Apportioning GST annually for business and private purchases

 

The general case regarding GST credits is that business owners can claim input tax credits relating to eligible business expenses when you lodge your business activity statement (BAS), which may be monthly or quarterly. However it is not unusual for business owners to occasionally make purchases that contain a private use component. Where expenses are partly for private use, only the proportion of credits relating to business use can be claimed.

When you can only claim a portion of a GST credit on a purchase, generally because the purchase is partly for business purposes and partly for private use, there are two ways of accounting for the GST credit:

  • calculate the portion of GST credit that you are entitled to and claim it on your monthly or quarterly activity statement
  • claim the entire GST amount as a credit on your monthly or quarterly activity statement and make a single annual adjustment at a later date.

This second option, with a single adjustment, is called annual private apportionment. This measure was introduced a few years ago to allow eligible taxpayers to claim the entire amount of input tax credits when lodging their monthly or quarterly BAS, both business and private, without apportioning for private use.

By electing to make an annual private apportionment of GST, you are choosing to account for the private portion of your business purchases once a year rather than each time you lodge an activity statement. GSTR 2006/4 provides information on determining the extent of creditable purpose in making acquisitions to arrive at the correct amount of input tax credits, and has examples of apportionment methods that can be used.

Eligibility
You can elect to make an annual private apportionment if both of the following apply:

  • your business’s annual turnover is $10 million or less, or your (non-business) enterprise’s GST turnover is $2 million or less, and
  • you have not elected to pay GST by instalments or report GST annually.

Annual private apportionment applies to all purchases that are made partly for business and partly for private purposes, unless:

  • the business portion of the purchase relates solely to making input taxed supplies
  • any part of the purchase is a “reduced credit acquisition” – that is, a purchase that relates to making financial supplies that you can claim a reduced GST credit for.

You must make any adjustments in a later activity statement to account for the portion of the purchase relating to private use. You can make the adjustment in any activity statement up to the one that covers the due date for lodging your income tax return. This means you can apportion for private use for both GST and income tax purposes at the same time.

The ATO expects however that a business that has elected to make annual private apportionments for GST must re-assess its eligibility for it on 31 July each year.

Your adjustment will either increase the amount of GST you are liable to pay or reduce your GST refund for the tax period you make the adjustment in.

If eligible, you can choose to use annual private apportionment at any time — for example, you can start at the beginning of the next tax period for which an activity statement is due. You do not need to notify the ATO if you choose to use annual private apportionment, but you must keep records that include the date you chose annual private apportionment and the date it took effect.

If you make input-taxed financial supplies as a minor part of your business you can use annual private apportionment for your purchases that relate to making those supplies as long as you do not exceed the financial acquisitions threshold.

The following simple annual private apportionment scenario is from the ATO:

George lodges his activity statement on a quarterly basis and has chosen to use annual private apportionment.

George purchases telephone services from a local telephone company. He pays $220 for these services including $20 GST and receives a tax invoice on the day of purchase. He anticipates his phone use will be 30% business and 70% private. The business component does not relate to making input-taxed supplies.

George claims a $20 GST credit for the purchase on the first activity statement he lodges after purchasing the services.

If George had not chosen to use annual private apportionment, he would only be entitled to a GST credit of $6 (30% of $20).

As George has claimed a $20 GST credit he will need to make what is known as an “increasing adjustment” (more GST is owed) on a future activity statement.

Generally, the ATO will expect you to make your annual increasing adjustment on either:

  • your activity statement that covers the period when your income tax return is due (for the income year covering the tax period you claimed your GST credit in), or
  • an earlier activity statement.

If you are not required to lodge an income tax return, you must make your annual increasing adjustment in your activity statement for the tax period spanning 31 December of the financial year that starts after the tax period in which you claimed the full GST credit.

The amount of your annual increasing adjustment equals:

  • the amount of the GST credit you have received or will receive for your purchase, less
  • the amount of the GST credit you would have received if you had not chosen annual private apportionment.

If you have applied annual private apportionment to several purchases you must calculate an annual increasing adjustment for each purchase, add the adjustments together and report the total on the activity statement.

When you calculate your annual increasing adjustment, you must take into account any other adjustments that occur with respect to your purchase. This includes:

  • adjustments that have arisen because of a change in the purchase price
  • instances where the supplier has written off a bad debt.

Stopping apportionment
You can stop using annual private apportionment at any time. If you do, the cancellation will take effect from the start of the tax period for which your next activity statement is due.

If your election to use annual private apportionment is cancelled in the financial year that you claimed the GST credit for the purchase, you must make an annual increasing adjustment on your activity statement either in:

  • the tax period in which the cancellation takes effect
  • an earlier tax period that you choose.

However if the cancellation takes effect from 1 July in any year, your annual increasing adjustment will be made at the time you would have made it had your election not been cancelled.

At times, the ATO can disallow your use of annual private apportionment if it finds you have not complied with one or more of your tax obligations. In these cases, annual private apportionment will cease to have effect from the start of the tax period in which you are notified of the disallowance.

A tweak for motor vehicle purchases
When preparing the BAS that covers the period a vehicle was acquired, the depreciation cost limit ($57,581 for the 2019 income year) caps the GST input tax credits that can be claimed before the annual private use adjustment to one eleventh of $57,581 ($5,235).

The subsequent annual apportionment may then reduce the GST input tax credit entitlement, depending on the eventual business/private use calculations.

Also, the GST treatment will differ regarding private use adjustments for depreciable assets. This depends on the type of entity acquiring the asset. For example, a company can claim the full GST input tax credit on a vehicle purchase, and the private use will be factored in by the fringe benefits tax rules and/or any private use employee reimbursement. This can be contrasted with a sole trader arrangement, with a straightforward GST annual apportionment for the business/private use calculation.