ATO Interpretative Decision

ATO ID 2001/475 (Withdrawn)

Goods and Services Tax

• This ATO ID is a straight application of the law and does not contain an interpretative decision.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the entity, a business operator, entitled to an input tax credit under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it pays out a lease on cessation of its business?

Decision

Yes, the entity is entitled to an input tax credit under section 11-20 of the GST Act when it pays out a lease on cessation of its business.

Facts

The entity is a business operator.

The entity leased premises from a lessor for the purposes of carrying on its business.

The entity decided to sell its business and reached an agreement with the lessor on a settlement amount to pay out the lease. The entity paid the agreed consideration in the course of ceasing its enterprise.

The agreement for the payout (or early termination) of the lease is a separate agreement to the lease agreement.

The supply by the lessor, under the termination agreement, is a taxable supply under section 9-5 of the GST Act.

The entity was registered for goods and services tax (GST) until the day it ceased its business.

Reasons for Decision

An entity is entitled to an input tax credit under section 11-20 of the GST Act for any creditable acquisition that it makes.

Section 11-5 of the GST Act sets out the requirements that must be satisfied for an acquisition to be a creditable acquisition. An entity makes a creditable acquisition if:'

(a)

it acquires anything solely or partly for a creditable purpose;

(b)

the supply to it is a taxable supply;

(c)

it provides, or is liable to provide, consideration for the supply; and

(d)

it is registered, or required to be registered for GST.

In this case, the requirements in paragraphs (b), (c) and (d) are met. Therefore, the issue in this case is whether the entity makes the acquisition for a creditable purpose.

Under subsection 11-15(1) of the GST Act, an entity acquires a thing for a creditable purpose to the extent that the acquisition is made in carrying on its enterprise. The term 'carrying on' an enterprise is defined in section 195-1 of the GST Act to include doing anything in the course of the commencement or termination of the enterprise. Therefore, an acquisition made in the course of the commencement or termination of an enterprise is for a creditable purpose.

In this case, the entity is terminating the lease of its business premises in the course of the cessation of its enterprise. It has been released from its obligation to make further lease payments in exchange for the payment of the agreed amount. The acquisition by the entity in relation to the payout of the lease is for a creditable purpose.

Accordingly, the entity is making a creditable acquisition under section 11-5 of the GST Act, and therefore, is entitled to an input tax credit under section 11-20 of the GST Act, when it pays out the lease on cessation of its business.

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 9-5
   section 11-5
   subsection 11-15(1)
   section 11-20
   section 195-1

Keywords
Goods and services tax
GST supplies & acquisitions
Creditable acquisition
Creditable purpose

Business Line:  GST

Date of publication:  17 October 2001

ISSN: 1445-2782