A brief history of GST adjustment rules

Since the major overhaul in 2011, GST adjustment rules have been notoriously complex. Taxpayers and advisors have found it challenging to understand and apply these rules effectively.

Over the years, CA ANZ has advocated for several changes to simplify the application of these rules, albeit not necessarily their understanding. These include allowing a one-off adjustment in situations where there is a complete change of use and capping the number of adjustments made based on the value and type of the asset.

In 2022 government officials made further changes to the adjustment rules, intended to make them more practical and workable.  They become effective from 2023.

Current issue with GST adjustment rules

Following the 2023 changes to the GST adjustment rules, Inland Revenue (IR) has become aware of a technical error. The error prevents some taxpayers who acquired an asset before 1 April 2023 from using the simplified one step adjustment calculation when there was a permanent change of use of that asset on or after 1 April 2023.

This creates a practical issue. Taxpayers are applying for GST refunds as a result of a one-off change of use from non-taxable to taxable use. However, in some cases they are technically not entitled to the refund because of the legislative wording.

Proposed solution to the refund issue

Addressing this refund issue requires legislative change, a process that can be time-consuming.IR cannot process refunds if taxpayers are not legally entitled to them under the current law.

Therefore, the proposed solution is a two-tier process. First, officials will draft amending legislation, expected to be introduced later in the year and likely passed into law next year. In the meantime, officials will use the Order in Council process to provide a temporary remedy.

Understanding the OIC process

The draft Order in Council, which aims to provide a temporary remedy to the error, is provided for public feedback. Submissions are due by 12 August 2024.

The Order, once enacted, will allow taxpayers to apply the proposed changes to the rules if they wish to do so. They can do this by filing their return as though the change already applied.

They are also protected if they have already filed a return on that basis.

Looking forward: Simplifying GST adjustment rules

A permanent solution to this issue is expected to be included in an upcoming taxation bill. The current situation serves as a reminder of the complexity of the GST adjustment rules. CA ANZ welcomes further thoughts from the taxpaying community on how they could be simplified.

In the meantime, it is great to see government officials using the OIC power to give certainty and ensure that the legislation operates as expected.

In practical terms, the Order will be important for taxpayers and advisors seeking GST refunds due to a one-off change of use. In many cases the refund is being delayed or refused if the taxpayer is technically not entitled to make the adjustment. Once the Order is issued, the refunds can be processed.