The Current Situation on GST apportionment Rules
As GST is not a tax on production, businesses are able to claim input tax deductions on business expenses used in their business. For those assets that are used for both private and business use, the deductible amount is estimated based on an estimated percentage of business use. If the estimate is incorrect, the difference must be accounted for at the end of the year. These current rules are complex, create high compliance costs and in some cases large and unexpected GST liabilities.
The Proposed Amendments to GST Apportionment
The proposed changes to GST apportionment and adjustment rules would reduce compliance costs imposed on businesses and promote fairness. The changes include:
- Principal Purpose test for goods/services obtained for $10,000 or less allowing registered person to claim a full GST input tax deduction
- Allow GST registered persons to elect to treat assets that have mainly private or exempt use as if they have only private/exempt use
What is the Principal Purpose Test?
The act will now allow a full deduction for goods/services acquired (for $10,000 or less) with the principal purpose of making taxable supplies. The principal purpose is the main, primary, or fundamental purpose, it does not always equate with more than 50% taxable use.
- When goods/services are not acquired with the primary purpose of making taxable supplies, the registered person will be unable to claim input tax deduction or apportion input tax over taxable and non-taxable period.
- When the goods/services acquired are acquired for more than $10,000 then the registered person will continue to use apportionment based on their estimated percentage use for making taxable supplies and adjustments being made at the end of each year.
The principal test would be applied from the time the goods/services are acquired. They will not need to monitor the actual use after acquisition or make any annual adjustments.
What Goods qualify as Exempt Supply?
This provision will allow registered person to elect to treat supply of certain goods that were not acquired for the principal purpose of making taxable supplies as exempt. This exemption is limited to only goods as it is meant to apply for tangible assets such as land, building, vehicles etc. This is because these tangibles are likely to have minor amount of use in making taxable supplies as opposed to intangibles such as intellectual property which are likely to have exclusive or mainly taxable use when acquired.
Goods do not need to be sold or disposed for the exemption to apply. To qualify as an exempt good, the following requirements must be met:
- No previous deductions claimed for the goods
- The goods were not acquired for the principal purpose of making taxable supplies
- The goods were not used for the principal purpose of making taxable supplies
- The goods were not acquired as zero-rated supplies under S 11(1)(m) or (mb)
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