Adjustments on disposals before the end of an adjustment period

(Clause 147)

Summary of proposed amendment

The Goods and Services Tax Act 1985 is to be amended to clarify that a person must make a final apportionment of input tax when goods or services are disposed of during an adjustment period.

Application date

The amendment will apply from the date of enactment.

Key features

On the acquisition of goods or services a purchaser may only claim input tax deductions to the extent that they intend to use the goods or services for making taxable supplies. However, if the actual taxable use of goods or services differs from the intended taxable use and no exclusions apply, the purchaser may be required to adjust the input tax deduction previously claimed to reflect the actual taxable use (sections 21 and 21A). Adjustments for any differences between the actual taxable use and the intended taxable use are done at the end of an adjustment period, which is usually a period of one year.

Section 21G(4) sets out the maximum number of adjustment periods for apportioning goods and services. The legislation does not, however, provide guidance on whether a section 21 and 21A adjustment is required if goods or services are disposed of before the end of an adjustment period.

The proposed amendment provides that when goods or services are disposed of before the end of the last adjustment period, the current adjustment period is treated as the final adjustment period ending immediately before the date of disposal. As a consequence, a person would be required to make their last adjustment under sections 21 and 21A in the final adjustment period. This final adjustment will ensure that the input tax deducted by the person in relation to the taxable use of the asset throughout the ownership of the asset, reflects the actual taxable use of the asset.

Background

From a tax policy perspective, a person who acquires goods or services should only be able to claim input tax deductions to the extent that the goods or services are used for taxable purposes. The new apportionment rules achieve this result by requiring a person to estimate their intended taxable use of goods and services on acquisition, and by making subsequent adjustments to the input tax deduction if the estimate proves to be incorrect. These subsequent adjustments are made at the end of relevant adjustment periods. For assets other than land, the number of adjustment periods is capped.

It has been noted that the rules do not expressly stipulate whether a person is required to make a final adjustment when a disposal occurs before the end of an adjustment period. Moreover, it has also been contended that the legislation may be interpreted as requiring the person to make adjustments after the disposal of goods or services until they reach the end of their last adjustment period.