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:
- Business assets used privately
- Entertainment expenses
- Goods and services used in making exempt supplies
- Other debit adjustments
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:
- Calculate a one-off adjustment for business assets used privately
- Calculate a period-by-period adjustment for business assets used privately
- Calculate an annual adjustment for business assets used privately
- Calculate the private use of a business motor vehicle
What to do when you're registered for fringe benefit tax (FBT)
Companies and employers who are registered for fringe benefit tax (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 fringe benefit tax (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 one-ninth 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.
ExampleIf your 2007 income tax return is due on 7 July 2007 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 |
return that covers the earlier of:
|
| 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 2007 tax year was a business lunch for clients. The lunch costs $225 including GST. The income tax return for the year ending 31 March 2007 is filed on 7 July 2007, and the business files six-monthly GST returns for the periods after April and October.
The adjustment would be made in the GST return for the six months ending 31 October 2007. The whole $225 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, divide the expense by 9. | $225 divided by 9 = $25 |
| 2 | Subtract GST from the entertainment expense. | $225 - $25 = $200 |
| 3 | Work out the amount that is not deductible for income tax (50%). | $200 x 50% = $100 |
| 4 |
|
$100 divided by 9 = $11.11 |
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 taxable 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
NoteThe 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 taxable 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 |
|
$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 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
NoteThe 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 |
|
$1,000,000 x 3% = $30,000 $30,000 divided by 12 = $2,500 $2,500 x 6% = $150
|
| 7 |
|
$150 divided by 9 = $16.66 |
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 one-ninth 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:
- one-ninth 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 one-ninth 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 $177.77 ($1,600 divided by 9) at the time of recovery, even if he has since changed his accounting basis.
Exported secondhand goods
If you claim a GST input credit for secondhand goods you have bought and later export these goods, you must account for the GST input credit you've claimed. This will be one-ninth 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.
Find out more
- Calculate adjustments on purchases and expenses
- Calculate adjustments on fringe benefits
- Apportionment methods
- Depreciation rates
- GST on exempt, zero-rated and special supplies
Next steps
- Calculate your GST total
- Managing changes, corrections and disagreements
- Completing your final GST return
Date published: 15 Jul 2008
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