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Edited version of private ruling
Authorisation Number: 1011650696906
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Ruling
Subject: GST and input tax credits
Question
Are you entitled to claim input tax credits on acquisitions relating to the housing project?
Answer
No, you are not entitled to claim input tax credits on acquisitions relating to the housing project.
Facts
You are constructing additional units to an existing development site. The accommodation in these units will be long term and rents will be charged.
You provided copies of the floor plans which show that each of the units provide a sleeping area and facilities for daily living such as a bathroom, toilet, laundry and kitchen.
The management agreement between you and Entity X contains the following:
· Entity X manages and is responsible for the day to day administration of the housing site.
· Entity X manages the housing site, for and on your behalf.
· Entity X is responsible for the good management of the housing site, the welfare of its tenants and the maintenance of the site assets and surrounds.
· Entity X separately records financial transactions relating to the housing site so that at any time the financial position of the housing site is available.
You are registered for GST and you are not an income tax exempt charity.
Reasons for decision
You are entitled to the input tax credit for any creditable acquisition that you make.
You make a creditable acquisition if all of the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met. 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 the GST Act.)
Section 11-15 of the GST Act defines the meaning of creditable purpose. Subsection 11-15(1) of the GST Act requires that you acquire a thing in carrying on your enterprise. However, paragraph 11-15(2)(a) of the GST Act provides that you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.
The acquisitions relating to the building of the additional units are made in carrying on your enterprise. However, we need to determine if these acquisitions relate to making supplies that would be input taxed.
Goods and Services Tax Ruling GSTR 2008/1 explains some factors that provide guidance in determining whether an acquisition is for a creditable purpose. GSTR 2008/1 notes that paragraph 11-15(2)(a) of the GST Act specifically focuses on the relationship between an acquisition and the making of supplies. The ruling goes on to state at Paragraph 106:
106. Paragraph 11-15(2)(a) does not require tracing to a specific supply. Nevertheless, unlike subsection 11-15(1), it requires some form of connection to the supplies that the entity makes, made or intends to make.
Paragraph 118 of GSTR 2008/1 deals with the principles that should be applied in determining whether an acquisition relates to making supplies that would be input taxed and includes:
The words 'relates to' are wide words signifying some connection between two subject matters. There must be a connection between an acquisition and the making of input taxed supplies. The connection or association signified by the words may be direct, or indirect, substantial or real. It must be relevant and usually a remote connection would not suffice.
Paragraphs 121 to 123 of GSTR 2008/1 deal with the situation where acquisitions are used or consumed in making input taxed supplies and they state:
121. Subsection 11-15(2) specifically focuses on the relationship between an acquisition and particular supplies. When viewed in the context of the adjustment provisions such as Division 129, it can be seen that, when an acquisition precedes a supply, the purpose of subsection 11-15(2) is to focus on the intended usage of the acquisition.
122. If the intended usage of the acquisition relates to supplies that would be input taxed, paragraph 11-15(2)(a) precludes it from being for a creditable purpose. Division 129 then focuses on the actual usage of the acquisition and adjusts accordingly, depending on whether the actual usage relates to input taxed supplies.
123. If the acquisition is used or consumed in making an input taxed supply, there is a direct connection between the acquisition and the input taxed supply. For example, acquisitions made in constructing or maintaining residential premises that are supplied by way of an input taxed supply of a lease or licence relate to making that supply and consequently are not for a creditable purpose.
Paragraph 40-35(1)(a) of the GST Act provides that a supply of premises by way of lease, hire or licence is input taxed if it is a supply of 'residential premises'. However, the supply is not input taxed supply if it is a supply of 'commercial residential premises' or a supply of accommodation in 'commercial residential premises' provided to an individual by the entity that owns or controls the 'commercial residential premises'.
The term 'residential premises' is defined in section 195-1 of the GST Act to mean land or a building that:
(a) is occupied as a residence or for residential accommodation; or
(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation
(regardless of the term of the occupation or intended occupation) and includes a floating home.
The definition of commercial residential premises in section 195-1 of the GST Act sets out the types of premises to be covered.
In your case, you are constructing additional units in the housing site. According to the floor plans you provided, the units each provide a sleeping area and facilities for daily living such as a bathroom, toilet, laundry and kitchen. The units possess the physical characteristics which satisfy the definition of residential premises.
You are providing these residential premises to Entity X. These residential premises are used for the purposes of providing residential accommodation to prospective tenants.
Accordingly, as the physical characteristics of the units are those of residential premises and the premises are used for residential accommodation, the lease of a unit to a tenant through Entity X is a supply of residential premises.
The units do not have the characteristics of commercial residential premises. The provision of the units is not a supply of commercial residential premises nor is it a supply of accommodation in commercial residential premises.
Therefore, the leasing of a unit to a tenant is an input taxed supply under section 40-35 of the GST Act.
As the acquisitions for the construction of the additional units relate to the making of input taxed supply of residential premises, these acquisitions meet paragraph 11-15(2)(a) of the GST Act and accordingly are not regarded as being made for a creditable purpose as required by paragraph 11-5(a).
As one of the requirements in section 11-5 of the GST Act is not satisfied, you are not making creditable acquisitions when you acquire things for the construction of the additional units. Therefore, you are not entitled to the input tax credits for the acquisitions relating to the housing project.
Correcting GST mistakes
Where you have incorrectly claimed an input tax credit, you have to correct this mistake in your activity statement. For further information refer to the fact sheet Correcting GST Mistakes which is available from our website.
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