Mixed-use assets: GST changes
(Clauses 77(1), (2) and (4), 83(1), (3), (4) and (7), 84, 85, 86 and 87)
Summary of proposed amendments
Changes are being made to the Goods and Services Tax Act 1985 consistent with those being made in the Income Tax Act 2007 for mixed-use assets. These changes will ensure that asset owners that are registered for GST will be able to claim input tax deductions in a similar way as they would be able to claim income tax deductions for the same item.
Some GST-specific rules are required to cater for the fact that:
- The “main” asset will have a GST component that will need to be apportioned over the ownership period (whereas for income tax purposes this would be capital expenditure).
- Some items of expenditure relevant for the income tax calculation will not be relevant for GST (such as interest).
- GST is not calculated on an annual basis.
Application date
The amendments will apply to taxable periods starting from 1 April 2013.
Key features
Owners of mixed-use assets will, under the proposed changes, be required to apportion their input deductions in a way that reflects their relative taxable and non-taxable use of the asset. This is consistent with the proposed treatment of income tax deductions.
The formula used for calculating GST deductions (contained in new section 20G) incorporates the income tax definitions as far as possible. Having the GST calculations as close as possible to those for income tax is intended to reduce the compliance costs associated with the proposed rules.
The main differences between the income tax and GST definitions relate to what is “expenditure” and reflect the different nature of the two taxes. In particular, the GST formula replaces “expenditure” with “input tax”.
The replacement of expenditure for input tax ensures that GST deductions are based on what the GST Act allows. Expenditure on some assets will be subject to GST, but irrelevant for income tax purposes. The most obvious example is likely to be the main asset itself, which is likely to have a GST component (either explicitly or through the secondhand goods rules). It is also to clarify that input tax on durable assets (such as a holiday house) is relevant for each subsequent adjustment period in the same way as it is for the general apportionment rules. On the other hand, interest is a relevant expense for income tax but not for GST purposes.
Detailed analysis
Link with apportionment rules
The Taxation (GST and Remedial Matters) Act 2010 introduced a new set of rules that require registered persons to apportion input tax in accordance with the taxable and non-taxable use of the supply. For example, if a registered sole-trader acquired a car that she estimated was to be used half of the time for business purposes, she would be entitled to claim half of the input tax on the car as a deduction in the first period of ownership.
As mixed-use assets are also used partly for private and partly for business purposes, the apportionment rules should also apply to expenditure in relation to these assets. To this end, under the proposals in the bill, the definitions used in the apportionment rules: “percentage intended use”, “potential actual use” and “percentage difference” will be extended to apply to the mixed-use asset formula (section 20G).
As with the general apportionment rules and the formula used for income tax, section 20G will require a registered person to perform annual calculations to determine the level to which they can claim input tax deductions. Section 20G will then require the registered person to pay any output tax or allow them to claim input tax on any positive or negative adjustment produced by the formula.
As with the income tax rules, no apportionment is required for input tax that relates solely to the income-earning use of an asset and no deduction is available for amounts that relate solely to the private use of the asset.
Applying the new formula
One issue specific to GST is that GST is not generally calculated on an annual basis, so GST-registered owners of mixed-use assets will be required to file returns on a monthly, two-monthly or six-monthly basis. Although the general apportionment rules provide for annual adjustments, the bill provides guidance for determining when the calculation is performed and what to do for intervening taxable periods.
Proposed sections 20(3JB)(b) and 20G require a person to perform the calculation at the end of an adjustment period, as defined. This is usually an annual period. However, the proposed rules require the registered person to estimate their taxable use of a supply in the intervening periods and calculate their actual taxable use at the end of each adjustment period. This wash-up calculation will determine the person’s true tax position for each of the taxable periods within the adjustment period. To ease the compliance burden on registered persons, the rules require input tax in the adjustment period to be aggregated. Only if the estimated deductions are 10 percentage points or greater than the actual taxable use (or less than 10 percentage points but more than $1,000) is a wash-up necessary (see section 20G(6)).
Example
In May, John, a registered person who accounts for GST on a six-monthly basis, acquires a holiday house on the open market for $575,000 including GST. John’s taxable periods conclude at the end of October and April, and he has a standard balance date. On acquisition, he estimates that his taxable use of the house will be 50 percent.
John’s expenditure in the first period is:
| Item | Cost | GST component |
|---|---|---|
| House | $575,000 | $75,000 |
| Rates, insurance and utilities | $1,725 | $225 |
Based on his 50 percent taxable use estimate, John claims deductions of $37,612 in his first return.
In the following six-months, John continues to incur rates, insurance and utilities expenses of $2,070.
The end of the following period is also John’s balance date, and John chooses to make this the end of his first adjustment period.[1] After performing the calculation for mixed-use asset expenditure, John discovers his actual taxable use of the asset for the adjustment period was 35 percent. This is greater than a 10 percentage points difference from his estimate, so a wash-up calculation is required.
John’s total expenditure for the year is therefore:
| Item | Cost | GST component |
|---|---|---|
| House | $575,000 | $75,000 |
| Rates, insurance and utilities | $3,795 | $495 |
Based on his actual use of 35 percent, John’s input entitlement for the year is $26,423 ($75,495 x 0.35). John’s claimed deduction of $37,612 in his first return was an over-estimate. As a result of the wash-up calculation, he is required to account for output tax of $11,189 (being the difference between the $37,612 claimed and his actual entitlement of $26,423) in his return following the end of the adjustment period.
An alternative approach, which ensures greater accuracy but that might reduce cash-flow, would be for the registered person to delay claiming input deductions in the intervening periods and instead claim their annual entitlement at the end of each adjustment period when the calculation is performed.[2]
Disposal
Proposed section 20G(7) provides that the disposal of the relevant asset by a registered person will be a taxable supply and sections 8 and 21F will apply. This means that output tax will be payable on the disposal and a registered person will be able to apply the section 21F formula to claim additional input tax.
1 John does have the option of delaying the end of the first adjustment period for 12 months under section 21G(2)(a)(ii).
2 Section 20(3) allows deductions from output tax to be claimed any time up to the second anniversary of the relevant supply.