Edited version of private ruling

Authorisation Number: 1011597471730

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Ruling

Subject: GST and input tax credits apportionment method

Does your proposed apportionment method to calculate the extent of creditable purpose of overhead costs as set out in your request for private ruling, satisfy the requirements of section 11-30 of the A New Tax System (Goods and Services tax) Act 1999 (GST Act)?

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 provide homes and services which are affordable, accessible and appropriate to meet the changing needs and life stages of people on low incomes.

Some of the activities you carry out are merely steps in the process of providing residential accommodation. These activities are regarded as integral, ancillary or incidental to the dominant supply of residential accommodation.

You make a mixture of taxable, GST free and input taxed supplies. As your key activity is the provision of residential accommodation to members of the community, you are limited in your ability to recover input tax credits in respect of overhead costs as these costs cannot be directly attributable to the making of either taxable, GST free or input taxed supplies.

You have previously claimed a small percentage of input tax credits (ITC) attributable to overhead expenditures. This was an arbitrary but conservative estimate of your ITC entitlement in respect of overhead costs and was based on estimated capital and maintenance expenditure attributable to both taxable and input taxed supplies of accommodation. No account was taken for other non-input taxed activities which may have been relevant at the time.

A project has recently been conducted to obtain a more accurate estimate of the apportionment of overhead costs. This project was based on the identification of the output activities and functions of yourself (that is, whether the activities related to the making of taxable, input taxed or a mixture of both taxable and input taxed supplies).

Appendix A provides a detailed listing of the activities and classification applied on the basis of activities being:

· a direct provision of residential rent supplies

· supplies that are 'separate and distinct from the supply of residential accommodation and do not relate to input taxed supplies

· supplies that are of a 'mixed' nature - those that relate to both the making of input taxed and creditable supplies.

You consider that the direct measure that is applicable to you is 'time'. This method seeks to determine the extent of creditable purpose of acquisitions according to the following formula:

Amount of Time allocated to tasks/activities considered to be separate and distinct from the supply of residential accommodation

-------------------------------------------------------------------------------------------------------

Amount of time allocated to all tasks/activities

X 100%

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Section 15

A New Tax System (Goods and Services Tax) Act 1999 Section 20

A New Tax System (Goods and Services Tax) Act 1999 Section 30

Summary

You have advised us in your request for a ruling that you have completed a review of your complementary activities to ensure that each activity is properly characterised for the purpose of calculating the extent of creditable purpose. Accordingly, based on the facts as presented in your ruling request, we accept that the apportionment method you propose to use for working your ITC entitlements in respect of the overhead costs is fair and reasonable and correctly reflects the use of such costs.

Detailed reasoning

Under section 11-20 of the GST Act, an entity is entitled to an input tax credit for any creditable acquisition that it makes. Section 11- 5 of the GST Act states:

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 defined in section 195-1 of the GST Act)

Where you satisfy all of the above requirements, you are entitled to claim an ITC.

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, it is not acquired for a creditable purpose if:

· the acquisition relates to making supplies that would be input taxed, or

· the acquisition is of a private or domestic nature.

The phrase 'extent of creditable purpose' is defined to mean the extent to which the creditable acquisition or importation is for a creditable purpose, expressed as a percentage of the total purpose of the acquisition or importation.

In your case, where you predominantly make input taxed supplies of residential accommodation by way of lease, hire or licence, it is also necessary to consider the nature of your complementary activities undertaken in conjunction with the supply of such residential accommodation. Where these complementary activities are ancillary, integral or incidental to your dominant supply of residential accommodation, then such supplies will be considered as input taxed supplies. However, activities such as policy development and training which are not ancillary, integral or incidental to supplies of residential accommodation need to be treated as separate and distinct from your input taxed supplies.

This distinction is necessary, when working out an apportionment method for overhead costs. As such, the extent of creditable purpose of certain acquisitions depends on the circumstances and the context in which those complementary activities are carried out.

Subsection 11-30(1) of the GST Act states:

An acquisition that you make is partly creditable, if it is a creditable acquisition to which one or both of the following apply:

(a) you make the acquisition only partly for a creditable purpose;

(b) you provide, or are liable to provide, only part of the *consideration for the acquisition.

Subsection 11-30(3) of the GST Act provides a formula that can be used to determine the amount of ITC entitlement in relation to partly creditable acquisitions. Further, subsection 11-30(5) of the GST Act provides that the Commissioner may determine in writing for the purpose of subsection 11-30(3), one or more ways in which an entity can work out the extent to which an acquisition is for a creditable purpose.

Goods and Services Tax Ruling GSTR 2006/4 (GSTR 2006/4) explains the Commissioner's view on the meaning of creditable purpose and 'extent of creditable purpose' for the purposes of the GST Act. The public ruling provides guidance on how to determine the extent of your creditable purpose in making acquisitions and importations, to enable an entity to claim the correct amount of ITC.

At paragraph 34, GSTR 2006/4 provides that in determining the extent of creditable purpose, a taxpayer needs to select an appropriate method for GST purposes. The apportionment method that you choose needs to:

· be fair and reasonable

· reflect the planned use of that acquisition, and

· be appropriately documented in your individual circumstances.

The GST status of activities depends on the circumstances in which the activities are carried on. In your case, whilst the key activity is the provision of residential accommodation, you make a mixture of taxable, GST-free and input taxed supplies. As your operating overhead costs are incurred in order to undertake a mixture of activities, your acquisitions will be partly for a creditable purpose. Therefore, in your case it is necessary for you to apply an appropriate method to calculate the extent of creditable purpose. This will enable you to work out your correct ITC entitlement for your overheads.

The apportionment methods explained in GSTR 2006/4 can be broadly categorised as direct or indirect methods. The Commissioner's view is that, if a direct method is available, that would best reflect the intended or actual use of the acquisition by an entity. However, an entity is not required to use a direct or indirect method in the manner set out in GSTR 2006/4, provided that whatever the alternative method the entity chooses to use is fair and reasonable, in line with the principles stated in paragraph 34 of that ruling.

Paragraph 108 of GSTR 2006/4 states:

Direct methods seek to identify a direct measure of the use of the acquisition or importation. Measures based on inherent characteristics of, or factors directly connected with, the acquisition usually give a fair reflection of the use of the thing. These factors are sometimes referred to in management accounting and costing systems as 'drivers'.

As provided in paragraph 109 of GSTR 2006/4, these factors or characteristics indicate a link between the acquisition and its use. In your case, as a result of the review process undertaken for the purpose of determining the appropriate apportionment method, you have chosen a method based on time employed by staff on each activity undertaken.

You have provided an Appendix A in your request for a ruling that is a detailed listing of the activities and classification applied on the basis of activities being:

· a direct provision of residential rent supplies

· supplies that are 'separate and distinct from the supply of residential accommodation and do not relate to input taxed supplies, and

· supplies that are of a 'mixed' nature, those that relate to both the making of input taxed and creditable supplies.

This has been done in order to enable you to work out the extent of creditable purpose and to determine the GST status of your complementary activities.

Further, you state that with the analysis of your activities, you have found the staff time employed to be the most appropriate direct method that would give a fair reflection of the use of your overhead acquisitions, as it expresses the relevant use as a percentage of total use.

On the basis of this analysis, you have been able to determine the percentage of total time spent by the staff in each cost centre in connection with input taxed supplies and non-input taxed supplies, based on the following formula:

Amount of Time allocated to tasks/activities considered to be separate and distinct from the
supply of residential accommodation

-------------------------------------------------------------------------------------------------------

Amount of time allocated to all tasks/activities

X 100%

You have reviewed each its activities individually as to whether the activity is input taxed as it relates to the provision of residential accommodation including activities that are integral, ancillary or incidental to the dominant supply of residential accommodation or as to whether they are separate and distinct supplies as they are not a composite part of the input taxed supplies of residential accommodation.

You have further asserted that this weighted average is indicative of the total time spent by your staff during that period, in relation to input taxed and non-input taxed activities.

You have advised us in your request for a ruling that you have completed a review of your complementary activities to ensure that each activity is properly characterised for the purpose of calculating the extent of creditable purpose. Accordingly, based on the facts as presented in your ruling request, we accept that the apportionment method you propose to use for working your ITC entitlements in respect of the overhead costs is fair and reasonable and correctly reflects the use of such costs.

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