Be it vehicles, electronic devices or the home office — many business expenses are also used for private purposes. This means a business must apportion the GST on these costs between private and business use. But how can a business determine exactly how much something is used for work or play? Fortunately, the ATO allows an annual adjustment for these expenses.
When a business pays for goods or services that can be used for the business and also privately, these expenses need to be apportioned to ensure that only the business part of the expense is claimed.
In line with this, only the business portion of the GST would be claimed back as an input tax credit on the relevant monthly or quarterly BAS. (That is unless fringe benefits tax, if applicable, is applied to the private use component.)
At best, this process is fiddly. At worst, it’s near impossible. Especially when the amounts involved are fairly insignificant.
The good news is that the ATO allows certain businesses to simplify the accounting for GST between the business and private use allocation by making an annual apportionment election under Division 131 of A New Tax System (Goods and Services Tax) Act 1999. This goes some way to easing the regular accounting and bookkeeping requirements on each BAS.
It means a business can claim the full amount of GST on the payment that includes both the business and private use component during the financial year on the relevant BAS. Then, after the EOFY and when the entity’s income tax return is being finalised, it can make a single adjustment to account for the reduction in the GST amount that can be claimed back for the private use components.
This annual apportionment election can be made if:
- the taxpayer is a small business entity with an annual turnover, calculated at the time the election is made, of less than $10 million, or an enterprise (that is not a business), with a GST turnover of $2 million or less, and
- no election to pay GST by instalments or to have an annual tax period has been made.
An annual apportionment election may be made at any time. It takes effect from the beginning of the earliest tax period for which an activity statement is not yet due, or the start of such other tax period as the Commissioner allows, as per a request made in the approved form. The election continues to apply until: a taxpayer cancels their election; it is disallowed by the ATO; or the annual turnover threshold is exceeded as tested on 31 July in any year.
However, there is an exception. This applies to acquisitions that relate to making supplies that would be input taxed. In these cases, the amount of the input tax credit on the acquisition to be included in that BAS is as follows:
Full input tax credit X extent of non-input taxed purpose X extent of consideration
Common types of payments that may include a mix of business and private use are:
- Home office costs/home power use
- Home telephone and internet costs
- Motor vehicle running costs (registration, fuel, repairs, toll fees etc)
- Computers and other electronic devices
- Stock taken for private use
- Motor vehicle purchases (see below).
The annual increasing adjustment of GST to be made on the BAS that covers the period that the entity’s income tax return falls due will be the total GST paid on the expenditure that relates to the private use component. This is based on the supporting records maintained by the entity.
It’s important to note that if an entity is not required to lodge an income tax return, the annual increasing adjustment is attributable to the tax period in which the 31 December occurs in the following financial year.
Further, for a tax period that covers the situation of an entity no longer carrying on an enterprise, or if the GST registration is cancelled, the annual increasing adjustment will need to be brought forward to the activity statement that covers that tax period.
Finally, GSTR 2006/4 provides information on determining the extent of creditable purpose in making acquisitions to enable you to claim the correct amount of input tax credits, by providing examples of apportionment methods that can be used.
The ruling indicates that an entity is not limited to the particular methods set out in the ruling. However, if it chooses an alternative method, it needs to be fair and reasonable based on the particular circumstances. The ruling does not deal in detail with Division 131 of the GST act that deals with annual apportionment of creditable purpose, yet it can be a useful guide (ie. paragraphs 128-129 “Determining extent of use for a creditable purpose on certain types of acquisitions”).
A comprehensive resource in relation to GST principles and practice, including worked examples, can also be found in Tax & Super Australia’s Tax Summary 2018-19 edition, Chapters 23 and 24.
Motor vehicle purchases
When preparing the BAS that covers the period the vehicle was acquired, the depreciation cost limit ($57,581 for the 2019 financial year) caps the GST input tax credits that can be claimed prior to 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.
In addition, 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.
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