Date posted: 05/09/2022

CA ANZ welcomes move to resolve GST rule catching out small businesses

Chartered Accountants Australia and New Zealand (CA ANZ) is welcoming moves in the August Tax Bill to fix a rule that has put small business owners, who work from home, on the hook for a big GST bill when they sell their home.

The rule currently affects small businesses owners who are GST registered in their own name, and who work out of their home, rather than in a trust or company structure.

“Sole traders working from the family home now have the opportunity to escape a big GST bill when they sell their home,” said CA ANZ Tax Leader John Cuthbertson FCA.

“The issue was that GST registered small business owners who worked out of a home registered under their name, doing a small amount of admin and claiming very little GST against that home, became liable for a relatively large amount of GST when they sold that home.”

“The rule was legitimate, but not intuitive and came as a surprise to many GST registered home sellers.”

“For example, say Jane owns a small landscaping business and is GST registered. She uses an office in her own home for eight hours a week and claims a portion of GST on items bought to maintain that home office.”

“When Jane goes to sell the home, because it was used for a taxable purpose, she would be required to pay full GST on it at the time of sale, and would then have to do a wash-up adjustment to claim back some of that GST.”

“Before 2011 we had a principal purpose test. It was quite simple, you were only charged GST if you used the home for business over 50% of the time. After 2011, you had to charge GST on sale, even if your business activity, was very small, say 5 to 10%. The result is not intuitive for many small business owners.”

“If for example, Jane’s house is sold for one million dollars, that’s a lot of GST to pay, compared to the small amount of earlier business use. Of course, Jane would be able to calculate an input credit adjustment, which should mean she can claim some GST back, but the current calculation is difficult, and not intuitive.”

The proposed solution would allow a GST registered person or business to elect to keep an asset private. The owner would not be able to claim a GST deduction on the purchase of the house, but they would also not have to return GST on the sale. However, under the current proposal, they would still be able to claim GST on home office expenses.

“There’s been a real outcry about expansion of GST on ‘Kiwisaver fees’, but the public should be happy with this one,” concluded Mr Cuthbertson.

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