Beware end of year GST return adjustments

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As this issue is published, readers with a March balance date will hopefully have survived the financial year end, counted their stock, written off their bad debts and generally tidied up their financial affairs for the year. To add to the pressure of then completing year end accounts, the extended due date for the March GST return will roll around very quickly, especially with Easter and school holidays thrown into the mix.

For any businesses that have assets used to make both GST taxable and non-taxable supplies, the end of year GST return holds special significance and requires more thought than usual.

This is because this GST period is known as an “adjustment period” and requires an assessment of whether the GST claimed on those assets fairly represents the way in which they are used.

In some cases the logic and calculation of the adjustments may be straightforward (such as business v private use of a car).

Why adjustments are needed

Let’s just take a step back to look at why adjustments are needed. When new assets are purchased by a GST registered person, there is a requirement to estimate the percentage that asset will be used for making GST taxable supplies (as opposed to making exempt supplies or being applied to non-taxable purposes), and GST input tax is claimed accordingly.

Then at each balance date after purchase there should be a review to determine whether that initial estimated percentage has changed.

If it has, and certain thresholds are met, a change of use adjustment must be made on the GST return period covering balance date. This could be GST payable or receivable depending on the circumstances.

The types of businesses that may need to make such adjustments include (but are not limited to) the following:
  • Sole traders with personal use of business assets, such as their vehicles;
  • Property developers renting properties prior to sale or before development commences;
  • Owners of mixed commercial/residential properties, including retirement villages;
  • Owners of property being used for both private use and short term holiday rental;
  • Financial service providers.

In some cases the logic and calculation of the adjustments may be straightforward (such as business v private use of a car). But where land is involved, the rules that govern the calculation of the adjustments are particularly complex and often illogical, and taxpayers can face significant compliance costs in complying with the rules.

Recognising that there is a fair level of both lack of awareness and non-compliance with the current adjustment rules, Inland Revenue has just issued a consultation document that proposes some changes to reduce the circumstances where taxpayers need to apply the rules.

Some of the key proposals include:

  • Allowing taxpayers the ability to elect certain assets out of the adjustment rules, meaning no GST could be claimed on purchase, but no GST would be payable on sale. This may be attractive for appreciating assets like land;
  • Simplifying the way the rules work by increasing thresholds under which adjustments are not required and reducing or removing the need to make future adjustments for certain lower value assets;
  • Clarifying the distinction between residential (GST exempt) and commercial (GST taxable) accommodation, to make it easier to determine which GST rules apply to the provision of the accommodation and the sale of such properties;
  • Suggesting changes to the way the sale of dwellings will be treated for GST, which is relevant where a dwelling forms only a part of the overall asset being sold, such as for farms with farmhouses or hotels/motels with manager accommodation;
  • More clearly defining, and possibly delaying, the time at which developers can claim GST on properties acquired for development; and
  • Requiring notice to Inland Revenue of the details of land and high value aircraft or pleasure craft that are acquired where GST is claimed or the purchase is zero-rated because the assets are part of the purchaser’s taxable activity. This is to allow Inland Revenue to track these assets and ensure GST is paid on eventual disposal.

If this is ringing alarm bells and you think that you might need to make a GST adjustment under the current rules, or that you might be affected by these proposals, you should seek advice from your accountant or tax adviser. Submissions on the proposals close on 27 April 2022.

Related: Don’t be penalised by excessive fringe benefit tax

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Andrea Scatchard
Andrea Scatchard
Andrea Scatchard is a Tax Partner at Deloitte, based in the Bay of Plenty. She can be contacted on ascatchard@deloitte.co.nz

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