Calculate period-by-period adjustments of business assets used privately
When to use period-by-period adjustments
If you make period-by-period adjustments you make the private use adjustment in the GST return that covers the time that the assets were used privately.
There are two types of adjustments to make, which are:
- adjustments for revenue or expense items, and
- adjustments for capital or asset items.
Revenue or expense items
Revenue or expense items are items used up or sold continuously in the course of your taxable activity. They include such items as raw materials, electricity, insurance, telephone costs and running costs for a car.
Capital or asset items
Capital or asset items are items used to run the business but not expected to be used up in the normal operations of the business. Examples are motor vehicles, computers and machinery.
Calculating period-by-period adjustment when GST rate changes
On 1 October 2010 the GST rate changed from 12.5% to 15%. If the asset was applied to private use prior to 1 October 2010 then the period-by-period adjustment can be calculated at the rate of 12.5%, even if accounted for in a later return period.
To calculate a period-by-period adjustment at 12.5% multiply the asset’s market value by the private use percentage and divide by 9 (instead of multiplying by 3 then dividing by 23).
A GST registered person can also choose to make the adjustment at the new GST rate of 15% even if the change of use occurred prior to 1 October 2010.
How to calculate it
How to calculate the adjustment for revenue or expense items
The table below explains how to calculate the adjustment for the revenue or expense item and provides an example.
Scenario:
Belinda is an interior decorator and has a six-monthly taxable period. She buys 20 litres of paint costing $160 for her business, which includes a trade discount of $20. She uses some of the paint for her own home.
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Step
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What to do | Example | ||||||
|---|---|---|---|---|---|---|---|---|
| 1 | Work out the percentage of private use. | Belinda uses 4 litres of paint for private use = 20% | ||||||
| 2 | If the GST-inclusive cost of the items is different from the market value use the lesser amount. Call this L. Otherwise use the price. |
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| 3 | Multiply L by the percentage of private use from Step 1. | $160 x 20% = $32 | ||||||
| 4 |
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$32 x 3 divided by 23 = $4.17 The adjustment for Belinda to show on her calculation sheet is $4.17. |
Calculating the revenue or expense adjustment for period-by-period adjustments
How to calculate the adjustment for capital or asset items
There are different methods for calculating the capital or asset adjustments, depending on whether your business is a sole trader operation, partnership or trust.
How to calculate the adjustment for a capital or asset item for sole trader operations
The table below explains how to calculate the adjustment for the capital or asset item when your business is a sole trader operation, and provides an example.
Scenario:
Matt, who has a two-monthly taxable period, uses his promotional caravan for a month-long family holiday. The cost of the caravan was $28,000 but its present market value is $20,000.
| Step | What to do | Example |
|---|---|---|
| 1 | Work out the percentage of private use. | Private use percentage for the period is 50% (one-month holiday within the two-month GST period). |
| 2 | Compare the GST-inclusive cost of the item with the current market value. Call the lesser amount L. | The lesser of cost or market value is $20,000. |
| 3 | Find out the straight line depreciation rate for the asset. Call this S. | The general straight line depreciation rate for caravans acquired after 1 April 2005 is 10.5%. |
| 4 | Calculate L x S divide by amount of taxable periods per tax year x percentage of private use from Step 1. | $20,000 x 10.5% divide by 6 x 50% = $175 |
| 5 |
|
$175 x3 divided by 23 = $22.83
The adjustment for Matt to show on his calculation sheet is $22.83. |
How to calculate the adjustment for a capital or asset item for partnerships and trusts
When an associated person of a partnership or trust uses capital or asset privately, the adjustment is worked out as though the capital or asset item was leased to the associated person.
The table below explains how to calculate the adjustment for the capital or asset item when your business is a partnership or trust, and provides an example.
Scenario:
Wilson and Norton partnership owns a car valued at $20,000. The car is used privately by one of the partners, Norman Wilson. The partnership has two-monthly taxable periods.
Reminder: You need to make an adjustment for running costs.
| Step | What to do | Example | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | Work out the percentage of private use. | The vehicle logbook shows that private trips were 25% of the total travel. | ||||||||||||||||
| 2 | Find out the current market value of the asset. This is not the book value, but what it would fetch if it was sold. You must supply proof, such as a written valuation from the vendor, or a dated advertisement for a similar asset. | Current market value of the car, excluding GST, is $20,000. | ||||||||||||||||
| 3 | Work out the interest for three years on the current market value at 6%. |
$20,000 x 6% = $1,200 $1,200 x 3 years = $3,600 |
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| 4 |
Depreciate the current market value of your asset over a period of three years using the diminishing value depreciation rate. This will give you the residual value of your asset.
NoteIf purchased after 1 April 2005 then the diminishing value is 30% - if before 1 April 2005 then it is 26%. |
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| 5 |
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| 6 | Multiply the rental amount for the taxable period by the private percentage from Step 1. | $1,069.50 x 25% = $267.38 | ||||||||||||||||
| 7 |
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$267.38 x 3 divided by 23 = $34.88 |
Note
The interest rate used in Step 3 is the prescribed rate of interest used for FBT purposes, for the period 1 July 2010 to 30 September 2010. The rate varies and is set by Order in Council. The three years in the example represents average lease agreement terms. Associated person value of supply is the open (current) market value as specified under section 10 (3) of the Goods and Services Tax Act 1985.
Find out more
- Calculate a one-off adjustment for business assets used privately
- Calculate an annual adjustment for business assets used privately
- Calculate the private use of a business motor vehicle
Date published: 29 Sep 2010
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