CA ANZ welcomed moves to fix a rule that has put some small business owners who work from home on the hook for a big GST bill when they sell their home. Other key proposals include: 

Allowing Inland Revenue to approve a wider range of apportionment methods

The apportionment rules are prescriptive. Inland Revenue can approve a different apportionment method, but only if the method has regard to “the tenor of” the default apportionment rules. This requirement will be removed.

This proposed amendment will apply from the day after the Bill receives Royal assent.

Re-introducing the “principal purpose” test for low-value assets

Prior to 2011, the GST Act included a “principal purpose” test. On purchase of an asset, GST could be claimed in full if the asset was acquired for the “principal purpose” of making taxable supplies. If the asset was not acquired for the “principal purpose” of making taxable supplies, no GST was claimed. The “principal purpose” test, traded precision for ease of application. 

The Bill proposes reintroducing the principal purpose test for low-value assets where the purchase price is less than $10,000 (excluding GST). If the asset is used for the “principal purpose” of making taxable supplies, the person will claim back all the GST. If the “principal purpose” is non-taxable (exempt or private), they will not claim back the GST.

The good news? There will be no further adjustments.

Repealing the GST rules for mixed-use assets

The Bill proposes repealing the GST rules for mixed-use assets. This is because the mixed-use asset rules are largely superseded by the other proposed changes. The mixed-use asset rules are complex, and it can be difficult to apply them on top of the apportionment rules.

PRESENT: A holiday home with less than 62 days of actual use is subject to GST apportionment and the mixed-use asset adjustments for GST.
PROPOSAL: For GST purposes, the holiday home will be subject to the apportionment rules only.

Capping the number of adjustment periods

The current GST rules require unlimited adjustments for land. This is a big compliance burden.  

Let’s take an example. Ming has a dog walking business and is registered for GST. He does not use his house as a home office. However, he rented a room in his private house on Airbnb for three separate weeks in the first three months that he owned it. In theory, that would be sufficient to bring the house within Ming’s taxable activity. Therefore, at the very least, he would need to keep making (increasingly smaller) adjustments for the entire time he owns the house as its use gradually changes from partly taxable to private. Ming does not take his house out of the GST net because he can use a downstairs bedroom as a home office in future. 

The proposed change in the bill will set a limit on the number of adjustments Ming needs to make. Once the proposed change becomes law, Ming will only need to make adjustments for ten periods.

PRESENT: unlimited apportionment adjustments required for land.

PROPOSAL: adjustments for land capped at ten adjustments.

The Bill is expected to be passed into law in the first quarter of 2023. Full details of the final legislation will be known at this time. The measures are certainly worth looking out for.