New Apportionment Rules

For GST purposes, the amount of input tax deduction that can be claimed by a GST-registered purchaser for acquired goods and services should relate to the taxable use of the goods and services.

This is achieved by allowing GST-registered persons to claim a full input tax deduction for GST paid on goods and services acquired for the principal purpose of making taxable supplies.

If the goods and services acquired for the principal purpose of making taxable supplies are used partly or entirely for another purpose, for example, for private and exempt purposes (non-taxable purposes), the GST Act treats the non-taxable use of goods and services as a taxable supply by the registered person, and output tax is charged accordingly.

Conversely, goods and services acquired principally for a non-taxable purpose (for which the GST-registered person is not entitled to an input tax deduction) could be partly or entirely used to make taxable supplies. In these circumstances, the GST Act allows a deduction to reflect that taxable use.

This approach of taxing the “self supply” of goods and services ignores the original input tax deduction claimed by the GST-registered person as the change-in-use adjustments do not relate to the amount of the deduction claimed on acquisition. This is because the use of goods and services for a non-principal purpose is deemed to be a supply which is separate from the purchase transaction.

Another aspect of the GST rules is that there is no statutory limit on the maximum number of adjustments that have to be made, so the number of adjustments required can be excessive relative to the amounts involved. In addition, since change-in-use adjustments do not relate to the amount of the initial input tax deduction, the value of adjustments that a person is required to make can potentially amount to more than the original GST paid on the purchase. Conversely the value of the deduction received by means of change-in-use adjustments can sometimes exceed the amount of GST originally paid.

Because of the detachment between the initial input tax claimed on acquisition and the subsequent change-in-use adjustments, the rules for imposing GST on mixed use assets have not been sufficiently clear for many taxpayers.

Other issues concerning the current approach were raised by the Court of Appeal decision in Lundy (2005) 22 NZTC 19 at 637, which involved land being used concurrently for taxable (advertised for sale) and non-taxable (generating rental income) purposes.

Proposals to reform the change-in-use adjustments rules were initially outlined in an officials’ issues paper, Options for strengthening GST neutrality in business-to-business transactions, released in June 2008. In the 2009 discussion document, GST: Accounting for land and other high-value assets, the Government proposed to replace the change-in use adjustment approach with one that would apportion input tax deductions in line with the actual use of the goods and services. The new apportionment rules contained in the Taxation (GST and Remedial Matters) Act 2010 have therefore been the subject of extensive consultation and incorporate various amendments that arose during the policy development process.

Overall, the new rules are intended to reduce compliance costs for businesses by being simpler and requiring fewer adjustments.

Key Features

The new rules replace the current adjustment approach with an approach that apportions input tax deductions in line with the actual use of the goods and services. In summary, the rules operate as follows:

On acquisition, unless an exclusion applies, the portion of a deduction that a registered person can claim must correspond with the portion of the asset’s use that is intended for taxable purposes.
In subsequent years, a person may be required to adjust the deduction claimed if the extent to which the asset is used for taxable purposes is different from the intended taxable use of the asset. A number of exemptions have been introduced to relieve a person from the requirement to make an adjustment if the amount of tax involved in the adjustment is low.
The maximum number of adjustments that a person may be required to make varies according to the asset’s value or estimated useful life.
Special “wash-up” rules apply when goods and services that have been subject to the apportionment rules are sold or the person deregisters.
Special rules also apply to assets used concurrently for taxable and non-taxable purposes.

Application Dates

The new rules will apply to goods and services acquired after 1 April 2011.

For goods and services acquired before 1 April 2011, registered persons will be required to continue making change-in-use adjustments under the current rules. The obligation to make adjustments will, however, be limited by new section 21H for all supplies other than those that wholly or partly consist of land:

For goods or services whose market value or book value on 1 April 2011 is $5,000 or less, no adjustment under the old rules may be made after 1 April 2011.
For goods or services whose market value or book value on 1 April 2011 is more than $5,000 but not more than $10,000, no adjustment under the old rules may be made after 1 April 2013.
For goods or services whose market value or book value on 1 April 2011 is more than $10,000, no adjustment under the old rules may be made after 1 April 2016.

Once the time limit for an asset is reached, the person must stop making any adjustments for change-in-use in respect of that asset.

Source: All of the following information has been extracted from IRD Tax Information Bulletin Vol 23 No. 1. Please click for more detailed analysis.