Edited version of private ruling

Authorisation Number: 1011554157913

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Ruling

Subject: GST credits on fit out of vessel

Are you entitled to an input tax credit on the fit out of a vessel in Australia which was subsequently exported for use in an enterprise outside Australia?

You are entitled to an input tax credit on the fit out of a vessel if you are carrying on an enterprise at the time the acquisitions were made. However, the operation of the 'four-year rule' restricts your entitlement to any credit to acquisitions.

Facts

You left Australia to reside in a country outside Australia (another country).

As part of the consideration for the sale of a business in Australia you received a vessel from the new owners of the business.

You have supplied us with a copy of a letter, jointly signed with the new owners of the business, confirming that the sale contract to you was fulfilled.

After receiving the vessel you contemplated buying a business in another country. You advised that prior to commencing to operate the business:

· You reviewed the previous owners accounting/bank records.

· You did not need to obtain any business finance.

· You applied to become residents of another country.

· You paid for all the appropriate business licences required to operate a business in another country.

You decided you could use the vessel in the new business in another country. Accordingly, you completed its fit out.

You advised that the vessel was fitted out to be able to use it in the business.

You have supplied us with tax invoices for the items you acquired in completing the fit out.

You commenced operating the business in another country.

You exported the vessel to another country and immediately commenced using it in the business. It is used solely in your business.

Detailed reasoning

Entitlement to input tax credits

Under section 11-20 of the GST Act you are entitled to the input tax credit for any creditable acquisitions that you make.

A creditable acquisition is defined in section 11-5 of the GST Act as:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

* denotes a term as defined in section 195-1 of the GST Act.

Where you make an acquisition that satisfies the requirements of section 11-5 of the GST Act you are entitled to the input tax credits for the acquisition.

Firstly, the things you acquired on the fit out of the vessel appear to be a 'taxable supply' as the tax invoices you supplied showed the amount payable as a GST inclusive total. Also, the tax invoices were addressed to you and you advise that you provided consideration for the supplies shown on these tax invoices. Accordingly, you satisfy paragraphs (b) and (c) of section 11-5 of the GST Act.

We shall now consider whether you satisfy paragraphs (a) and (d) of section 11-5 of the GST Act.

Acquired for a creditable purpose

Under section 11-15 of the GST Act you acquire a thing for a 'creditable purpose' to the extent that you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to the making of input taxed supplies, or is of a private or domestic nature.

'Enterprise' is broadly defined in the GST legislation and includes activities where you are engaged in a business. 'Carrying on an enterprise' includes anything done in the course of the commencement or termination of the enterprise.

Whether you are 'carrying on an enterprise' is a question of fact. You advised that the vessel was fitted out with the purpose of using it solely in the business which you commenced operating in another country. Further, you advised that the vessel was not used for private purposes. Also, the vessel will not be used for making input taxed supplies.

Accordingly, the things you acquired during the fit out of the vessel were acquired in carrying on your enterprise and you satisfy paragraph (a) of section 11-5 of the GST Act.

Registered or required to be registered

Division 23 of the GST Act sets out conditions on who is required to be registered and who may be registered for GST.

Section 23-5 states:

23-5 Who is required to be registered

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *annual turnover meets the *registration turnover threshold.

Section 23-15 of the Act provides that the annual registration turnover threshold amount is $75,000 unless you are a non-profit body which is $150,000.

The annual turnover threshold is the sum of values that you have made or are likely to make during a 12 months period of all supplies that are connected with Australia. This threshold excludes supplies that are input taxed, not for consideration, or are not made in connection with an enterprise that you carry on.

As the business you operate in another country does not make any supplies connected with Australia you are not required to be registered for GST under section 23-5 of the GST Act.

However, if you are carrying on an enterprise, you may choose to be registered for GST even if your turnover does not reach the annual turnover threshold amount.

Section 23-10 of the GST Act states:

23-10 Who may be registered

You may be *registered under this Act if you are carrying on an *enterprise (whether or not your *GST turnover is at, above or below the *registration turnover threshold).

You may be *registered under this Act if you intend to carry on an *enterprise from a particular date.

In your situation you may choose to apply for GST registration as, even though the business is in another country, you are still carrying on an enterprise.

We now need to consider the 'particular date' from which you are carrying on an enterprise. Subsection 25-5(1) of the GST Act states that:

25-5 When the commissioner must *register you

1. The Commissioner must register you if:

a) you have applied for registration in an *approved form; and

b) the Commissioner is satisfied that you are *carrying on an *enterprise, or you intend to carry on an enterprise from a particular date specified in your application.

Subsection 25-5(3) of the GST Act further states that:

(3) The Commissioner must notify you in writing of any decision he or she makes in relation to you under this section. If the Commissioner decides to register you, the notice must specify the following:

(a) the date of effect of your registration;

(b) your registration number;

(c) the tax periods that apply to you.

The Commissioner must decide the date from which your registration takes effect, or took effect. Under paragraph 25-10(1)(c) of the GST Act this date of effect must not be earlier than the day specified in your application for registration.

Similar to the earlier discussion about 'carrying on an enterprise' being a question of fact, the particular date on which you are regarded as commencing to carry on that enterprise is also a question of fact and degree.

You may determine that your activities in fitting out the vessel were done in the course of the commencement of your business.

If so, you could make an application in the approved form requesting the commencement date for GST registration as the date you started acquiring things for the fit out.

Where the Commissioner approves that date of registration you will be registered for GST and thus satisfy paragraph 11-5(d) of the GST Act.

For further information about the procedures for GST registration please refer to the ATO Fact Sheet: GST registration information for a non-resident. It can be found on our website at www.ato.gov.au by entering the title of the document in 'Search').

(Please note that if you are dissatisfied with our decision on the date of effect of your registration you are entitled to seek a review of that decision)

Therefore, in these circumstances you may be entitled to an input tax credit on the fit out of the vessel for those things acquired after the date of effect of your GST registration.

However, we also need to consider two further matters. Firstly, as the acquisitions you made in respect of the fit out of the vessel were made prior to 1 July 2007 the legislation in place at that time may affect your entitlement to an input tax credit for the fit out of the vessel. Secondly, there is a four-year time limit in which an input tax credit may be claimed (four -year rule).

We shall now consider each of these matters:

Pre 1 July 2007 acquisitions relating to a 'boat'

Prior to 1 July 2007 when the legislation arising from the 2006 Budget changes came into effect, some limitations were placed on 'creditable acquisitions'. Division 69 of the GST Act, as it was prior to 1 July 2007, excluded 'non-deductible expenses' from being creditable acquisitions. Non-deductible expenses were defined in subsection 26-50(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as follows:

You cannot deduct under this Act a loss or outgoing to the extent you incur it:

a. to acquire ownership of a *leisure facility or boat; or

b. to retain ownership of a *leisure facility or boat; or

c. to acquire rights to use a *leisure facility or boat; or

d. to retain rights to use a *leisure facility or boat; or

e. to use, operate, maintain or repair a *leisure facility or boat; or

f. in relation to any obligation associated with your ownership of a *leisure facility or boat; or

g. in relation to any obligation associated with your rights to use a *leisure facility or boat.

However, there are exceptions (see subsections (3),(4),(5),(6), and (8)).

The previous subsection 26-50(5) of the ITAA 1997 outlined the exceptions in relation to 'boats' as follows:

Subsection (1) does not stop you deducting a loss or outgoing for a boat if at all times in the income year you:

a. hold the boat as *trading stock for sale in the ordinary course of a *business that you carry on; or

b. use the boat (or hold it) mainly for letting or hire in the ordinary course of a business that you carry on;

c. use the boat (or hold it) mainly for transporting for payment in the ordinary course of a *business that you carry on, the public or goods;

d. use the boat for a purpose that is essential to the efficient conduct of a *business that you carry on.

Therefore, in your case, it is necessary to consider whether the expenditure incurred on a 'boat' (the vessel) would be a non-deductible expense by virtue of being not deductible under Division 8 of the ITAA 1997 because of section 26-50 of that Act. Such expenditure would be non-deductible unless one of the exceptions in subsection 26-50(5) of the ITAA 1997 applied.

Prior to 1 July 2007, the common element for the exceptions under subsection 26-50(5) of the ITAA 1997 was that the boat was used, or held, in the course or conduct of a business that a taxpayer 'carries on'. Therefore, in order to determine whether this exception applies to your situation, consideration first needs to be given as to whether you were carrying on a business.

Taxation Ruling TR 2003/4 Income Tax: Boat Hire Arrangements discusses when the taxpayer's activity amounts to the carrying on of a business in relation to a boat for the purposes of subsection 26-50(1) of the ITAA 1997. It provides that the following general indicators, when taken together, provide a guide to determine if your boat hire activity amounts to the carrying on of a business:

· significant commercial purpose or character

· prospect of profit

· activities of the kind carried on in a similar manner to those of ordinary trade

· organised, systematic, business-like manner

· repetition and regularity

· the size and scale of the activity.

The following comments are made on each indicator from TR 2003/4 based on the information you have provided:

Significant commercial purpose or character

From the information provided, you have worked in the industry in the past.

You contemplated buying a business in another country. You had reviewed the accounting/bank records of the previous owners of the business and were satisfied with the commercial prospects of the business.

You envisaged that the business could grow with the addition of a second boat decided to fit out the vessel suitable for use in your business. It was used in the business from the date of its arrival in another country, which was shortly after your operations commenced.

Prospect of profit

While you have not provided evidence of the expected prospect of profit you have been running the business continuously.

You have not needed to cover the costs of any business finance.

Activities of the kind carried on in a similar manner to those of ordinary trade

The business which you intended to carry on is the business of chartering two vessels. You advise that the vessels are not used for any private purposes.

You had obtained all the relevant business licences required to operate a business and had applied to become residents of another country so you could operate the business.

Organised, systematic, business-like manner

At the time of commencing the fit out of the vessel there was little evidence of how your business was organised. All your activities were prior to the commencement of the business.

Repetition and regularity

At the time of commencing the fit out of the vessel you had not commenced trading. Therefore, you could not display repetition and regularity in your business conduct and this indicator is not determinative.

However, subsequent activities show that both vessels were utilised in the business.

The size and scale of the activity

At the time of the fit out of the vessel started you envisaged that both vessels could be utilised in the business. When it commenced and since that time this has proven to be the case.

Therefore, the size and scale of your activities are indicators that a business was being carried on.

Analysis

Accordingly, as you would have satisfied the majority of the indicators in TR 2003/4, the overall general impression gained is that your activities do amount to the carrying on of a business.

As you satisfy the exception in paragraph 26-50(5)(b) of the ITAA 1997 because you are carrying on a business, we consider that the expenses that relate to the refit of the vessel are deductible under subsection 26-50(1) of the ITAA 1997. Therefore, the acquisitions that relate to the refit of the vessel will not be regarded as non-deductible expenses as defined in subsection 69-5(3) of the GST Act.

Accordingly, Division 69 of the GST Act, as it was prior to 1 July 2007, does not operate to preclude your entitlement to claim input tax credits for acquisitions relating to the fit out the vessel.

Four-year rule

The Taxation Administration Act 1953 (TAA) sets a four-year time limit on which an input tax credit may be claimed. Broadly, these provisions of the TAA require that any retrospective claim for a refund of GST must be made on or before the fourth anniversary of the tax period to which the acquisitions are attributable.

A retrospective claim for an input tax credit is covered by subsection 105-55(1) of the TAA, which states:

You are not entitled to a refund, other payment or credit to which this subsection applies in respect of a *tax period or importation unless:

(a) within 4 years after:

(i) the end of the tax period; or

(ii) the importation,

as the case requires, you notify the Commissioner (in a *GST return or otherwise) that you are entitled to the refund, other payment or credit; or

(b) within that period the Commissioner notifies you (in a notice of assessment or otherwise) that you are entitled to the refund, other payment or credit...

To meet the requirements of subsection 105-55(1) of the TAA, a notification in respect of a tax period must be received on or before the fourth anniversary of the end of the relevant tax period. For example, if an entity has overpaid GST on a taxable supply it made on 12 November 2006 and the tax period to which the supply is attributable ends on 30 November 2006, the notification must be received by the Commissioner on or before 30 November 2010.

The ATO's view on the meaning of the phrase 'notify the Commissioner' is discussed in Miscellaneous Tax 2009/1: Miscellaneous taxes: notification requirements for an entity under section 105-55 of Schedule 1 to the Taxation Administration Act 1953 (MT 2009/1). Paragraphs 11 - 12 of MT 2009/1 states:

11. There is no specific form that is required for a notification for the purposes of section 105-55. However, the notification should be in writing and must be received on or before the fourth anniversary of the end of the relevant tax period or the importation.

12. The following are valid notifications for the purposes of section 105-55:

· an activity statement or revised activity statement which includes the relevant entitlement in the relevant tax period;

· an application for a private indirect tax ruling, an objection or other correspondence from an entity that asserts the entity has an entitlement and:

o provides a description of the nature of the entitlement to a refund, other payment or credit, which is sufficient to bring to the Commissioner's attention the basic factual and legal basis for the entitlement; and

o specifies the tax period(s) or importation(s) to which the entitlement relates.

In terms of notifying the Commissioner we would regard your letter as a valid notification for the purposes of section 105-55 of the TAA.

In your case the things for the fit out were acquired between X and Y. If you determine that your enterprise commenced in X and the Commissioner approves this as the date of effect of your GST registration, the relevant quarterly tax periods for the purposes of subsection 105-55(1) will be those ending on A and B.

This means that you will only be entitled to an input tax credit on those things you acquired for the fit out that were attributable (see below) to the quarterly tax period ended C. However, you will not be entitled to an input tax credit on those things you acquired for the fit out that were attributable to the quarterly tax period ended D or any earlier quarterly tax period.

Attribution rules

You are eligible to elect to use either a cash or non-cash accounting basis if your turnover is less than $2 million.

If you elect to account for GST on a cash basis your acquisitions are 'attributable' to the tax period you pay for them.

Where you elect to account for GST on a non-cash basis your acquisitions are attributable to either:

· the first tax period in which an invoice is issued in relation to the sale

· the first tax period in which any payment is made.

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