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Calculate GST adjustments on sales and income

This section describes how to calculate adjustments that are added in with GST on sales and income. These adjustments include:

Important - GST rate change affecting time of supply

Change of use adjustments

A GST adjustment is required for supplies when there is a change in their use. This could be goods and services intended originally for:

  • business purposes which may be used for making non-taxable supplies (that is, for exempt or private purposes)
  • exempt or private purposes which may be used in the registered person’s business.

The adjustment is made in the GST period when adjustment is calculated.

The tax rate for the adjustment will be one at the time the goods were acquired or imported by the registered person ie 12.5% before 1 October and 15% on and after 1 October.

Example: Roz uses her company car originally purchased in January 2008 for personal use. She uses the car personally for only 20% of the time each month. Roz makes an annual adjustment for this use in the six monthly GST return ending 31 July 2011.

As the car was purchased before 1 October 2010, Roz can still use the 12.5% rate when calculating her adjustment instead of the 15% rate.

Example: Milhouse uses his personal computer originally purchased on 5 October 2010 for his part time Comic book business. He uses the computer for this purpose for 40% of time each month.

Milhouse makes an annual adjustment for this use in the six monthly GST return ending 31 July 2011.

As the computer was purchased after 1 October 2010, Milhouse will have to use the 15% rate when calculating his adjustment.

Business assets used privately

If you are registered for GST and use any of your business assets for private purposes, you need to make a GST adjustment. There are three options you can choose from to calculate these adjustments:

  • one-off adjustment
  • period-by-period adjustment, or
  • annual adjustment.

How to calculate GST adjustments on business assets used privately

Find out how to:

What to do when you're registered for fringe benefit tax (FBT) 

Companies and employers who are registered for FBT do not need to make this adjustment. However, a GST adjustment is needed for any fringe benefits liable for GST.

Sole traders, partnerships and trusts who are registered for FBT may still have to make the private use adjustment. This will happen if the owner, partners, trust members or associated persons use business assets privately. They will also have to make GST adjustments for any fringe benefits liable for GST.

Note

Sole traders, partnerships and trusts not registered for FBT must always make the private use adjustment for business assets used privately.

Entertainment expenses

Business entertainment expenses are related to taxable income, and are incurred in the course of running a business. Private entertainment expenses, such as a restaurant lunch with friends, are non-deductible and GST cannot be claimed.

Generally, only 50% of business entertainment expenses are deductible for income tax. See our Entertainment expense (IR268) booklet for full details. This means that there must also be a GST adjustment of 3/23 of the amount that is non-deductible for income tax.

During the year continue to show your total business entertainment expenses on your GST return. The GST adjustment will be made once a year.

The table below explains exactly when to make the adjustment depending on whether a tax agent prepares your income tax return.

If you... then you make the adjustment in the GST...
don't have a tax agent

return that covers the date your income tax return is due or filed, whichever is the earlier date.

 

Example

If your 2010 income tax return is due on 7 July 2010 and you don't have a tax agent, you need to make your GST adjustment in the GST return which covers that date.

have a tax agent without an extension of time

return that covers the earlier of: 

  • the date your income tax return is filed, or
  • 31 March after the due date for your income tax return.
have a tax agent who has an extension of time to file your income tax return

period that covers the date your income tax return was actually filed.

 


Note
  • If an employee makes a contribution towards the expense, this is treated as a separate supply for GST purposes. Include the total expense amount in Box 11 on your GST return as usual, and show the employee contribution in Box 5.
  • Because the GST adjustment is based on the amount which is not deductible for income tax, organisations that are not liable for income tax, eg non-profit bodies and charities, do not need to make this adjustment.

How to calculate the adjustment for an entertainment expense

The table below explains how to calculate the adjustment for an entertainment expense, and provides an example.

Scenario:

The only entertainment expense in the 2010-11 tax year was a business lunch for clients. The lunch costs $230 including GST. The income tax return for the year ending 31 March 2011 is filed on 7 July 2011, and the business files six-monthly GST returns for the periods ending 30 April and 31 October.

The adjustment would be made in the GST return for the six months ending 31 October 2011. The whole $230 would have been included in Box 11 of an earlier GST return to claim the GST credit.


Step What to do Example
1 To work out the GST, multiply the expense by 3 then divide by 23. $230 x 3 divided by  23 = $30
2 Subtract GST from the entertainment expense. $230 - $30 = $200
3 Work out the amount that is not deductible for income tax (50%). $200 x 50% = $100
4
  • Multiply the non-deductible amount by 3 then divide by 23. This is your GST adjustment.
  • Show this GST adjustment on your GST adjustments calculation sheet (IR372) under "Entertainment expenses".
  • Transfer the total amounts to Box 9 on your GST return for the period ending 31 October 2011.
$100 x 3 divided by  23= $13.04

 

Important - GST rate change affecting time of supply

For the 2010-11 tax year, GST-registered persons can choose to use a special time of supply to account for their entertainment expenditure incurred before 1 October 2010 at the GST rate of 12.5%.

To make this election you must make the GST adjustment for all expenses incurred prior to 1 October 2010 in the GST return including the period 30 September 2010.

Entertainment expenditure incurred from 1 October 2010 will be accounted for at the GST rate of 15% and be adjusted for as above.

Example: Diana wants to claim entertainment expenses for the 2010-11 year. When preparing her GST return for the period ending 30 September 2010 she chooses to identify all the expenses that occurred before 1 October 2010. Diana makes an adjustment for the GST component of those entertainment expenses in her GST return that includes September 2010 at the rate of 12.5%

Diana will have to do a second adjustment for the GST on entertainment expenses claimed after 1 October until the end of her income year. The adjustment for the GST component of these expenses will occur in the return period in which the corresponding income tax return was either filed or became due, whichever is earliest.

Alternatively, Diana could have just made an adjustment based on a GST rate of 15% for all the expenses and included this in the GST return period which covers her corresponding income tax return due or filed date, whichever occurs earliest.

Goods and services used in making exempt supplies

You will need to make a GST adjustment for goods and services that are used to make exempt supplies if, over the next 12 months, your exempt supplies will be more than the threshold, which is the lesser of:

  • $90,000, or
  • 5% of your total taxable and exempt supplies to be made in the 12-month period.

At the start of each taxable period check to see if you have to make this adjustment.  

How to calculate a revenue adjustment

The table below explains how to calculate a revenue adjustment, and provides an example.

Scenario:

ABC Finance is adjusting office overheads as they include the cost of making exempt supplies. The company has a two-monthly taxable period. To work out a revenue adjustment, ABC Finance needs the following figures:

  • total expenses for overheads for taxable period: $1,331
  • expected value of exempt supplies for 12 months: $85,000
  • expected value of taxable supplies for 12 months: $370,000
  • total value of exempt supplies for a two-month period: $ 8,472, and
  • total value of all supplies for a two-month period: $ 70,600.

 

Step What to do Example
1 Work out the expected value of total supplies for 12 months. $85,000 + $370,000 = $455,000
2 Multiply the expected value of total supplies by 5%.

$455,000 x 5% = $22,750

 

Note

The expected value of the exempt supplies ($85,000) is less than $90,000 but more than 5% of the expected value of total supplies ($22,750), so an adjustment is needed. ABC Finance has to make an adjustment for the two-monthly taxable period.

3 To work out the percentage of total exempt supplies for the taxable period, divide the total value of exempt supplies for the taxable period by the total value of all supplies for the taxable period. $8,472 divided by $70,600 = 0.12 (12%)
4 Multiply the total expenses for overheads for the taxable period by the exempt percentage from Step 3. $1,331 x 12% = $159.72
5
  • Multiply the amount from Step 4 by 3 then divide by 23. This is your GST adjustment.
  • Show this GST adjustment on your GST adjustments calculation sheet (IR372) under "Goods and services used in making exempt supplies for annual or period-by-period adjustments".
  • Then transfer the total amounts to Box 9 on your GST return.
$159.72 divided by 9 = $17.75

How to calculate a capital adjustment

The table below explains how to calculate a capital adjustment, and provides an example.

Note

For capital item adjustments you must first check whether your exempt supplies are over the threshold. If they aren't you don't need to make an adjustment.


Scenario:

DEF Holdings, a manufacturer with a one-month taxable period, buys a reinforced concrete building for $1 million inclusive GST. DEF Holdings will be supplying some financial services (exempt supplies) from the building. To work out a revenue adjustment, DEF Holdings needs the following figures:

  • expected value of exempt supplies for 12 months: $100,000
  • expected value of taxable supplies for 12 months: $2,000,000
  • total value of exempt supplies for the one-month taxable period: $10,524
  • total value of taxable supplies for the one-month taxable period: $175,000.

 

Step What to do Example
1 Work out the expected value of total supplies for 12 months. $100,000 + $2,000,000 = $2,100,000
2 Multiply the expected value of total supplies by 5%.

$2,100,000 x 5% = $105,000

 

Note

The expected value of the exempt supplies ($100,000) is less than 5% of the expected value of total supplies ($105,000) but more than $90,000, so an adjustment is needed. DEF Holdings has to make an adjustment for the one-monthly taxable period.

3

To work out the percentage of total exempt supplies for the taxable period, divide the total value of exempt supplies for the taxable period by the total value of taxable supplies for the taxable period.

$10,524 divided by $175,000 = 0.06 (6%)
4 Use the lesser of the cost or the open (current) market value of the goods to be adjusted for exempt supplies for the taxable period. Call this L. The lesser of the cost or open (current) market value is $1,000,000.
5 Find out the straight line depreciation rate for the asset. Call this S. The general straight line depreciation rate for reinforced concrete buildings acquired before 19 May 2005 is 3%.
6
  • Multiply L by S.
  • Divide this sum by the number of taxable periods per tax year.
  • And, multiply by the percentage of exempt use.

$1,000,000 x 3% = $30,000

$30,000 divided by 12 = $2,500

$2,500 x 6% = $150

 

7
  • Multiply the amount from Step 6 by 3 then divide by 23. This is your GST adjustment.
  • Show this GST adjustment on your GST adjustments calculation sheet (IR372) under "Goods and services used in making exempt supplies for annual or period-by-period adjustments".
  • Then transfer the total amounts to Box 9 on your GST return.
$150 x 3 divided by 23 = $19.57

Other debit adjustments

Barters

Sometimes, goods and services are exchanged for other goods or services, or a combination of goods, services and money. This is called barter. 

If the exchange is for other goods and services, you must account for 3/23 of the open (current) market value of whatever you received in return for your supply.

When part of the exchange is in money, you must include:

  • 3/23 of the open (current) market value of the goods and services you received as an adjustment in Box 9 of your GST return, and
  • the money received in Box 5 of your GST return.

This rule applies regardless of your accounting basis.

Sometimes, when you receive goods and services in full (or part-exchange) for your supplies, you and the other person work out a dollar value for the exchange. A common example would be trade-ins. In this case, you must include this agreed value, plus any money involved, in Box 5 of your GST return.

Bad debts recovered

If you have had a GST deduction for a bad debt written off, and you later recover all or part of the debt, you must make an adjustment for the amount recovered.  

Include 3/23 of the amount recovered in in Box 9 of your GST return.

Example

Michael Jones, a surgeon, who uses the invoice basis, wrote off a bad debt of $2,500, and later recovered $1,600. Mr Jones must make an adjustment of $208.70 ($1,600 x 3 divided by 23) at the time of recovery, even if he has since changed his accounting basis.

Exported secondhand goods

If you claim a GST input tax credit for secondhand goods you have bought and later export these goods, you must account for the GST input tax credit you've claimed. This will be 3/23 of the full purchase price of the exported secondhand goods.

Insurance payments received

If you receive an insurance payment relating to your taxable activity, you must include the GST content as an adjustment in the GST return covering the time you received the payment.

Example

An insurance company issues a cheque to cover equipment damaged in a fire. Include 3/23 of the cheque value at box 9 of your GST return.

Adjustments for output tax at 12.5% GST rate

Credit and debit notes for invoices at GST rate of 12.5%

The GST rate on a credit or debit note must be the same as the rate that applied at the time of the original invoice. A credit or debit note issued for a transaction that was originally invoiced at 12.5% must have GST included at the rate of 12.5%.

If you issue a credit note or receive a debit note that includes GST at the 12.5% rate account for the GST component (the difference between the GST component on the original invoice and the actual GST charged) on the credit or debit note as an adjustment under "other" in box 9 of your GST adjustments calculation sheet (IR372).

Finance Leases

The supplier (lessor) of goods under a finance lease can elect for the GST rate on payments made after 1 October 2010 to remain at the rate of 12.5% provided all the following conditions are met:

  • the term of the finance lease began before 1 October 2010 and ends after 1 October 2010
  • the term of the finance lease is less than or equal to five years in length, and
  • the lessor advised the purchaser by no later than 31 October 2010 that the GST rate on payments after 1 October 2010 would remain at 12.5%

If you make or receive payments for a finance lease after 1 October 2010 that have GST included at 12.5% you need to account for these as adjustments on the return in which the payment is made or received. The GST-component of the payment can be calculated by dividing the amount of payment by 9.

If you are receiving the payment you include the adjustment under "other" adjustment in Box 9 of your GST adjustments calculation sheet (IR372).

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Date published: 29 Sep 2010

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