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Inland Revenue

Tax Policy

Chapter 3 - Compliance costs of apportionment for large businesses

3.1 The current apportionment and adjustment rules were introduced in the Taxation (GST and Remedial Matters) Act 2010. Under the apportionment rules, input tax may be deducted to the extent that goods and services acquired are used or available for use in making taxable supplies. In the event that acquisitions will be used in making both taxable and non-taxable supplies, input tax needs to be apportioned initially and actual use is subsequently periodically assessed and adjustments made to the apportioned deduction.

3.2 During consideration by the select committee, public submissions identified financial service providers as a group who would potentially incur significant compliance costs in applying the new apportionment rules, for little additional value. Consequently, amendments were made to allow a person principally making supplies of financial services to use a “fair and reasonable” method of apportionment, and of adjustment, as agreed with the Commissioner and having regard to the tenor of the apportionment rules. This is contained in sections 20(3E), 20E(b) and 21(4).

3.3 At the time, the property sector was identified as potentially being another industry which makes a mix of taxable and exempt supplies, such as the taxable sale of a newly constructed dwelling which has been rented out, producing some exempt supplies prior to sale. However, the rules for the concurrent use of land, in section 21E, were intended to specifically deal with this situation.

3.4 It is evident that retirement village operators and conceivably other kinds of larger business who make mixed supplies may also experience substantial compliance costs, in addition to those covered by section 20(3E), in applying the apportionment rules. Current difficulties are discussed below.

Activities of a retirement village

3.5 Retirement village operators provide both accommodation and a number of assisted living services to residents of their villages. There are a number of legal forms that are used to provide accommodation and related services. Accommodation may be supplied to a resident by way of a lease or other right to occupy the unit. A resident will be entitled to use certain shared facilities, such as the grounds and common areas, as well as residing in the unit. Alternatively, the village operator may sell a unit to a resident, coupled with an arrangement or option to repurchase it at the end of the resident’s stay.

3.6 When a resident ceases to use a unit, it will be supplied to a new resident. The new resident may acquire the unit on different terms to the original resident. For example, a resident who received a package including accommodation and full care services may be replaced by a new resident who only acquires the accommodation.

3.7 Retirement village operators may also provide residents with a wide variety of assisted living services, including nursing services, medical care, transport, group activities, and assistance with living, such as laundry, cleaning and meals. The level of assistance required will vary among residents, and not all residents will require the same services. In some cases, these services will be included with the accommodation, and in other cases some services may be optional additions that a resident can choose to acquire.

Retirement villages and the GST rules

3.8 The GST treatment of accommodation provided by a village operator will vary depending on the terms of the contract for the supply, rather than be based solely around the structure in which the accommodation is provided. In particular, leased or licensed accommodation will be exempt when it is provided in a “dwelling” or taxable if it is provided in a “commercial dwelling”. What would ordinarily be a commercial dwelling may instead become a dwelling, if the consideration is for the right to occupy the unit.


B Co., a retirement village operator, offers individual apartments to residents for a weekly charge. The weekly charge entitles the resident to the exclusive use of their apartment, and to use shared facilities, such as the grounds, and common rooms. Residents may opt to acquire additional services – such as cleaning, rubbish disposal, eligibility to take part in organised outings, and nursing care – separately for an additional charge. However, there is no obligation to acquire these services.

The supply of the apartment is GST-exempt (as accommodation in a dwelling). If a resident chooses to acquire the additional services, the supply of those additional services will be taxable and will not alter the GST treatment of the accommodation.

C Co., another retirement village operator, offers care apartments to residents for a weekly charge. The care apartments are supplied as part of a larger package that also includes the use of shared facilities, meals, the periodic cleaning of the apartment, rubbish disposal, eligibility to take part in organised outings, and regular visits from a nurse.

The supply of accommodation in the care apartment is taxable, as the supply will not be the supply of accommodation in a “dwelling”.

3.9 The treatment of a number of incidental services, such as use of the grounds, will depend on the treatment of the accommodation. Both taxable and exempt accommodation may be provided within the same building, and residents of each kind may share the use of the same shared facilities.

3.10 The supply of care services such as cleaning, nursing or medical services, is generally taxable, although some goods and services (including the right to occupy the premises) supplied may be “domestic goods and services” and when provided in a commercial dwelling, be subject to an effectively lower rate of GST.[3] This recognises that they are close substitutes for exempt residential accommodation.

3.11 The proportion of taxable to exempt use of goods and services within a retirement village will likely vary depending on which part of the village is being used and what goods and services are supplied. This proportion will also vary over time. A retirement village operator will need to apply the apportionment and adjustment rules.[4]

Compliance costs in applying the apportionment and adjustment rules

3.12 When goods or services are acquired, a retirement village operator must deduct tax charged on those goods or services, based on its estimated use of those goods and services in making taxable supplies (the “intended use”), using a determination method that provides a fair and reasonable result.

3.13 Officials have been advised that this leads to significant compliance costs as follows:

  • When goods and services used within different parts of the village have different intended uses, multiple apportionment rates need to be determined, applied and tracked. For example, head office expenses may relate to the entire business activity, including multiple villages, and other costs may relate to a specific part of a village with its own unique proportion of taxable/exempt supplies.
  • During the construction phase of a village, costs may relate to the construction of “exempt” units, “taxable” units, and shared facilities. It may be difficult to determine the relative proportion of any particular invoice relating to constructing each of these items and what the overall apportionment should be.
  • The use of facilities in making taxable supplies also continuously varies, as the services provided to residents change over the lifespan of the village. Ongoing calculations are required to determine any adjustments required.
  • The use of supplies may not have been able to be accurately determined at the time of apportionment. For example, when an apartment may be acquired by a resident either as independent living accommodation (exempt) or as part of a care package (taxable), the GST treatment will depend on this choice.
  • When the use of a good or service in an early adjustment period differs from its use in subsequent adjustment periods, incremental adjustments may be required in the subsequent periods, as the use in the early periods progressively becomes a smaller proportion of actual use.

3.14 As a result, a retirement village operator may need to apply multiple apportionment rates to different invoices and track these invoices so that subsequent adjustments can be made. The retirement village operator will need to calculate if adjustments are required in relation to these supplies.

Policy considerations

3.15 The apportionment rules are intended to ensure that when a business makes exempt supplies (or the goods and services are privately consumed), deductions are not available. This ensures that exempt supplies and private consumption are still effectively taxed.

3.16 The rules were intended to be relatively simple to comply with, and provide certainty for taxpayers. This has largely been achieved, as most taxpayers are able to undertake an initial apportionment and then make limited further changes if there is little change to the relative taxable and exempt use. However, for some larger taxpayers (such as retirement village operators) apportionment, as shown, is complicated. This is undesirable.

3.17 As exempt supplies are taxed by denying deductions, it is important that any change does not affect the overall proportion of input tax that may be deducted. If the proportion of input tax that may be deducted varies from the use of the goods or services in making taxable supplies, the result would be under- or over-taxation.

Suggested solution

3.18 On balance, officials consider that the ability to agree a similar alternative method to the apportionment rules with the Commissioner, could be extended to a wider group of taxpayers, beyond the financial services sector, subject to certain restrictions to ensure administration costs are kept relatively low. This would provide the necessary flexibility to address the specific circumstances and difficulties faced by taxpayers most affected.

3.19 While officials are only aware of difficulties within the retirement village sector, in theory any larger business making both taxable and exempt supplies could experience similar issues.

3.20 Relief from high compliance costs could be provided by a more aggregated approach to estimating the amount of input tax that may be deducted, which takes into account the specific business circumstances of the taxpayer and reaches a similar overall outcome to that which would be available by applying the apportionment and adjustment rules.

Proposed method

3.21 It is expected that the agreement would provide alternatives to applying the rules on a supply-by-supply basis, the number of periods for which adjustments may be required to be made, and the way the adjustment rules closely follow the actual use of the goods or services over their current life.

3.22 It is not intended to codify matters any agreement with the Commissioner must consider. It is anticipated that an alternative method would need to be fair and reasonable after taking account of the specific business circumstances of a taxpayer. However, it is expected that agreements would usually set out the following:

  • all relevant business activities of the applicant;
  • the methodology proposed (for example, calculation based on turnover, floor space, time spent, number of transactions or cost allocations);
  • categories of costs that can be directly attributed to either taxable or non-taxable supplies, and categories of costs that relate to both taxable and non-taxable supplies;
  • the methodology proposed for significant one-off acquisitions such as land;
  • the method by which disposals of assets will be dealt with (for example, what input tax adjustments will be made);
  • any adjustments that will be made in relation to goods and services that have already been acquired, including those that are subject to the current apportionment rules, transitional rules or old apportionment rules;
  • details of any proposed variations to the minimum number of adjustment periods for which adjustments will be made;
  • details of any proposed variations to the period in which adjustments will be returned; and
  • an explanation of why the proposed methodology is fair and reasonable, and how it reflects the outcomes that would be reached under the apportionment rules.

3.23 Approval could be granted subject to conditions. These might include the methodology being subject to regular review by the Commissioner (such as every three years) and the taxpayer being required to notify the Commissioner of the GST recovery position taken in relation to high-value acquisitions (such as land).

3.24 The period over which any agreed approach applied would need to be considered, as just looking at an annual position could misrepresent the degree of relative accuracy between the agreed approach and the more literal application of the legislation. For example, consider the situation of a good which is initially used to only make exempt supplies in the first adjustment period, before being applied to make taxable supplies in subsequent adjustment periods. An incrementally larger input tax deduction may be available in these subsequent adjustment periods, as the earlier exempt use becomes a lower proportion of its actual use. A method that based the deduction on the planned long-term actual use of the goods and services in making taxable supplies would bring the deduction forward (compared with the adjustment rules being applied) and could produce a timing advantage. An alternative method would need to take this timing difference into account, if material.

Scope of eligibility

3.25 The issues discussed arise in relation to larger taxpayers (including registered groups), who make both taxable and exempt supplies as these businesses have a greater number of transactions and more complex transactions.

3.26 To help ensure that an alternative agreement produces a net benefit, a threshold would restrict eligibility to taxpayers who make a large volume of supplies. We suggest that this threshold be aligned to the requirement mandating a 1-month taxable period – registered persons whose turnover in a 12-month period is $24 million or more, or expected to be $24 million or more, once their business activities fully commence.

3.27 Financial service providers covered by the existing ability to reach an apportionment agreement would not be covered by this proposed new rule.

3.28 The Commissioner could refuse to enter into agreements when the benefits arising under an agreement, such as compliance cost savings, would not justify the administrative cost of agreeing upon, and maintaining, an alternative methodology.


3 Through the operation of section 10(6).

4 The Commissioner’s view of the GST treatment of retirement villages is being considered in the Public Rulings’ project PUB00201. It is expected that the Interpretation Statement for this project will be published shortly.