GST core
Change in creditable purpose
A change in creditable purpose happens when the actual or intended use of a purchase turns out to differ from what you claimed, and a GST adjustment may be needed on your BAS.
When you buy something, you decide how much of it is for a creditable purpose, and that decides the GST credit you claim. If the actual use later turns out to be different, or if your intended use changes, the credit you claimed may have been too high or too low. A change in creditable purpose is the technical term for the difference, and the law may require you to make an adjustment on your BAS to correct it.
Changes can be an increase or a decrease. If you first claimed 50 per cent of a purchase and later use it fully for taxable business activity, you may be entitled to an additional credit. If you claimed full credit but later start using the item privately or to make input-taxed supplies, you may need to repay some of the credit. The adjustment goes in the BAS for the period when you become aware of the change, in line with the rules.
The rules are tied to the amount of the purchase. Small purchases may have limited or simplified adjustment requirements, while larger ones may require adjustments over several adjustment periods, which are usually spread over a number of years. The precise thresholds and the number of periods are set out in the GST law and may change, so check with the ATO for the current settings.
A change in creditable purpose can occur in many ways. A registered business might start renting out part of a building as residential accommodation, a business might switch from taxable to input-taxed activity, or an asset might be moved from business to private use. Business owners often find that significant changes in activity prompt a review of their past claims.
Common misunderstandings include thinking that no further action is needed once the original BAS has been lodged, or that an adjustment is only for assets. The rules can also apply to services and other acquisitions where use differs from the original intention. Another mistake is not keeping records of the original claim, which makes it hard to calculate the adjustment later.
Keep a register of the larger items on which you claimed credits, along with the percentage you used and the reasoning. Review it at the end of each financial year. This content is general information only, so confirm your situation with the ATO or a registered tax professional.
Worked example
A registered business buys equipment for $22,000 including GST ($2,000 GST) and claims the full credit, expecting wholly taxable use. In a later period, 25% of its use shifts to input-taxed activity. The credit relating to that portion would be $2,000 x 25% = $500, subject to the adjustment rules, and the business may need to make a decreasing adjustment of up to $500 on its BAS.
Practical tips
- Keep a register of larger purchases, noting the percentage claimed, so you can spot a change in use.
- Review your claims when your business activities change, such as starting residential rentals or private use of assets.
- Ask your accountant to check for adjustments as part of your year-end review, especially after buying or selling property.