Edited version of private ruling

Authorisation Number: 1011588848530

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Ruling

Subject: GST treatment of supplies

Question 1

Can a specified method of calculation be used to calculate the amount of input tax credit (ITC) in relation to second hand goods acquired from unregistered persons? If not, what method should be used?

Answer

Yes.

Question 2

If yes to Question 1, can we claim the ITC for the tax periods 1 July 2007 to 30 June 2010 in our next activity statement?

Answer

Yes.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for Goods and services tax (GST).

You purchase second hand goods and cut them into parts which are sold to customers. You claim the GST credits on these acquisitions on a quarterly basis.

A majority of your sales are GST-free Exports.

Domestic sales constitute taxable supplies with GST being charged by you and reported on your quarterly activity statements (AS).

You are not able to use the direct method nor the global accounting method to establish the ITC entitlement on second hand goods that are subsequently divided for re-supply on the basis that:

§ you have purchases from private sellers that are below $300 as well as above $300.

§ once a good is divided up, there is no tracking of the individual parts.

You would like to use a percentage of taxable supplies on total annual income as a reasonable basis for calculating the second hand goods GST credits claim. This way you would ensure that only GST relating to taxable (domestic) supplies is claimed on the second hand goods purchases.

You propose that the calculation formula be as follows:

Purchases from GST non-registered sellers X Annual taxable supplies

Total annual sales

Relevant legislative provisions

Division 66 of the GST Act

Reasons for decision

Question 1

Can a specified method of calculation be used to calculate the amount of ITC in relation to second hand goods acquired from unregistered persons? If not, what method should be used?

Detailed reasoning

Division 66 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) allows a taxpayer to claim ITCs for acquisitions of second-hand goods, even though GST was not payable on the original supply of the goods.

In order to establish whether you can use your proposed method of accounting for ITCs, it is necessary to determine whether you are entitled to use the provisions of Division 66 of the GST Act.

Section 66-5 of the GST Act establishes the rules for second-hand goods which are acquired from unregistered suppliers. These rules may apply to your circumstances subject to those conditions.

66-5 Creditable acquisitions of second-hand goods

1. If you acquire second hand goods for the purpose of sale or exchange (but not for manufacture) in the ordinary course of business, the fact that the supply of the goods to you is not a taxable supply does not stop the acquisition being a creditable acquisition.

2. However, this section does not apply, and is taken never to have applied, to the acquisition if:

a) the supply of the goods to you was a taxable supply, or was GST-free; or

b) you imported the goods; or

c) the supply of the goods to you was a supply by way of hire; or

d) Subdivision 66-B applies to the acquisition; or

e) You make a supply of the goods that is not a taxable supply.

3. This section has effect despite section 11-5 (which is about what is a creditable acquisition).

The meaning of the expression 'goods acquired for the purpose of sale or exchange (but not for manufacture) in the ordinary course of business' is considered in Goods and Services Tax Ruling GSTR 2000/8. Paragraphs 31 and 34 of GSTR 2000/8 provides that the expression 'goods acquired for the purpose of sale or exchange (but not for manufacture) in the ordinary course of business' refer to 'trading stock' as that term is ordinarily used.

Although GSTR 2000/8 is a ruling on the operation of section 16 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (Transition Act), it is appropriate to apply the same interpretation of the expression 'for the purpose of sale or exchange (but not for manufacture) in the ordinary course of business' to section 66-5 of the GST Act because that expression is used in the same context in section 16 of the Transition Act and section 66-5 of the GST Act.

You purchase second hand goods, mostly unlicensed vehicles, and cut them into parts, which are sold to customers. You do not alter the nature of the second-hand goods into something different, and therefore, you do not acquire the second-hand goods for manufacture.

One of the limitations provided in paragraph 66-5 (2)(d) of the GST Act provides that section 66-5 cannot apply if subdivision 66-B applies to the acquisition.

Subdivision 66-B of the GST Act deals with acquisitions of second-hand goods that are divided for re-supply.

Section 66-40 of the GST Act provides:

66-40 Acquisitions of second-hand goods that can be used to offset GST on future re-supplies

1) This Subdivision applies to an acquisition of second-hand goods if:

I. you acquire the goods for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business; and

II. either the consideration for the acquisition was more than $300 or you choose to have this section apply to the acquisition; and

III. the goods are of such a kind, or they are supplied to you in such a way, that it would be reasonable to expect you to divide them before supplying them in 2 or more separate supplies; and

IV. you do not subsequently make a single supply of the entirety of the goods acquired.

2) However, this Subdivision does not apply, and is taken never to have applied, to the acquisition if:

a) the consideration for the acquisition separately itemises the consideration for the different goods acquired, and your division of the goods before supplying them:

i. corresponds to that itemisation; or

ii. does not involve dividing the goods any further than the division indicated by that itemisation; or

b) the supply of the goods to you was a taxable supply, or was GST-free; or

c) you imported the goods; or

d) the supply of the goods to you was a supply by way of hire; or

e) you make a supply of the goods, or part of the goods, that is not a taxable supply (other than because of section 66-45).

You have advised that in relation to your purchases from private sellers that there are purchases that are under $300 as well as over $300. You have advised that you have not claimed any ITCs in relation to those acquisitions.

As you do not acquire the goods for manufacture, and you divide the goods into separate parts for sale, and it is assumed that you have exercised the choice available under paragraph 66-40(1)(b) above for your purchases under $300, then the requirements of subsection 66-40(1) of the GST Act are met.

However, paragraph 66-40(2)(e) applies to your circumstances. The paragraph denies the application of Subdivision 66-B of the GST Act, with regard to acquisitions to which the following applies:

(e) you make a supply of the goods, or of parts of the goods, that is not a taxable supply.

You have advised that you export a majority of your products to overseas clients and that these sales are GST-free supplies as provided by section 38-185 of the GST Act.

Therefore, paragraph 66-40(2)(e) of the GST Act operates to exclude the application of Subdivision 66-B of the GST Act to the acquisition you make, which later became part of the product which are exported.

In view of the above, there is no legislative basis upon which you can use the provisions of Subdivision 66-B of the GST Act for acquisitions which ultimately form part of its product which is exported (that is not a taxable supply).

You have advised that you are not able to use the direct method nor the global accounting method to establish the ITC entitlement on second hand goods that are subsequently divided for re-supply on the basis that:

§ you have purchases from private sellers that are below $300 as well as above $300 (both categories are kept in separate accounts from 1 July 2008.

§ once a good is divided up, there is no tracking of the individual.

Second-hand goods acquired by you from unregistered persons are sold both to overseas entities as well as Australian entities. As you have advised that it is difficult to track a particular acquisition to the ultimate sale of those parts you are unable to determine the ITCs you are entitled to if any at all. Further you are not able to apply the A new Tax System (Goods and Services Tax) Rules for Applying Subdivision 66-B Determination (No.1) 2000 to allow pooling of ITCs since the sales made by you are not all taxable supplies.

There is no specific authority for the Commissioner to allow you to use an indirect method to calculate the amount of ITC. However, the Commissioner has the general administration of the GST Act. In that capacity the Commissioner may consider it appropriate to consider an indirect method for calculating the amount of an ITC to which you are entitled. This would only occur where you are unable to maintain adequate records to justify the ITCs as would be required under the GST Act, and is supported by your statement that,

…Once a car is divided up, there is no tracking of the individual parts of a single vehicle (engine goes to the engine section of the car yard, tyres are piled up in the tyre section, etc.)

This approach is consistent with a principle established in the decision of Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47. Although the decision relates to income tax it nevertheless establishes that where it is not possible to apportion acquisitions on the basis of the information regarding the actual application or purpose of expenditure, apportionment must be calculated on some 'fair and reasonable' basis.

The ATO applied this principle in GSTR 2006/4 Goods and Services Tax: Determining the extent of creditable purpose for claiming ITCs and for making adjustments for changes in extent of creditable purpose. In particular paragraphs 115 and 116 to 124 deal with the apportionment of ITCs using an output based indirect method.

The ATO accepts your methodology as being reasonable for calculating your entitlement to ITCs from 1 July 2007, namely:

Purchases from GST non-registered sellers X Annual taxable supplies

12 Total annual sales

Question 2

If yes to Question 1, can I claim the ITC for the tax periods 1 July 2007 to 30 June 2010 in my next activity statement?

Summary

Yes. The four year rule does not apply to you.

Detailed reasoning

Subsection 93-5 of the New Tax System (Goods and Services Tax) Act 1999 (GST Act) imposes a time limit of four years on taxpayers seeking to claim an ITC. The four year period commences from the day on which the taxpayer was required to give the Commissioner a return for the tax period to which the ITC would be attributable under the basic attribution rules in subsections 29-10(1) and (2) of the GST Act. Where an ITC is not taken into account in the calculation of a net amount within this time, the taxpayer generally ceases to be entitled to the credit

In your case your periods from 1 July 2007 to 30 June 2010 are within four years, therefore subsection 93-5 of the GST Act will not apply.

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