Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello MP)
Chapter 2 - Annual apportionment of creditable purpose
2.1 Schedule 2 to this bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to allow small businesses to elect to undertake annual apportionment of input tax credits for certain acquisitions used for a partly creditable purpose.
2.2 The Government announced in the 2004-2005 Budget its intention to introduce goods and services tax (GST) measures aimed at reducing the costs of compliance for small businesses and non-profit bodies.
2.3 Small business operators are more likely than larger businesses to acquire goods and services that are used for a partly creditable purpose. This means that the business applies the acquisition only partly for the purpose of their enterprise. In particular, small business may have private usage for electricity, telephone, lease payments, rent and other regular ongoing expenses.
2.4 Under the current lodgement and payment rules, these businesses are required to determine the amount of input tax credits they will claim for goods and services acquired in each quarterly or monthly tax period. This requires the business to calculate its potential non-enterprise or private use of the acquisition so that it does not incorrectly claim input tax credits.
2.5 In practice, the actual use of the acquisition may not be accurately determined until the business is required to complete and lodge its annual income tax return. It is at this time that the business will undertake the analysis, or seek the services of a tax professional to undertake the analysis, needed to more accurately establish its use of the acquisition. If the actual use is established to be different to the assumed use, the business must undertake to correct its earlier input tax credit claim.
2.6 In recognition of this problem, the Government has decided to allow small businesses that meet certain eligibility criteria to be able to elect to determine their non-enterprise or private use of acquisitions on an annual basis. The business would initially make a claim for the full input tax credit applicable to the acquisition in the relevant quarterly or monthly GST return. The business will then be required to make a later single adjustment of its input tax credits to take account of the actual use. Businesses will be able to make the relevant increasing adjustment at any time up to the end of the tax period in which it is required to lodge its income tax return. This will allow those businesses that are required to lodge an income tax return to simultaneously establish the extent of business use for both income tax and GST purposes and thereby assist businesses to lower their compliance costs.
2.7 This bill will amend the GST Act to allow an entity that satisfies certain eligibility criteria to elect to undertake annual apportionment of input tax credits for acquisitions or importations that are partly creditable.
|New law||Current law|
|An entity that satisfies the eligibility criteria can elect to claim full input tax credits at the time of attribution for certain acquisitions and importations that are partly creditable. The entity will make a later single adjustment to the input tax credits it has claimed during the financial year to account for the application of the acquisitions or importations for an other than creditable purpose.||At the time of making a claim, an entity may claim an input tax credit to the extent that the acquisition or importation is for a creditable purpose.|
2.8 Division 131 is inserted into the GST Act. This Division sets out the rules that will enable an entity that satisfies specified eligibility criteria to elect to undertake an annual apportionment for input tax credits relating to acquisitions that are partly creditable. [Schedule 2, item 14, section 131-1]
2.9 Subdivision 131-A sets out the rules and procedures to enable an entity to make an annual apportionment election. An annual apportionment election is one that satisfies new section 131-10. An entity that makes an annual apportionment election must keep a record of that election and any later revocation of the election. The election takes effect from the commencement of the earliest tax period for which a GST return is not yet due. This means that if the election is made before the date the GST return for a particular tax period is to be lodged with the Commissioner of Taxation (Commissioner), the election will take effect from the start of the tax period to which the return relates. In the 2004-2005 financial year, elections will generally first take effect from 1 October for entities with quarterly tax periods and 1 November for entities with monthly tax periods. [Schedule 2, item 14, section 131-10]
Example 2.1 Harry lodges GST returns on a quarterly basis. His GST return for the quarter ended 31 March is due on or before 28 April. Harry elects to apply the annual apportionment option on 25 April. As Harry made his election before the due date of his GST return for the quarter ended 31 March, the election is taken to have commenced at the beginning of the tax period that ended on 31 March.
2.10 An entity will be eligible to make an election if its annual turnover does not exceed the annual apportionment turnover threshold at the time of the election. This means that an entity must have an annual turnover that does not exceed $2 million or such higher amount as specified in regulations. The entity must not be subject to either the GST instalment or annual tax period options at the time of the election, as these options do not involve the lodgement of GST returns on a quarterly or monthly basis. [Schedule 2, item 14, section 131-5]
2.11 Special rules apply to elections made by representatives of GST groups. These rules ensure that an election can only be made if each member of the group satisfies the eligibility criteria. If the representative member makes or revokes an election, each member is taken to have made or revoked the election. [Schedule 2, item 14, section 131-15]
2.12 Once a valid annual apportionment election has been made, it will continue to apply unless the entity revokes the election, the Commissioner disallows the election, or the entity's annual turnover exceeds the annual apportionment turnover threshold on 31 July in a financial year. [Schedule 2, item 14, subsection 131-20(1)]
2.13 An entity may revoke its election at any time. The revocation takes affect at the start of the earliest tax period for which a GST return is not yet due. This means that if an entity revokes its election before the GST return for a tax period is due to be lodged with the Commissioner, the revocation will have effect from the start of the tax period to which the GST return relates. [Schedule 2, item 14, subsection 131-20(2)]
Example 2.2 Harry revokes his election on 25 April. His quarterly GST return for the quarter ended 31 March is due for lodgement with the Commissioner on 28 April. Harry will complete his GST return for the quarter ending 31 March as if the election has been revoked from the start of that quarter on 1 January.
2.14 The Commissioner may disallow an entity's annual apportionment election if the Commissioner is satisfied that the entity has failed to comply with one or more of its tax obligations. The disallowance will take effect from the start of the tax period in which the Commissioner notifies the entity of the disallowance. Therefore, the entity will not be required to amend GST returns already lodged with the Commissioner where the Commissioner disallows an election. [Schedule 2, item 14, subsections 131-20(3) and (4)]
2.15 Where an entity exceeds the annual apportionment turnover threshold of $2 million on 31 July in a financial year, the entity's election ceases to have effect from the start of the entity's tax period in which 31 July falls. This date has been selected to allow those entities that are subject to monthly tax periods sufficient time to correctly complete their GST return for July, and those subject to quarterly tax periods sufficient time to correctly complete their GST return for the quarter ended 30 September. [Schedule 2, item 14, subsection 131-20(5)]
2.16 Subdivision 131-B sets out the consequences that apply to an entity that makes an annual apportionment election. An entity that has made a valid election will be entitled to claim an input tax credit equal to the GST payable on acquisitions or importations that are partly creditable. This means that the acquisition or importation does not have to be applied solely for the enterprise or business in order for the entity to claim a full input tax credit. An acquisition or importation is not partly creditable where it is applied or intended to be applied solely for a private, or non-enterprise purpose, or solely for the purpose of making input taxed supplies. [Schedule 2, item 14, sections 131-40 and 131-45]
Example 2.3 Harry acquires telephone services from a local provider. He paid $20 GST on the supply of those services. He uses these services to make a combination of business and private calls. Harry has made a valid election to apply annual apportionment to his acquisitions. He claims the full $20 as an input tax credit in his GST return for the tax period in which the services were acquired.
2.17 The annual apportionment option will not apply to acquisitions or importations that are of a kind specified in regulations. While it is not possible to definitively specify the acquisitions and importations to which the apportionment measure is intended to apply, the policy intent is that the measure would relate only to acquisitions and importations relating to the normal operation of a business that are used partly for business purposes. The operation of the annual apportionment method may give rise to unforeseen practices that are clearly not consistent with the policy intent. A regulation-making provision has therefore been inserted to allow regulations to prescribe kinds of acquisitions or importations to which the annual apportionment option will not apply. The regulation-making provision is intended to provide flexibility to ensure the ongoing integrity of the measure. It is not intended that regulations be made at this stage to specify any kinds of acquisitions or importations. [Schedule 2, item 14, sections 131-40 and 131-45]
2.18 An entity cannot claim an input tax credit under the annual apportionment option to the extent the acquisition or importation relates to the making of input taxed supplies - consistent with the more general policy regarding input taxed supplies. Therefore annual apportionment does not apply to acquisitions to the extent they relate to the supply of residential rent or premises or to making financial supplies. Also, annual apportionment will not apply to acquisitions that are, to any extent, reduced credit acquisitions used to make financial supplies. In order to ensure the appropriate reduced credit entitlement is calculated, and to avoid complexity, reduced credit acquisitions will continue to be subject to the existing special rule for such acquisitions in Division 70 of the GST Act. In addition, an entity cannot claim an input tax credit under the annual apportionment option to the extent the entity is not required to provide, or liable to provide, consideration for it. [Schedule 2, item 14, sections 131-40 and 131-45]
2.19 A special rule applies to the acquisition or importation of a car. The amount of input tax credit to which the annual apportionment election applies must be worked out under section 69-10 of the GST Act. In general, this means the amount of input tax credit that an entity can claim in relation to the acquisition or importation of a car cannot exceed the input tax credit that would apply to a car acquired or imported for the amount of the car limit. The GST dictionary already contains a definition of 'car' and 'car limit' for GST purposes. [Schedule 2, item 14, section 131-50]
2.20 After the end of the financial year in which the input tax credit for an acquisition or importation was attributed, an entity may have an increasing adjustment. The amount of the increasing adjustment is calculated by comparing the input tax credit already claimed during the financial year with the amount of the input tax credit that should have been claimed taking into account the application for a creditable purpose. These calculations will need to take into account the operation of Divisions 19, 21 and 136. There are similar rules that provide for the calculation of an increasing adjustment where an entity revokes its election or has its election disallowed by the Commissioner before the end of a financial year. [Schedule 2, item 14, section 131-55]
Harry has applied the telephone services 80% of the time for business purposes during the relevant financial year. Harry determines the amount of the increasing adjustment at the end of the financial year as follows:
input tax credit claimed in quarterly GST return
input tax credit on basis of actual business use at 80%
amount of increasing adjustment
2.21 Any increasing adjustment is attributed to the tax period in which the entity's annual income tax return is due to be lodged with the Commissioner. This means that the entity will make the adjustment in the GST return that covers the quarterly or monthly tax period in which the date for lodgement of its income tax return occurs. If an entity is not required to lodge an income tax return, the entity must attribute the increasing adjustment to the tax period that ends on 31 December. If an entity revokes or the Commissioner disallows an election during a financial year, the entity will attribute the increasing adjustment for the tax period in which the revocation or disallowance takes effect. If an entity has a concluding tax period under section 27-40, the entity will attribute any increasing adjustments not attributable to an earlier tax period to its concluding tax period. [Schedule 2, item 14, section 131-60]
Example 2.5 Harry has an increasing adjustment of $4 in relation to input tax credits he has claimed in a particular financial year. He is required to lodge his income tax return for that financial year by 30 November. Harry will attribute the $4 increasing adjustment to the quarterly tax period ended 31 December. This is the tax period in which the due date of his tax return fell. Harry's GST return for the tax period ended 31 December is required to be lodged by 28 February.
2.22 Division 78 of the GST Act has been amended to take account of the introduction of new Division 131. An entity that makes a claim under an insurance policy will continue to advise its insurer of its actual input tax credit entitlement for the insurance premium as if the annual apportionment election did not apply. This will allow the insurer to determine its own entitlement to claim a decreasing adjustment arising on any settlement of a claim under the entity's insurance policy. [Schedule 2, item 10, subsection 78-10(2); item 11, subsection 78-50(2)]
2.23 Other sections of the GST Act that determine an amount of input tax credit that an entity may claim for an acquisition or importation that is partly creditable have been amended to take account of the operation of Division 131. [Schedule 2, item 4, paragraph 19-70(c); item 5, section 19-70; item 6, section 19-75; item 9, subsection 72-45(1A); item 12, subsection 84-13(1); item 13, subsection 111-5(3); item 15, subsection 132-5(2); item 16, section 136-10]
2.24 Subsection 62(2) of the Taxation Administration Act 1953 is amended to include items 37AB and 37AC to ensure that the Commissioner's refusal for an annual apportionment election to take effect from the start of another tax period and the Commissioner disallowing an annual apportionment election are reviewable GST decisions. [Schedule 2, item 22, subsection 62(2)]
2.25 The amendments apply, and are taken to have applied, in relation to net amounts for tax periods starting on or after 1 October 2004 for entities with quarterly tax periods and 1 November 2004 for all other entities. [Schedule 2, item 23]
2.26 The objective of allowing small businesses to undertake annual apportionment of input tax credits for certain acquisitions and importations used partly for non-business purposes is to achieve a significant and ongoing reduction in compliance costs.
2.27 As the information collected on the GST return is essential to the integrity of the new tax system, the measure is also intended to avoid unduly risking the integrity of the system. Entities will continue to provide sufficient information, in a suitable timeframe, to ensure that necessary appropriate compliance verification can continue.
2.28 Allow GST registered entities with an annual turnover of $2 million or less the option to undertake annual apportionment of input tax credits for acquisitions and importations that are partly creditable except large value acquisitions or importations.
2.29 Allow GST registered entities with an annual turnover of $2 million or less the option to undertake annual apportionment of input tax credits for acquisitions and importations that are partly creditable except acquisitions or importations that may be specified in the regulations.
2.30 Both options are intended to benefit small businesses and non-profit organisations with annual turnovers of $2 million or less which acquire goods and services that are used only partly in the course of carrying on their enterprise. The entities most affected by this measure would be individuals registered for GST that use acquisitions partly for private or non-business purposes. The change will particularly benefit businesses that rely on their tax agent to calculate apportionment for income tax purposes and then use it for GST purposes. Data on the potential number of entities affected by this measure is not available as data on apportionment is not separately captured in GST returns.
2.31 The two options have similar costs and benefits. The main point of differentiation between them is the scope of acquisitions and importations to which the annual apportionment measure will apply.
2.32 Each option is expected to reduce compliance costs for small businesses by providing them with an option to apportion their input tax credits for partly creditable acquisitions and importations on an annual, rather than on a monthly or quarterly basis. Small businesses are currently required to calculate their input tax credit entitlement, to reflect the projected use of the acquisition or importation in their enterprise, in each GST return they lodge with the Commissioner.
2.33 In practice, the actual use of an acquisition or importation used partly in the course of an enterprise may not be accurately determined until the time a business completes and lodges its annual income tax return. Enabling businesses to undertake annual apportionment on acquisitions and importations used for a partly creditable purpose will particularly benefit those businesses that rely on their tax agent to calculate apportionment for income tax purposes, as this analysis can also be used for GST purposes.
2.34 Allowing small businesses to undertake annual apportionment without limiting the scope of acquisitions and importations to exclude large value acquisitions and importations would avoid complexity. However, it could result in some businesses accumulating relatively large end of year tax liabilities. This would be exacerbated in the situation where a full input tax credit has been claimed but the extent of the creditable purpose for the acquisition or importation is only a small percentage of the total usage, resulting in a large increasing adjustment.
2.35 Excluding large value acquisitions and importations from the measure would not have a significant impact on compliance costs. Given that large value acquisitions tend to be infrequent, they would be easy to identify and the extra compliance involved in allowing for them would only be small.
2.36 Limiting the types of acquisitions to which the option applies would minimise the risk of an entity accumulating large tax liabilities. Nevertheless, it is expected that before electing this option entities would carefully weigh up the advantages of lower quarterly compliance and tax liabilities with the prospect of a deferred end-of-year tax liability.
2.37 The option of having a provision to exclude from the measure acquisitions or importations that may be specified in the regulations would provide no immediate limit to the measure. However, it would provide flexibility for the scope of the measure to be adjusted in the light of experience and unforeseen issues.
2.38 The Australian Taxation Office will need to communicate the annual apportionment option to eligible entities. However, administration costs are expected to be lower to the extent that there will be less revisions to GST returns due to apportionment only having to be calculated once per year.
2.39 The introduction of this measure is expected to result in a small but unquantifiable deferral of GST revenue from one year to the next.
2.40 Consultation on the need to have limits on the measure has been undertaken with small business representatives and tax practitioners. Most participants preferred that there should be no restriction on the acquisitions or importations to which the annual apportionment measure applies.
2.41 Option 2 is the recommended option. This option provides flexibility to specify acquisitions or importations that should be excluded from annual apportionment if appropriate, and represents the appropriate balance between reducing compliance costs for small businesses and ensuring the ongoing integrity of the measure.