If you have claimed GST on an asset with mixed business and personal use, you could face an unexpected GST liability when selling it. However, a one-time transitional rule under section 91 of the GST Act provides a unique opportunity to opt the asset out of the GST system. This rule is only available until 31 March 2025, making it critical to act now if you qualify.
Understanding the GST Obligation on Asset Sales
When GST is claimed on the purchase of an asset, GST is generally payable on its full sale price if the asset is later sold. This can result in a significant tax liability, particularly for appreciating assets like property.
Even if the asset was only partly used for business purposes, once GST is claimed, the entire asset becomes subject to GST upon sale. In some cases, there may be an offset from GST input credits, but this often does not fully cover the amount owed, leaving the seller out of pocket.
To help address this issue, the New Zealand government introduced a temporary opt-out option through a transitional rule. This allows eligible taxpayers to remove certain assets from the GST system, preventing a future GST liability upon sale.
Who Can Use the Transitional Rule?
To qualify, all four conditions must be met:
- The asset must have been acquired before 1 April 2023.
- The asset was not purchased primarily for making taxable supplies.
- The asset was not primarily used for making taxable supplies.
- GST was previously claimed on the asset, or the asset was acquired as a zero-rated supply.
If you meet these criteria, you can elect to apply the transitional rule and avoid a future GST liability when selling the asset.
Common Assets That Should Be Reviewed
The transitional rule is particularly relevant for assets that have a mix of business and private use. Consider whether you have claimed GST on any of the following:
- Home office within a private residence.
- Holiday home that was occasionally rented out but primarily used for personal purposes.
- Mixed-use business property, where some areas are used for taxable activities and others for GST-exempt or private purposes.
Even if your asset is not listed above, if GST was claimed on a portion of the purchase and the asset is mainly used for non-taxable purposes, it is worth reviewing your position to determine if opting out is beneficial.
How to Elect the Transitional Rule
To take advantage of this opportunity, you must notify the Commissioner of Inland Revenue before 1 April 2025. The recommended process is:
- Prepare a formal letter stating:Your election to apply the transitional rule.The asset details.The effective election date.
- Submit the letter via myIR by 31 March 2025.
Failure to submit this election before the deadline means that from 1 April 2025, the sale of any business-use asset where GST was previously claimed will be subject to GST on its full sale price.
What If You Don’t Act?
If no election is made:
- GST will apply to the entire sale price of the asset.
- This could result in a substantial tax liability.
- The transitional rule will no longer be available after 31 March 2025.
Final Considerations
- Calculate the potential GST impact now to determine if opting out is financially beneficial.
- No extensions will be granted beyond the 31 March 2025 deadline.
- If GST is payable upon sale and you cannot afford to pay it immediately, Inland Revenue may offer an instalment plan to assist with payments.
The GST transitional rule is a one-time opportunity to remove certain assets from the GST system and avoid a potentially large GST bill when selling. If you previously claimed GST on an asset that is primarily used for non-business purposes, now is the time to review your situation and take action.
Given the complexity of GST rules and the financial implications, consulting with a tax professional is strongly recommended to ensure you make the right decision before the deadline.
The content in this blog is intended to provide general insights and should not be regarded as professional advice. Each business situation is unique, and we recommend consulting with a professional for specific guidance. At Black Arrow Business Studio, we specialise in accounting and consulting services designed to support your business’s growth and success. Feel free to contact us for expert advice and customised solutions.
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