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Complicated, confusing and misunderstood… GST apportionment rules are changing

Tax Alert - April 2023

By Allan Bullot, Sam Hornbrook, Hana Straight & Rachel Hale 

The most complicated, confusing and misunderstood sections of the GST Act, the apportionment rules, are changing. For the most part, the changes to the GST apportionment rules are focused on increased flexibility, reduced complexity and reduced compliance costs for taxpayers.

Apportionment rules apply to taxpayers who have both taxable and non-taxable/private use of asset(s), or taxpayers whose use of an asset has changed from taxable to exempt/personal, or vice versa.

The apportionment rules normally are considered at acquisition, sale and the end of an adjustment period (usually the GST period ending 31 March). For March GST returns this year, the new rules won’t have an impact, so make your normal adjustments in the normal way (if you’re unsure about this, please talk to your usual advisor).

From 1 April 2023, there are a number of changes that have come into force. We’ll discuss various parts of the new rules throughout the year in future editions of Tax Alert, however, there are a couple of changes that are worth being aware of sooner rather than later.

If you are a GST-registered business that is currently required to carry out GST apportionment adjustments, or if your business activities involve both taxable and exempt supplies, you need to understand how these rules will apply.

Examples of taxpayers who need to consider these rules include:

  • Anyone purchasing land that is intended to be used to make a mix of taxable and non-taxable supplies;
  • Property owners using properties for a dual purpose (e.g. a property purchased for development and sale but, due to a change in circumstances, used for residential rental prior to a future sale);
  • Financial service providers;
  • Aged care sector (e.g. mixed-use retirement villages);
  • A sole trader using assets for personal use (e.g. a work car for personal use).

It will be important to ensure there is a clear understanding of how the updated GST apportionment regime will apply to your business and how your GST obligations may change as a result of these changes.

A new change will allow certain capital assets to, in effect, be taken out of the GST net for capital expenditure purposes, even if they are still being used to generate GST taxable supplies and to incur GST claimable costs, from an operating expenditure perspective.

Where GST has previously been claimed on a portion of the purchase of certain capital assets, now the default position upon sale is that a GST liability will be triggered for the Vendor, resulting in the Vendor having to pay 15% (if the zero-rating rules do not apply) on the full sale price. This is even if GST was only claimed in respect of part of the asset. Previously this only applied to dwellings, but has now been expanded to all assets where GST has been claimed on at least part of the purchase price. The GST liability will not only be unexpected for many Vendors but may also have a significant impact on the economics underpinning the sale of the asset. The GST wash-up rules do also have to be considered at the time of sale of the capital asset, and this can lead to a deemed deduction for a portion of the GST (there are special rules for property developers).

It is important to note the nature of the expense where GST has previously been claimed. As stated above, these rules apply where GST has been claimed on capital expenditure, and the rules would not capture GST that has been claimed on operating costs (such as rate, insurance, utilities). Whilst this capital/revenue distinction is a familiar income tax concept, these rule changes mean that in this area the nature of the expense now also needs to be considered and understood from a GST perspective.

There is a limited window of opportunity to elect assets out of the GST net where those assets were not acquired for the principal purpose of making taxable supplies (i.e., a family home where just the home office was utilised in the business).

To ensure that such assets are out of the GST net, an election must be made before 1 April 2025. From 1 April 2025, this opportunity to elect assets out of the net will be gone and any subsequent sale will be treated as subject to GST. As part of making this election, however, any GST that has previously been claimed will need to be repaid to Inland Revenue (subject to certain conditions).

Some examples of assets that should be considered in light of these changes are as follows:

  • A home office within a larger private family residence;
  • A holiday home that may have had some use as rented out short stay accommodation but is primarily a family bach; and
  • Buildings used by businesses making a combination of taxable and exempt supplies.

We note that the above list is not exhaustive. If you have any assets where a portion of GST has been claimed historically but are primarily used for non-taxable/non-business use then you need to be thinking about these rules and whether an election should be made within the next two years.

We strongly recommend reaching out to the Deloitte GST specialist team who can assist you with deciding whether you need to make such an election as well as help with making the election itself.

As outlined in our previous Tax Alert article, one of the key changes is the reintroduction of a ‘principal purpose’ test for low-value assets costing $10,000 or less (GST exclusive). If assets are used for the principal purpose of making taxable supplies, 100% input tax can be claimed, and conversely, if they’re used for the principal purpose of making exempt supplies, no input tax can be claimed.

This rule is optional and allows businesses to decide whether to keep the current apportionment methods or apply the principal purpose test.

Once the decision is made to utilise the principal purpose test for low-value assets, the business will be required to apply the same approach for all of its assets costing $10,000 or less and will be required to continue to do so for at least 24 months, i.e. all low-value assets will either be subject to apportionment, or they won’t.

As a result, while this is a great change, care should be taken before deciding to use this methodology to ensure that it is the best approach given the time period in which the business will be committed to using this methodology going forward.

Inland Revenue will have more flexibility to approve a greater range of GST apportionment methodologies.

Along with this, comes the ability for the publication of apportionment methodologies considered appropriate for specific industries, e.g. property developers. This will mean that taxpayers should be able to adopt an approved apportionment method without having to engage with Inland Revenue – providing businesses with greater flexibility, consistency with others in the industry, and also reducing compliance costs.

If you are already relying on an agreed apportionment methodology, you will still need to consider the interplay and impact of the new rules.

In addition to the changes discussed above, there are many more changes and tweaks to the apportionment rules, including the repeal of the mixed-use asset rules.

Given the complexity and changing rules, it is important to consider the GST treatment of assets when they are acquired, or the use changes, rather than waiting until the end of an adjustment period (or worse, an Inland Revenue audit).

The overarching principles of apportionment remain unchanged:

  • Whatever approach to apportionment is used, it must be fair and reasonable
  • ‘Direct attribution’ to wholly taxable or wholly exempt use is required before apportionment

Inland Revenue will be releasing guidance to help understand these “new” rules, but if you have any questions, please get in touch with your usual Deloitte advisor and they can connect you with one of our indirect tax specialists.

April 2023 - Tax Alerts

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