Application of section 21B

(Clauses 136(2) and 145)

Summary of proposed amendment

The Goods and Services Tax Act 1985 is to be amended to allow a registered person to claim input tax deductions in respect of imported and second-hand goods acquired before registration and to remove the $5,000 minimum requirement for apportioning goods and services acquired before registration.

Application date

The amendment will apply from 1 April 2011.

Key features

Section 21B of the GST Act allows a registered person to claim input tax deductions for goods or services acquired before registration. As currently drafted, the provision allows input tax deductions only when GST has been charged by the vendor under section 8(1) of the GST Act. Moreover, section 21B does not apply if the original cost of goods or services, excluding GST, was $5,000 or less.

Since GST may be charged on the importation of goods or be imbedded in second-hand goods purchased from an unregistered person, section 21B will be amended to allow a registered person to claim input tax deductions for imported and second-hand goods acquired before registration.

In addition, it is proposed to repeal the $5,000 minimum threshold in section 21B(4). This will allow GST-registered taxpayers to claim input tax deductions for all goods and services acquired before registration.

Background

Section 21B was enacted as part of the Taxation (GST and Remedial Matters) Act 2010, with effect from 1 April 2011, and allows a registered person to make an adjustment in order to claim input tax deductions for goods or services acquired before registration. The purpose of the provision is to ensure that GST imposed on goods or services purchased by a person before their registration is not a cost on the business when those goods or services are used in the business after the person registers for GST.

Specifically, section 21B operates by requiring a person to treat the period that starts on the date of acquisition and ends on the first balance date that falls after either the time of registration or at a later time when the person uses the goods or services for making taxable supplies as the person’s first adjustment period for the purposes of the GST apportionment rules.

As the legislation operates on the assumption that the person is making a “subsequent” adjustment of the input tax, like the general apportionment rule, the adjustment is allowed only if the original cost of the goods or services was more than $5,000 (section 21B(4)).

As an unregistered person is unable to claim any input tax on the acquisition of goods or services, the effect of the minimum threshold is to preclude them from being able to claim any input tax on goods or services purchased for $5,000 or less.

Furthermore, as currently drafted, section 21B allows input tax deductions only when GST has been charged by the vendor under section 8(1) and not in respect of second-hand or imported goods. This is not an appropriate outcome as the GST component should be recoverable by a purchaser if the acquired goods are used for making taxable supplies.