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  • Decision-making methodology

    To determine the amount of GST credits that can be claimed, you should:

    • identify, capture and process GST on acquisitions that wholly relate to supplies that are not input taxed
    • determine and apply any concessions for GST on acquisitions related to input taxed supplies (for example, reduced input tax credits)
    • apportion GST on acquisitions partly related to the making of input taxed supplies.

    This information is primarily concerned with GST on acquisitions that are partly related to making input taxed supplies.

    The method for apportioning GST on acquisitions partly related to input taxed supplies requires you to analyse a number of factors, where no single factor is likely to be determinative. It is important that:

    • you consider all factors to form a balanced view
    • you document each factor
    • the reasons for your conclusion record the influence and weighting of each factor.

    This information will help you to identify, record and analyse the possible methods available and to document your reasoning for accepting or rejecting methods under the test for fairness and reasonableness.

    In addition to the relevant rulings, this will help you to achieve an outcome:

    • that will be fair and reasonable
    • which recognises and explains the relationship between acquisitions and their intended or actual use.

    Find out about:

    Factors to consider

    In choosing your methodology, you should:

    • keep in mind that the purpose and outcome of the methodology is to measure the relationship between acquisitions and their intended or actual use
    • be satisfied that the basis of apportionment makes sense in the context of your enterprise
    • ensure there is a documented description of the business that demonstrates the intended or actual use of the acquisitions in a practical business context
    • ensure you consider all relevant information and document it
    • ensure that you do not consider irrelevant information
    • consider alternative methods and assess them to determine those which are fair and reasonable and those that are not
    • be conscious of the compliance cost of any method, having regard to the context (size, structure and nature) of your business
    • be responsive to any changing circumstances in your business that may impact on whether your chosen methodology continues to be fair and reasonable.

    Assessing whether the method is fair and reasonable

    In choosing a fair and reasonable method, our experience in reviewing methodologies is helpful. We consider that these questions and factors are important in assessing whether a chosen method is fair and reasonable:

    • Is the information accurate and complete?
    • Is the information likely to change in the near future?
    • Can you fully explain your business activities and consumption of acquisitions and resources? Have you documented this?
    • Have you accurately determined the classification of supplies?
    • Are there any distorting elements in the methodology
    • Do you apply the method consistently?
    • Did you use assumptions in the methodology and can they be supported? Do they continue to be relevant over time?
    • Is the method overly complex and burdensome and does it cause unnecessary compliance costs?
    • Is the method sufficiently sophisticated and appropriate to the nature, size, complexity and resourcing of your business?
    • Is the outcome consistent with your documented understanding of the business activities and relationship or connection between acquisitions and supplies made?

    Comparing different methods

    While it is feasible that a single method can be identified and considered fair and reasonable, a comparison of different methods will demonstrate that you made a more balanced judgment.

    This table will help you to do this. It will also record and address the relevant questions and factors so that you can determine and demonstrate which methods are fair and reasonable. We also provide:

    Example of how to establish your method is fair and reasonable
    (include a brief description and formula for each method).

     

    Method 1

    Method 2

    Method 3

    Method 4

    Describe the relationship between the supplies made, method and actual or intended use of the acquisition (in general this factor will carry the greatest weighting)

     

     

     

     

    Does the method require adjustment or adaptation to deal with any distortive factors? If so how and why?

     

     

     

     

    What are the costs of compliance and administration of the method and are they reasonable in the context of the business (taking into account resourcing and materiality of GST in question)?

     

     

     

     

    How is the method determined and is it readily measurable?

     

     

     

     

    Why is the method fair and reasonable (or not), taking into account relevant factors, including those listed?

     

     

     

     

    Common methods used

    There are no specified methods that should be used. However, the following are some of the more common methods.

    Common methods

    Method

    Description

    Method may be appropriate when:

    Time spent

    The total time spent in activities that relate to input taxed supplies compared to the time spent in activities that relate to other supplies, for example staff time or computer processing time as evidenced with time sheets.

    Acquisitions related to the relevant supplies are used in proportion to staff time or computer time and where the time spent provides a reasonable measure of business activities.

    Transaction count

    The ratio of number of input taxed supply transactions compared to number of taxable and GST-free supply transactions.

    Where the costs related to the making of each type of supply are the same or similar, and you can identify the volumes of transactions for each type of supply made.

    Staff head count

    The ratio of staff used on making input taxed supplies compared to staff used on making taxable and GST-free supplies.

    Acquisitions are used in proportion to the number of staff on making a particular nature of a supply.

    Floor space

    The ratio of floor space used in making input taxed supplies compared to floor space used in making taxable and GST-free supplies.

    When acquisitions can be attributed to specific areas (floor space) of premises and specific activities, making the supply.

    Cost

    The ratio of costs wholly attributable to input taxed supplies compared to costs wholly attributable to taxable and GST-free supplies.

    When there are wholly attributable acquisitions incurred in making both input taxed and taxable and GST free supplies.

    A significant amount of acquisitions can be directly attributable to making either input taxed supplies or non-input taxed supplies, and the ratio between the two is likely to also reflect the usage of other (non- attributable) acquisitions across the business.

    Input tax

    The ratio of GST on costs wholly attributable to input taxed supplies compared to GST on costs wholly attributable to taxable and GST-free supplies.

    When there are wholly attributable costs incurred in making both input taxed and taxable and GST free supplies.

    Asset value

    The ratio of assets used to make input taxed supplies compared to assets used to make taxable and GST-free supplies.

    When there is a consistent relationship between the use of acquisitions and assets and where the assets appropriately reflect the input taxed, taxable and GST-free supplies made.

    Revenue

    The ratio of input taxed income or revenue compared to taxable and GST-free income or revenue.

    Where acquisitions made in generating revenue is proportionate to the revenue for that supply, across a range of different types of supplies.

    See also:

    Consider the use of existing cost allocation methods that would reflect your business's practical allocation of acquisitions between business functions. This may need to be refined (or indeed ignored) if it is not a relevant driver or measure of usage of an acquisition. For example, the cost of certain acquisitions may be borne by one business unit when in fact some or all of the things acquired are used in another business unit.

    A number of methods may be fair and reasonable

    Your analysis may identify a range of different methods that are:

    • fair and reasonable
    • not fair and reasonable.

    You can use any method that is fair and reasonable. The fact that some methods may provide a higher rate of recovery than others is not of itself an indicator that they are not fair and reasonable.

    Where it is not clear whether a method is fair and reasonable, you should carefully consider whether it should be used.

    You should also monitor and review your methods on an ongoing basis and also have regard to the actual acquisitions they are being applied to. This includes considering whether your chosen method needs to be adapted in any way to ensure it appropriately reflects usage of the acquisitions. For example, if using a revenue method, it may be necessary to weight or adjust figures to allow for different revenue/cost ratios across the business, which otherwise may lead to distortions.

    Details of how to establish your method is fair and reasonable

    You will be able to make informed decisions and appropriate choices of particular methods if you record detailed and accurate descriptions. It will also help you to document your evidence to support your choices.

    Details of decision-making methodology

    Factor

    Commentary on factor

    Describe the relationship between the supplies made, method and actual or intended usage of the acquisition

    This question and the answer will ordinarily be the most important one. The description of the relationship between the thing acquired and the supplies made will show in a practical and physical way how the thing acquired is used or consumed by the business. So it is important that in answering this question you:

    • capture the activities of the business, how that information has been obtained and describe the acquisitions used
    • describe the relationship between the acquisitions and the activity, the supplies to be made and the method
    • describe the usage from physical, economic and profitability perspectives.

     

    Does the method require adjustment or adaptation to deal with any distortive factors? If so how and why?

    Record here if the method produces any apparent distortions and if so how those distortions are managed.

    What are the costs of compliance and administration of the method and are they reasonable in the context of the business (taking into account resourcing and materiality of GST in question)?

    Take into account the compliance costs of applying the methodology and consider if this cost is appropriate in the context of the outcomes achieved and the complexity and diversity of the business.

    How is the method determined and is it readily measurable?

    Examine and record the process for calculating the method and assess its reliability. Methods that rely on existing cost allocation methods used by the business, may be more reliable and measurable than ones designed and implemented solely for the purposes of GST.

    Why is the method fair and reasonable (or not), taking into account relevant factors, including those listed?

    Document your conclusions and the reasons for making the decision. Reasons will include commentary on the information recorded against the other questions and any other relevant factors.

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      Last modified: 30 Jul 2019QC 17480