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Inland Revenue

Tax Policy

Chapter 4 - Apportionment rules

Wash-up rule for taxable or non-taxable use

4.1 An issue has arisen with the GST treatment of land that has been purchased for both taxable and non-taxable use, but is later used solely for one or the other and is subject to on-going adjustments.[4] The question that arises is whether there reaches a point when a wash-up calculation should be performed to eliminate the need for continual adjustments.


John purchases a building that is used 50 percent for commercial use and 50 percent apartments. On the basis that the apartments will be leased as dwellings, an input deduction of 50 percent is taken at the time of purchase. After two years, John gives notice to his tenants and signs an agreement with a management company that will operate the apartments as serviced apartments for business travellers.

As serviced apartments are commercial dwellings, the building is now being used solely for making taxable supplies. John makes the necessary adjustments in subsequent adjustment periods to reflect the taxable and non-taxable proportion of use over his ownership period. Because of the two years of part non-taxable use, John will never be in a position to claim 100 percent of his inputs in relation to the building.

4.2 John is not compelled to make an adjustment in each period, because eventually the adjustments will fall within the $1,000 or 10% de minimis rule in section 21(2)(d). However, because John’s “percentage taxable use” is always increasing, he may be motivated to claim the small additional amount of input tax at the end of each adjustment period.

4.3 We consider that the on-going adjustment requirement in these circumstances causes disproportionately high compliance costs for the revenue actually at risk.

Suggested solution

4.4 We consider that there should be a wash-up calculation that a registered person must perform if they meet the following criteria:

  • their taxable use of the asset is 100 percent or 0 percent in both the relevant adjustment period and the adjustment period immediately prior; and
  • their percentage actual use over the course of their ownership of the asset is over 90 percent or under 10 percent, as the case may be.

4.5 If the calculation were to be optional, registered persons could take advantage of it to complete their input claims, but would be less likely to use it if the result was an output tax liability. We therefore suggest making the calculation compulsory to capture both ends of the spectrum.

4.6 The adjustment calculations would need to begin again if the person again changed the use of the asset beyond the levels in the section 21(2) de minimis rules.

Ensuring apportionment rules apply to all entity types

4.7 There is some confusion over how, or if, the apportionment rules apply to all GST-registered persons. In particular, there is a question over whether non-natural registered persons (such as a company) can have “private” use of an asset and, if so, how to measure it.


ABC Ltd is registered for GST. Sam and his brother Tim are the only shareholders in ABC Ltd. ABC Ltd buys a company car. It is anticipated that the car will be used 50 percent of the time for business purposes, 25 percent by Sam for his private use and 25 percent by Tim for his private use.

4.8 The policy intent behind the apportionment rules would see ABC Ltd claiming 50 percent of the input tax for the car, with the remaining 50 percent being unable to be claimed because of the private nature of the use.

4.9 However, there is an alternative interpretation that would allow ABC Ltd to claim all of the inputs. This comes about because the GST Act arguably treats the 50 percent “private” use as taxable for the purposes of the apportionment rules. The supply of the car by ABC Ltd to Sam or Tim is an associated supply, to which the market value rules apply and for which ABC Ltd would be required to return output tax.[5]

4.10 Although the supplies to Sam and Tim will generate an output tax liability for ABC, they also mean that the company is using the asset for 100 percent taxable supplies, so will not have to apply the apportionment rules to the car.

4.11 Over the life of most assets there may not be a materially different revenue impact between the two approaches. However, the alternative approach increases the compliance costs to ABC Ltd because, instead of simply being denied 50 percent of the input tax upfront, it is required to account for output tax on an on-going, per-use basis.

Suggested solution

4.12 We consider that the definition of “percentage actual use” in section 21G(1) should be clarified so that associated supplies are not treated as being taxable supplies. However, we recognise that creating a blanket rule could create difficulties because it may not be desirable to have all associated supplies dealt with through the apportionment rules.

4.13 The simplest approach, which also deals with the policy concerns around private use, would be to amend section 21G to exclude associated supplies, from being “taxable supplies”, when the recipient of the supply is a natural person.

4.14 Consequential amendments would be necessary to “switch off” the output tax liability on the relevant supplies. The interplay between the associated supply rules and the fringe benefit rule in section 21I would also need to be considered to ensure that there is not effective double taxation by denying input deductions and then still charging output tax on the private use on the basis that a fringe benefit is being provided.

Suggested application date

4.15 In order to reduce confusion and compliance costs for taxpayers who have, since the apportionment rules took effect, been apportioning input tax in accordance with the intended policy outcome, we consider that the revised rule should be retrospective to 1 April 2011.

4.16 However, to reflect the fact that genuine uncertainty exists, it may not be appropriate to force a registered person that has adopted the alternative interpretation to revisit their returns. We therefore consider that the amendment should include a “savings” provision to preserve the position of people who have adopted the alternative interpretation.

4.17 Any savings provision that is enacted would generally only apply until the new rule is enacted. At that point, people whose position in respect of certain assets has been preserved may (depending on the value of the asset) need to make adjustments subsequent to the clarification to reflect use that is now confirmed as non-taxable. We welcome views on whether a grandparenting rule should be allowed for these assets.

Output tax and the disposal of land

4.18 There appears to be a risk that a person can dispose of land (and other assets) outside the course or furtherance of their taxable activity, while still not returning all of the input claimed in relation to that asset. From a policy perspective, when input tax has been claimed on an asset and that asset is then on-sold, the on-selling should generally be subject to output tax.

4.19 Imposing output tax on the sale achieves broadly the right policy result because the registered person will already have an input deduction that reflects their taxable use of the asset and the wash-up calculation that occurs on sale may provide further input tax deductions to recognise the fact that:[6]

  • the non-taxable use of the asset has contributed to its depreciation (assuming it is depreciating); and
  • further consumption of the asset is being enjoyed further down the supply chain.

4.20 Under these rules, if the asset is appreciating, the person will generally be entitled to a full input deduction on disposal. Even if the asset has depreciated in value, the calculation will give the person an additional input deduction.

4.21 A problem arises when a person uses land for making taxable supplies and then fully devotes it to a non-taxable purpose before disposal. In an extreme example, the person will have claimed a full input tax deduction for the land, and will use it for non-taxable purposes for a year or two and then dispose of it. The nature of the apportionment rules means that the person will still not have returned all of the acquisition input tax (they might have been using it in their taxable activity for a number of years).

4.22 However, on disposal, the person will arguably not be disposing of the land in the course or furtherance of their taxable activity – it having been taken out of that activity and devoted to private use. In these circumstances, it may be that no output tax is returnable on the sale and the calculation under section 21F does not have to be performed.

4.23 This factual scenario and possible interpretation does not produce the correct policy outcome. The person’s input position will reflect their use of the asset, but they will not be given the benefit of the additional input tax under section 21F. Equally, the consumption of the asset further down the supply chain will not be taxed appropriately. If the purchaser is not a registered person, they may not have to pay GST to the registered vendor, despite the fact that they are effectively a final consumer purchasing an asset from a registered person.[7]

Suggested solution

4.24 Although this issue potentially arises for other assets, we consider a targeted solution that deals with land would be the most appropriate way to address the issue. Such a solution would recognise the fact that land is the most problematic area and would also avoid confusion for registered persons, such as financial service providers, that have claimed some inputs in respect of assets but may not consider their subsequent disposal as being the course or furtherance of a taxable activity (for example, a bank selling surplus office furnishings or computer equipment).

4.25 We therefore consider that the most appropriate way to resolve the issue would be to extend the scope of section 5(16) so that it applies to all subsequent supplies of land when input tax has been claimed (at present it is limited to dwellings). An amendment that treated such supplies as being in the course or furtherance of a taxable activity would require the supplier to charge output tax and also perform the wash-up calculation in section 21F.

4.26 We consider that a carve-out will be necessary for registered persons that have performed the wash-up calculation proposed on pages 7–8. In other words, if a person has already returned all of the output tax on their original purchase, the proposed rule automatically treating the subsequent disposal as being in the course or furtherance of their taxable activity should be switched off. In practice this would be determined on a case-by-case basis. If the disposal is in fact part of a taxable activity, sections 8 and 21F would apply in the usual way.

Non-profit bodies and the apportionment rules

4.27 Non-profit bodies are able to take advantage of a special input deduction rule that allows them to claim all of their inputs except to the extent that the goods or services in question are used for making exempt supplies.[8] There is an argument, however, that a non-profit body to whom this rule applies may then have to return some or all of the input tax claimed under the apportionment rules.

4.28 This result could arise because, unless it intends to use, or uses, the goods or services for actually making taxable supplies, its use will fall outside the definitions of “percentage actual use” and “percentage intended use” in section 21G(1). This argument is potentially relevant for “regular” taxable supplies as well as supplies of land to which section 20(3J) applies.

Suggested solution

4.29 The apportionment rules were not intended to alter the input entitlements of non-profit bodies. We therefore consider that section 20(3K) should be amended to specify that it applies for the purposes of subsections (3) and (3C) and the definitions of “percentage intended use” and “percentage actual use” in section 21G(1).

Suggested application date

4.30 We are not aware of any non-profit bodies having filed GST returns on the basis of the interpretation set out above. However, to provide clarity to this group, we consider this amendment should be made retrospective to 1 April 2011.


4 This issue potentially applies to assets generally, but is most prevalent with land because of the rule in section 21G(5) that requires indefinite adjustments.

5 Section 10(3) Goods and Services Tax Act 1985.

6 This wash-up calculation is contained in section 21F.

7 Note that this situation would not arise when the vendor is deregistering because of the deemed supply rule in section 5(3).

8 Section 20(3K).