in taxable use).
Special rule for concurrent use of land
A special rule will be introduced to deal with situations when land is used concurrently for a taxable purpose and a non-taxable purpose, such as when land is simultaneously advertised for sale (taxable use) and rented out as a dwelling (non-taxable use). In these circumstances, a question may arise over what the taxable use of the land is. To remove doubt, new section 21D provides formulas to enable taxpayers to calculate the extent to which land is used for making taxable supplies.
Section 21D(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 x 100%
Total consideration for supply
The “consideration for taxable supply” will be defined 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” will be defined as the sum of the “consideration for the taxable supply” and the amount of all rental income derived from the land since the land was acquired or the market value of rental income that would have been derived if the land had been used for this purpose.
New section 21D(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 not arm’s-length amounts.
The amount resulting from the use of the formula in section 21D(3) represents the proportion of the land used for taxable purposes.
An additional formula (section 21D(6)) estimates the extent of taxable use of the land if the land has, at any time, been used solely for making non-taxable supplies. 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 21D(3).
Section 21D will not apply if the Commissioner of Inland Revenue agrees that the registered person may use another calculation method (section 21D(2)).
Adjustment on disposal
If 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, they may be able to claim an additional amount of input tax (new section 21E). The amount that can be claimed on disposal cannot exceed the total amount of input tax to which the person would be entitled if they had acquired the goods or services solely for making taxable supplies.
Clauses 25, 29(2) and 35 are consequential amendments to the Income Tax Act 2007. They ensure that input and output tax calculated under the apportionment rules are taken into account in the relevant income tax and depreciation calculations.
New section 21G provides transitional relief for taxpayers who may wish to apply the new approach to their existing assets rather than have them grandparented. To transition into the new rules, registered persons will have to treat themselves as disposing of the relevant goods or services at market value (and account for output tax on the disposal) and then acquiring the goods or services for the same market value under the new rules.
To ensure that transitional provisions do not result in any windfall payments, subsection (4) specifies that the person will not be entitled to recover any amounts of an adjustment made under the current adjustment rules.
New Zealand’s current approach to accounting for the taxable and non-taxable use of assets on which GST is paid involves deeming a supply to occur when an asset which is used for business purposes is subsequently used for private or exempt purposes, or vice versa. This approach has been described by commentators and taxpayers as complex and confusing. The lack of relationship between the initial input tax deduction claimed and the change-in-use adjustments, means that the concepts behind imposing GST on mixed use and changes in the use of assets may not be sufficiently transparent for many taxpayers and that adjustments may be required for an indefinite period. This can result in unforeseen tax and compliance costs. The possibility of making adjustments on either the cost basis or the open market value basis can also leave the regime open to manipulation.
In the 2009 discussion document, GST: Accounting for land and other high-value assets, the Government proposed to replace the existing change-in-use adjustment approach with one that would apportion input tax deductions in line with the actual use of the goods and services. Submitters on the discussion document in general supported the proposed changes.