GST and mixed use assets
The Taxation (Livestock Valuation, Asset Expenditure and Remedial Matters) Bill became law on 17 July 2013. The Asset Expenditure part of the title refers to the changes made to the treatment of expenditure on holiday houses, boats and aircraft for both GST and income tax purposes.
Our July Tax Alert covered the changes to the income tax treatment of these assets. It is fair to say that it is the income tax changes which have grabbed the most attention in the press since the enactment of the legislation. However the GST changes will potentially have a big impact where the owner of a mixed use asset is GST registered. As many GST registered people deal with their own GST returns throughout the year, it is important to understand the impact of the GST changes as they need to be reflected in each GST return and not left for the accountant to sort out after year end.
Historically a number of owners of these lifestyle assets will have registered for GST and claimed back the GST paid on the purchase of the asset as a way to help fund the overall cost of the asset. They will have returned GST on any income received from renting the asset out, and claimed GST on the majority of the costs on the grounds that the asset was available for rent for the majority of the time throughout the year. The mixed use asset changes are set to change this GST treatment, but perhaps not in the way that many people are expecting.
To briefly recap the key changes from an income tax perspective, expenditure is disallowed as a deduction to the extent that it relates to private days. Private days include any use by the owner, as well as any use by associates of the owner or where the user pays less than 80% of the market rent for the use. Any income that is earned from private use days is not required to be returned for income tax purposes.
While the GST rules use the same formula for apportioning GST input tax claims as that for income tax, the results can be vastly different. In fact where mixed use assets are owned in a corporate structure, private days are likely to only include situations where the assets are made available to friends (i.e. people that are not technically associated persons) for no consideration. This is because the definition of private days for GST purposes excludes days where any consideration is received, whether or not that consideration is at market value, or where the assets are used by a person associated with the asset owner. The result of this is that for those days where any consideration is received, the income is taxable for GST purposes and the GST on costs allocated to those days is able to be claimed. In many cases this will mean quite a variance between the percentage of costs able to be claimed for income tax and GST – generally the GST percentage will be higher, but so will the GST output tax due to the deeming rules.
Affected GST registered people must estimate the percentage of GST input tax that is able to be claimed on costs as they are incurred throughout the year, and then perform a wash-up adjustment at the end of each year once the full year percentage of income earning to private days is known.
Where a mixed use asset is used by an associate of the owner, such as a shareholder, partner or beneficiary, or a relative of any of these parties, and that person did not use the asset to make taxable supplies themselves, the current GST rules deem that supply to have been made at market value. This gives rise to an output tax liability for the owner of the asset, even if no consideration has been received. This deemed supply rule has always existed but may have been overlooked by GST registered persons and the Inland Revenue alike. Given that the changes to the ability to claim input tax on mixed use assets may result in increased input tax deductibility, we expect that the Inland Revenue may also apply more focus on the output tax side of such transactions and enforce the market value rule.
The GST changes for holiday houses came into effect from 17 July 2013, and for boats and aircraft they will apply from 1 April 2014. The changes will affect both on-going costs of holding these assets, such as rates, insurance, maintenance etc, as well as the initial purchase price. It is not entirely clear how the GST changes apply to the initial input tax claim that may have been made on assets that were purchased before the respective application dates, though we understand that the Inland Revenue’s view is that that component of input tax will remain subject to the regular GST change of use rules rather than the new mixed use asset apportionment rules. Hopefully guidance on this issue will be forthcoming from Inland Revenue.
We encourage anyone owning a mixed use asset in a GST registered entity to contact their usual adviser to discuss the impact of these changes.
Tax Alert November 2013 contents:
- Multinationals come under the compliance spotlight
- Regular pattern of building and selling houses catches up with trustees
- The OECD Base erosion and profit shifting project – how New Zealand might respond
- Chinese tax and business regulatory framework: evolving landscape and hot topics
- GST and mixed use assets
- Equity based remuneration
- Records in the cloud