Consumption Tax Adjustment on the Change of Use of Fixed Assets

For income tax purposes, the cost of fixed assets is generally recognized over time through depreciation. Under Japan’s consumption tax rules, however, the input tax credit is generally determined when the asset is acquired. Because a fixed asset may be used for many years, its use or the business’s taxable sales ratio may change after acquisition. The rules therefore require an adjustment to the input tax credit in certain circumstances.

This rule applies to “adjustable fixed assets” refer to assets other than inventory, including buildings and their ancillary facilities, structures, machinery and equipment, vessels, aircraft, vehicles and conveyances, tools, implements, and fixtures, mining rights, and other assets, where the value of a single transaction unit is JPY1 million or more.

This newsletter focuses on adjustments arising from a change in use where the input tax credit was originally calculated under the individual attribution method (referred to as the “Itemized Method”).

Itemized Method

The itemized method can be used when taxable sales during a taxable period exceed JPY500 million, or when the taxable sales ratio for that taxable period is less than 95%. Under the method, if taxable purchases made domestically during that taxable period, can be clearly separated and identified as:

• Those required solely for the transfer, etc., of taxable assets;
• Those required solely for the transfer, etc., of assets other than taxable assets (hereinafter referred to as “transfers, etc., of other assets”); and
• Those required for both the transfer, etc., of taxable assets and the transfer, etc., of other assets,

then the total amount of the consumption tax specified below shall be deducted.

1. Consumption tax amount pertaining to taxable purchases required solely for the transfer, etc., of taxable assets
2. The amount calculated by multiplying consumption tax amount pertaining to taxable purchases required for both the transfer, etc., of taxable assets and the transfer, etc., of other assets, by the taxable sales ratio

Case 1: Change of Use from Taxable to Non-Taxable

In some cases, a business operator may change the use of an adjustable fixed asset that was purchased originally as being required solely for the transfer, etc., of taxable assets based on the itemized method. If, within three years from the date of the purchase, the business operator changes the use of the asset to being used for the transfer, etc., of assets other than taxable assets, an adjustment is made based on the original consumption tax recorded (hereinafter referred to as the “adjustable tax). The consumption tax on taxable purchases in the fiscal year where the change of use occurs is reduced as shown in the table below.

In this case, the amount remaining after such deduction shall be deemed to be the consumption tax amount attributable to purchases for the taxable period (Article 34, Paragraphs 1 and 2 of the Consumption Tax Act).

Example

If a company has purchased a building for JPY9 million with 10% consumption tax (JPY900,000) and has used it for business in April, 2024, if it changes the use to residential use from June, 2026, consumption tax of JPY300,000 would be deducted from the consumption tax on taxable purchases in the 2026 fiscal year.

Case 2: Change of Use from Non-Taxable to Taxable

If a business operator has made a taxable purchase of adjustable fixed assets within Japan, and none of the consumption tax paid (“adjustable tax amount") is deductible under the itemized method because it is deemed to be required solely for the transfer, etc., of other assets, and if the business operator changes the use of adjustable fixed assets for business activities related to the transfer, etc., of taxable assets within three years from the date of the purchase, the consumption tax amount shown in the list below shall be added to consumption tax on taxable purchase in each fiscal year.

In this case, the amount after such addition is deemed to be the consumption tax amount relating to purchases for the relevant taxable period (Article 35, Paragraph 1 of the Consumption Tax Act).

Example

In the case that a company has purchased equipment for JPY3 million with 10% consumption tax (JPY300,000) and has used it for social welfare services in September 2025, if it changes the use to business use from December, 2026, consumption tax of JPY200,000 would be added to consumption tax on taxable purchases in the 2026 fiscal year. 

Note

Since this provision applies only when the itemized method is used, it does not apply if the proportional lump-sum method is used at the time of acquisition of adjustable fixed assets.

Even when the itemized method is applied, this provision does not apply if adjustable fixed assets required for both "the transfer, etc., of taxable assets" and "the transfer, etc., of other assets" are repurposed or if adjustable fixed assets are repurposed as being required for both "the transfer, etc., of taxable assets" and "the transfer, etc., of other assets”. Furthermore, if adjustable fixed assets are repurposed after the end of the fiscal year in which includes the date passing three years from the acquisition, it is not subject to this provision. 

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