GST & ADJUSTMENTS Presented by: Grantley Stevens FTIA Partner Edwards Marshall 17/06/2003 1
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Intro Corrections Different types of adjustments Timing and $ limits How to calculate adjustments When can you make adjustments Examples 17/06/2003 3
What is an enterprise Defined sec 9-20 Includes activities where you are engaged in business Activities of charitable and religious organisations, govt bodies and trusts Exclusions activities of employees, activities done as a private hobby Question of fact 17/06/2003 4
Making Corrections and Adjustments Changes to BAS Increase or decrease GST payable Increase or decrease ITC claimed 17/06/2003 5
Corrections Examples decrease GST payable clerical mistakes double counted taxable supplies incorrectly recorded a GST free supply as taxable on earlier BAS Examples increase GST payable or decrease ITC Clerical mistake double counted creditable acquisitions Incorrectly recorded a taxable supply as GST free on earlier BAS 17/06/2003 6
Corrections time limits Annual turnover Less than $20m $20m or more Time limit Up to 18mths Up to 3 mths 17/06/2003 7
Corrections $ limits Annual turnover Less than $20m $20m < $100m $100m < $500m $500m < $1b $1b and over $ limit Less than $5,000 Less than $10,000 Less than $25,000 Less than $50,000 Less than $300,000 17/06/2003 8
Adjustments Increasing adjustment increases your net GST due Decreasing adjustment decreases your net GST 17/06/2003 9
Types of adjustments Changes in price or GST status (Div 19) Debts becoming bad or overdue (Div 21) Changes in intended use (Div 129) Changes in registration status ceasing business (Div 138) 17/06/2003 10
Div 19 Adjustment Events Cancellation of a supply or acquisition Change in the consideration eg discount, invoice incorrect Goods supplied for export however are not exported within 60 days 17/06/2003 11
Adjustment - Div 19 Incorrect invoicing Adjustment event if previously agreed consideration is changed Can fix by adjustment note If error corrected in same BAS period, no adjustment 17/06/2003 12
Are discounts an adjustment? If settlement discounts routinely provided (incl tiered settlement) no adjustment event If commercial interest on early payment, interest is financial supply - no adjustment event If compromise or settle debt - adjustment 17/06/2003 13
Adjustment - practical example Car Manufacturer P/L offers $1,100 payment to end purchaser Car Manufacturer Retailer End purchaser Car manufacturer has decreasing adjustment of 1/11 of $1,100 If end user is registered for GST, increasing adjustment of 1/11 of $1,100 17/06/2003 14
Payments arranged by third parties Co-operative buying arrangements Separate entity receives and administers payments Payments will be adjustment events 17/06/2003 15
Example - Late payment charges If charge interest based on time value of money financial supply Financial supply is not an adjustment event If charge is for consideration to compensate supplier for additional costs eg admin fees, account keeping fee Not a financial supply, therefore adjustment event 17/06/2003 16
Div 19 - Adjustment notes For decreasing adjustments an adjustment note is required if supply > than $50 GST exclusive Statutory obligations ATO guidelines in GSTR 2000/1 Must show amount of adjustment to the GST payable or a statement to the effect that the difference in the price of the taxable supply includes GST 17/06/2003 17
What is not an adjustment Charge for additional supply eg agreed extension to a hire period Promotional or advertising allowances Foreign exchange gains or losses Dishonoured cheques 17/06/2003 18
Division 21 Adjustments - Bad debts debts written off or are outstanding > 12 mths decreasing adjustment of 1/11 of amount written off increasing adjustment if recover bad debts or if the supplier writes off the debt that you owe 17/06/2003 19
Div 129 Adjustments Adjustment arises: when the actual use and planned use are different; &/or if there is a difference between actual use up to the end of one adjustment period and actual use up to end of previous adjustment period 17/06/2003 20
How to determine if an adjustment has arisen under Div 129 You must Work out the actual application of the thing expressed as a percentage Work out the intended or former application of the thing expressed as a percentage Compare the two percentages 17/06/2003 21
Partly creditable acquisitions require an apportionment of ITC If your acquisitions are partly made in carrying on your enterprise; and/or partly used to make input taxed supplies; and/or partly of a private or domestic nature 17/06/2003 22
Example of apportionment Purchase computer 60% for a creditable purpose, entitled to claim 60% of ITC Adjustment if planned use differs to actual use later business usage is 90% adjustment event for 30% 17/06/2003 23
Methods ATO approve to determine extent of apportionments Direct method Distance - eg km travelled by car Time eg computer time spent on various activities Transactions numbers of transactions of specific types Area usage eg floor area Indirect method (two types) Input based - apportioning ITC in respect of acquisitions that have a mixed purpose eg business and private use Output based - % of total supplies; % of net or gross profit 17/06/2003 24
Comparison input and output based methods (example) Colin the carpenter Builds houses and owns residential rental properties Keeps separate records for taxable supplies and input taxed supplies Overhead expenses, say office expenses, not able to directly allocate 17/06/2003 25
Comparison input and output based methods (example) Taxable supplies Input taxed supplies Total Sales 70,000 40,000 110,000 Direct expenses 35,000 15,000 50,000 Gross profit 35,000 25,000 60,000 Overheads 11,000 Net profit 49,000 17/06/2003 26
Comparison input and output based methods (example) Input based: direct cost of making taxable supplies total direct costs 35,000/50,000 = 70% Output based: revenue from taxable supplies total revenue 70,000/110,000 = 63.64% 17/06/2003 27
Increasing and decreasing adjustments Sec 129-40 Increasing adjustment Full ITC x (intended/former application actual application Decreasing adjustment Full ITC x (actual application intended/former application 17/06/2003 28
What is an adjustment period Usually an adjustment is attributable to tax period you become aware of adjustment Different rules for Div 129 adjustment - timing and dollar limits 17/06/2003 29
Adjustment periods GST exclusive value of consideration for acquisition $1,000 or less $1,001 to $5,000 $5,001 to $499,999 $500,000 or more Number of adjustment periods None Two Five Ten 17/06/2003 30
Example Adjustment period BusinessCo P/L is registered, quarterly tax period Acquires machinery 15 Mar 2002, GST excl $100,000 ITC $10,000, tax period 31 Mar 2002 First adj period 1 Apr 2003 to 30 Jun 2003 17/06/2003 31
Example first adjustment period Mar 02, Car $33,000, full ITC was $3000 Planned use of car is 90% bus use First adjustment period Jun 2003 BAS, actual usage 60% Increasing adjustment of $3,000 x 30% is $900 Increases net amount on BAS 17/06/2003 32
Div 129 adjustments - not a creditable acquisition adjustment event can occur even if not initially creditable acquisition Example landscape architect acquires 4WD for private use later uses car for business apply under Div 129 for an adjustment 17/06/2003 33
Effect on adjustment period for disposals etc If there is a disposal, an item is lost, stolen or destroyed the last adjustment period is the next tax period applying to you that ends on 30 June 17/06/2003 34
Concluding tax period This is the tax period in which: An indiv dies, becomes bankrupt, ceases to carry on an enterprise Entity goes into liquidation or receivership, ceases to carry on an enterprise, or ceases to exist 17/06/2003 35
Exclusions to making adjustments under Div 129: GST exclusive value does not exceed $1,000 a previous adjustment has arisen under Div 130 (goods applied for private or domestic use) annual turnover of financial supplies is below financial threshold ($50k) creditable acquisition and is supplied as a gift to a charity 17/06/2003 36
Period of non usage is to be treated as if the actual usage pattern continued over the period of non use Eg car 60% bus use and 40% private Crash, repairs take two months Ignore the repair period 17/06/2003 37
Div 130 Goods applied for private or domestic use limited in its application to acquisition of trading stock changes from solely for a creditable purpose to private or domestic use increasing adjustment, increases net GST due 17/06/2003 38
Example - motor vehicle use Sole trader, uses log book if use c/km - reasonable business estimate suffice if business usage changes - Div 129 adjustment running costs - no adjustment adjustment for initial ITC - time limit 17/06/2003 39
Example - Partnership B1 and B2 establish a partnership B1 - contribution is $20k - not a taxable supply B2 - contribution is car $22k - taxable supply Beware of planned use v actual use Adjustment event may occur 17/06/2003 40
Example - adjustment of a going concern Horticulturalist purchases farm - GST free intends to build residential premises rent premises to manager increasing adjustment - now input taxed supply adjustment is 1/10 x supply x proportion of price non creditable use 17/06/2003 41
Property adjustments Are adjustments subject to GST? ATO view is that adjustments form part of the consideration for the supply of the land 17/06/2003 42
Div 138 Cessation of registration Can have increasing adjustment if registration is cancelled immediately before cancellation claim ITC for assets 17/06/2003 43
Recordkeeping Generally 5 years after the completion of the transaction Records must show and explain all transactions that are relevant to the acquisition Log books, depreciation schedules 17/06/2003 44
Penalties Late lodgement penalty: $110 for every 28 days or part thereof Late payment penalty: GIC 11.96% compounding daily GST Audit corrections - errors: GIC 11.96% compounding daily GST Audit corrections - deliberately fraudulent legal action 17/06/2003 45