Anyone who owns an asset that is used for a dual purpose (taxable, exempt or private use) should be aware that there are extensive and complicated rules dealing with how GST input tax credits should be claimed. These rules potentially require annual adjustments over the entire period the asset is owned. Examples of taxpayers who need to consider these rules include:
- A sole trader using a work car for personal use
- Apartments residentially rented above shops (where both are owned by the same person)
- Properties rented out for short term use via a digital platform that was historically used for long term residential purposes
- Properties rented out for short term use only for specific periods during the year and are lived in the rest of the year
- Properties that are residentially rented while being advertised for sale
- Financial service providers
- Properties purchased for development but used for residential rental prior to the development commencing
The current apportionment rules have been in place since 2011 and it's fair to say there has been a mixed approach to compliance with the rules, with many taxpayers finding themselves with unexpected tax bills, particularly when a dwelling that has been used for short-term rental is sold.
The consultation document proposes to reform these rules to mitigate the issues that taxpayers have been experiencing and to simplify the rules. The proposals include options to substantially reduce the number of taxpayers who need to consider the rules by having more targeted rules. Options under consideration include:
- A principal purpose test for assets purchased for less than $5,000 (GST inclusive).
- A 20 percent de minimis rule – if a person’s taxable use of an asset is less than 20 percent, no GST can be claimed and no GST will arise on disposal.
- An 80 percent round-up rule – assets with 80 percent or more taxable use will be entitled to claim full input tax credits without further adjustment.
- Apportionment adjustments would still be required for assets costing more than $5,000 with between 20-80 percent taxable use; however, adjustments would only be required when there has been a major change in the use of the asset (e.g. a variation of 20 percent or more).
- Amending the concepts of “dwelling” and “commercial dwelling” to help reduce overlap between the concepts and confusion about when GST applies.
- New rules for making house sales an exempt supply and clearer rules for property developers.
The proposals in the consultation document are a refreshing change from some of the other more recent consultations as the purpose of the reform is to make taxes easier and fairer for taxpayers. The consultation paper should be read by any taxpayers with dual-use assets. Submissions close on 27 April 2022.
