To work out if your purchase is related to making a financial supply, you must consider whether there is a sufficient connection between the purchase and the financial supply, the timing of the purchase and how much the purchase relates to making a financial supply.
Connecting purchases and financial supplies
There is a sufficient connection between a purchase and a financial supply where you use or intend to use the purchase solely or partly to make a financial supply.
Purchases can be either of the following:
- directly related to making a particular supply (for example, brokerage)
- indirectly related to making a supply (for example, overheads).
As long as there is a sufficient connection between a purchase and the making of a particular financial supply, you treat the purchase as a financial acquisition whether it is directly or indirectly related to the making of that financial supply and regardless of the end purpose of making that financial supply.
Overhead purchases such as rent, gas, electricity and fittings, although not directly connected with making individual supplies, may relate indirectly to making those supplies.
You must allocate the overhead purchases indirectly related to making supplies according to:
- their character
- your apportionment method.
See also:
- GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose?
- GSTR 2003/9 Goods and Services Tax: financial acquisitions threshold.
- GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies.
Timing of purchases and financial supplies
The timing of purchases you use to make financial supplies is important. This is because a purchase relates to making a financial supply if you use it to do either of the following:
- make an actual financial supply
- plan to make or consider making a financial supply.
Any of the following may show there is a relationship between a purchase and a financial supply you make:
- a business plan
- an accounting budget
- previous experience using similar purchases
- correspondence with third parties about a proposed financial supply, for example
- a mandate
- letter of engagement
- resolution passed by the board of directors
- activities (such as ordering a prospectus to be printed).
However, if a purchase is clearly for making a financial supply, it is a financial acquisition even if the relationship between the purchase and the financial supply is not shown in any of the indicators above.
Changing your plans to float
If you change your plans on whether or not to float you work out the financial acquisitions threshold differently from the time you make that decision.
If your plan was to use your purchase to make supplies other than financial supplies, but you later used the purchase to make financial supplies, your purchase becomes a financial acquisition from the time you decide to use the purchase to make financial supplies.
In these circumstances do not recalculate the financial acquisitions threshold tests you did in the tax periods before you changed your plans on how to use the purchase. The financial acquisitions threshold tests are based on your circumstances at that time. Subsequent events do not change the outcome of financial acquisitions threshold tests you did before.
If the way you use a purchase changes from the way you planned to use it, you may need to make an adjustment for a change in creditable purpose.
See also:
How to treat progressive or periodic purchases
Under GST law there are special rules for treating progressive or periodic purchases. Those rules say that supplies and purchases you make periodically or progressively in return for payments that are also made periodically or progressively are treated as separate supplies or purchases.
If you purchase a financial acquisition over time and the special rules apply, you treat each progressive or periodic purchase as if each is a separate purchase.
In these circumstances, when you are working out whether you exceed the financial acquisitions threshold for a particular tax period, only include the amount of GST credits you can claim for each purchase during that time.
See also:
How much of a purchase relates to financial supplies
A purchase may relate to making any of the following or a combination of the following types of supplies:
- input taxed supplies
- taxable supplies
- GST-free supplies.
To work out the amount of input tax credits you can claim on your purchase, you must work out how much of your purchase relates to a particular supply you make.
You can use one of the following methods or a combination of these:
The methods you use must be fair and reasonable and appropriately reflect how you use a purchase.
We prefer that you use direct attributions and direct estimations, but where it is not possible to use these methods you may use an indirect estimation that is fair and reasonable.
See also:
- GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies
Direct attribution
A direct attribution method identifies a direct connection between your purchases and supplies or other business activities on a fair and reasonable basis.
Direct estimation
This method:
- estimates how much a purchase is directly connected to supplies
- usually matches the cost of certain purchases solely to particular activities.
You can also use a direct estimation method to allocate mixed purpose costs to particular supplies according to an internal cost allocation system. Such a system could be one that allocates costs to any of the following:
- specific transactions, product lines, functions or activities
- cost centres, profit centres or business divisions.
If you already use a system like this as part of your accounting processes you may want to take the same approach to apportion for GST.
Indirect estimation
This method estimates how much a purchase is connected to a supply by taking into account factors or characteristics that are not directly related to the way you use the particular purchase.
General revenue formula
One method you can use is the general revenue formula.
You might use the general revenue formula where you may have to estimate how much the cost of overheads, such as gas and electricity, is connected to a supply. You could work out the proportion of your input taxed and non-input taxed income and use that information to work out how to allocate your overhead expenses.
For example, the general revenue formula is an appropriate method for Cindy's business. Cindy works out:
- that 45% of her company's income is from input taxed activities
- that 55% is from non-input taxed activities.
Cindy estimates that 45% of the cost of her overheads is connected with making input taxed supplies.
You can also use the general revenue formula where you make a large number of small purchases and it is not cost effective to measure how you use each individual purchase.
Other indirect estimation methods
You may use other indirect measures where the general revenue formula is not appropriate, for example:
- number of transactions
- floor space
- profits
- hours.
Use the measure that is the most accurate in showing the relationship between your activities and the purchase. The way you work this out must be fair and reasonable.