Edited version of private ruling

Authorisation Number: 1011635095087

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Ruling

Subject: GST and residential rental bonds

Issue 1

Question

Is the current treatment of not claiming GST credits on the activities of the rental bond holding enterprise correct?

Answer

No, the current treatment of not claiming GST credits on the activities of the rental bond holding enterprise is not correct.

Issue 2

Question

Given the recent budget announcement that the financial acquisitions threshold will increase from $50,000 to $150,000 from 1 July 2012, on what basis would the prospective calculation be made from 1 August 2011?

Answer

We are unable to provide a ruling on prospective legislative changes. We are only able to provide guidance on aspects of the law as they currently stand.

Relevant facts and circumstances

Entity X established the rental bond holding enterprise (RBHE) to administer a rental deposits scheme for residential bonds. The RBHE does not have a separate GST registration and is incorporated under entity's ABN.

The RBHE holds approximately $X in trust for bonds collected on residential properties.

The activities of the RBHE are primarily custodial services, being that it simply collects from tenants/landlords the residential bonds, and then return this upon the completion of the tenancy.

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 11-15

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

Reasons for decision

Issue 1

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) provides that you are entitled to input tax credits for any creditable acquisitions that you make.

In order to determine whether or not entity X is entitled to claim input tax credits for acquisitions made in the course of administering the RBHE, it is first necessary to establish whether it has made creditable acquisitions.

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.

For entity X to be entitled to an input tax credit, the four elements of section 11-5 of the GST Act must be satisfied.

From the facts provided, entity X is registered for GST. Therefore as long as entity X's business acquisitions are taxable supplies (purchases on which entity X has been charged GST), and entity X has provided consideration for these supplies (entity X has paid money or its equivalent), entity X will have met the conditions in sections 11-5(b), 11-5(c), and 11-5(d) of the GST Act.

Accordingly, the only element of section 11-5 of the GST Act that may be an issue is paragraph 11-5(a) of the GST Act, that is whether entity X has acquired something for a creditable purpose.

(a) You acquire anything solely or partly for a creditable purpose

Relevant to this issue is the meaning of creditable purpose. What is a creditable purpose is provided for in section 11-15 of the GST Act. Relevantly, that section provides:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your *enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

Subsection 11-15(1) of the GST Act focuses on whether there is a connection between the acquisition and any of the activities of the enterprise. In this case, entity X has said that the RBHE was established as an arm of entity X, to hold in trust rental deposit bonds in relation to residential property.

Entity X advised that the activities of the RBHE are primarily custodial services, being that RBHE simply collects from tenants/landlords the residential bonds, and then return this upon the completion of the tenancy.

GSTR 2008/1 provides the ATO view on when a business is seen as acquiring something for a creditable purpose. Paragraph 56 of the ruling talks about the meaning of 'enterprise', and states:

"The definition of 'enterprise' refers to an activity or series of activities that is done in the form of a business, an adventure or concern in the nature of trade or the regular or continuous leasing, licensing or granting of an interest in property. It also includes an activity or series of activities done by a trustee of a trust or complying superannuation fund, a charitable institution or charitable fund, a religious institution or a government or an entity established for a public purpose."

As such we can see that entity X will be seen as carrying on an enterprise, and the running of the RBHE is one of the activities of this enterprise. Accordingly any purchases entity X makes in the course of running the RBHE will satisfy the requirements of subsection 11-15(1) of the GST Act.

The acquisitions that entity X makes are not of a private or domestic nature. Therefore, paragraph 11-15(2)(b) of the GST Act is not in issue. Accordingly, the issue to be determined is if these acquisitions relate to making supplies that would be input taxed for the purposes of paragraph 11-15(2)(a) of the GST Act.

Division 40 of the GST Act deals with input taxed supplies. There are six broad categories of supply that are considered input taxed:

40-A Financial Supplies

40-B Residential Rent

40-C Residential Premises

40-D Precious Metals

40-E School tuckshops and canteens

40-F Fund-raising events conducted by charitable institutions etc.

The acquisitions that entity X makes are in relation to carrying out its duties of holding deposits in trust for tenants and landlords. Although the deposits are made in relation to residential properties, entity X is not actually in the business of supplying residential properties for rent or for sale. entity X, in running the RBHE, is seen more as providing a supply of custodian services in relation to money. A supply of custodian services in relation to money is also specifically addressed as neither being a 'financial supply' under item 16 of regulation 40-5.12 of the A New Tax System (Goods and Services Tax) Regulation 1999 (GST Regulations).

These custodian services provided by the RBHE will therefore not be input taxed supplies, as they do not fall into one of the categories in Division 40 of the GST Act.

As the acquisitions made by entity X do not relate to making input tax supplies, nor are they of a private or domestic nature, they will satisfy the requirements of section 11-15 of the GST Act as being for a creditable purpose. Entity X is therefore entitled to claim input tax credits on business acquisitions it makes in the course of running the RBHE.

Issue 2

The Government has announced that it will introduce a package of reforms to the financial supply provisions of the GST.

As part of the reforms, the Government will legislate to increase the financial acquisitions threshold from the current $50,000 to $150,000 of input tax credits.

As the proposed changes to the financial acquisitions threshold are not yet law, the ATO is not in a position to comment on the operation of the proposed changes at this time.

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