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Ruling

Subject: Acquisition of property

Issues:

Would you be able to claim the whole of the initial deposit as input tax credit on payment of the deposit?

If not, when would you be able to claim this money?

Can the vendor demand from you an amount equal to the GST as a deposit in advance of the settlement?

Decisions:

See below.

See below.

This is a contractual matter between you and the vendor and we cannot comment on it.

This ruling applies for the following periods:

Not applicable in this case.

The scheme commences on:

Not applicable in this case.

Relevant facts and circumstances

You are an individual intending to engage in a leasing enterprise.

You are not currently registered for the goods and services tax (GST) in your individual capacity. However, you are a director of a company which is registered for the GST.

You intend to purchase real property in order to engage in the proposed leasing enterprise.

If you purchase the property, you will lease it to the company in which you are a director.

You will register for the GST at the commencement of your enterprise.

You have not decided whether to choose cash basis or non-cash basis when accounting for GST.

You are informed that the vendor of the property is registered for the GST and the sale of the property would be a taxable supply.

You are also informed by the vendor's solicitor that the vendor accounts for GST on a cash basis.

The contract of sale you intend to enter into with the vendor, a copy of which you submitted to us, requires you to provide consideration for the property in monthly instalments.

The contract also stipulates that you are allowed to take possession of the property with the payment of an initial deposit.

The deposit amount equates to the GST liability of the vendor, which is 1/11^th of the consideration for the property.

The contract of sale document does not stipulate that the deposit will be forfeited if you fail to honour the terms of the contract. In that regard the deposit is not a forfeitable security amount held by the vendor. This is also your interpretation of the contract.

Under the contract, you are required to pay the stipulated instalment amount periodically up to two years.

The settlement of the property is scheduled to take place at the end of two years on the payment of the balance of the consideration.

The title of the property will pass on to you on settlement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999:

Section 11-5

Section 11-15

Section 11-20

Section 29-5

Section 29-10

Section 29-70

Section 195-5

Reasons for decision

Land sales contracts

The sale of real property, in a majority of cases, falls within what is termed as a 'standard land contract'. Goods and Services Tax Ruling GSTR 2000/28 (GSTR 2000/28) provides the Commissioner's view of attributing GST payable or input tax credit arising from a sale of land under a standard land contract. GSTR 2000/28 defines, at paragraph 13, a standard land contract to be one which is a written contract for the sale of land that provides for:

· The payment of a deposit that is either to be forfeited if the purchaser defaults or applied as consideration on settlement, and

· The payment of the balance of the purchase price upon settlement.

An agreement, which requires a purchaser to provide the purchase price to a vendor in the form of a number of instalments, as opposed to a deposit and a final payment upon settlement, is not a standard land contract for the purpose of GSTR 2000/28.

Under the terms of the contract of sale in this case, you agree to pay an initial amount referred to as a "deposit" followed by a number of instalment payments until the settlement date, on which date, you are required to pay the remaining balance of the price.

The contract does not refer to the "deposit" as one that would be forfeited if you fail to perform the obligations under the contract. Further, the certificate of title to the land (property) will not pass from the vendor to you until all of the consideration (the deposit, the instalments and the balance) is paid to the vendor. As such you are not acquiring the property under a contract that is regarded as a standard land contract for the purpose of GSTR 2000/28. Therefore, the basic rules on acquisition and attribution will apply in this case.

As this ruling is issued to you and not to the vendor, we cannot advise you on the obligations of the vendor. The vendor will need to act in accordance to the vendor's liability under the GST Act. Generally, in cases such as these, the vendor is required to apply the attribution rules in accordance with section 29-5 of the GST Act.

Attribution rules for taxable supplies

ATO Interpretative Decision ATO ID 2004/181 (ATO ID 2004/181) explains the attribution rules on taxable supply of land where consideration is received on an instalment basis. According to this interpretative decision, an entity is required to apply the attribution rules in accordance with section 29-5 of the GST Act and attribute all the GST payable on its taxable supply of land to the tax period in which it receives the first instalment payment from the purchaser.

Under subsection 29-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), where a registered entity accounts on a non-cash basis, the GST is payable by the entity on a taxable supply is attributable to either:

· the tax period in which any of the consideration is received for the supply, or

· if, before any of the consideration is received, when an invoice is issued relating to the supply - the tax period in which the invoice is issued.

However, if the entity accounts on a cash basis, then, under subsection 29-5(2) of the GST Act, an entity must attribute the GST payable in the tax period in which the entity receives consideration for the taxable supply, but only to the extent of the consideration received.

Entitlement for input tax credits

In this case, you are the recipient of the supply. As such, your ability to claim input tax credit on the proposed acquisition depends on you satisfying the basic requirements provided in Division 11 of the GST Act.

Under the GST Act, to claim input tax credit you must make a creditable acquisition.

Section 11-20 of the GST Act states:

You are entitled to the input tax credit for any *creditable acquisition that you make.

(The term marked with an asterisk is defined in section 195-1 of the GST Act.)

Section 11-5 of the GST Act states that 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.

For an acquisition to be creditable all of the four conditions above must be satisfied. .

Thus, for the proposed purchase of the property to be a creditable acquisition, it must be acquired for a creditable purpose, the supply of the property by the vendor must be a taxable supply, you have to provide or be liable to provide consideration for the acquisition and you must be registered or required to be registered.

'Creditable purpose' is defined in section 11-15 of the GST Act as follows:

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 for a private or domestic nature.

You will satisfy the "creditable purpose" criterion if the acquisition of the property is in carrying on your enterprise.

Attribution rules for claiming input tax credits

Section 29-10 of the GST Act provides the attribution rules for the input tax credits for any creditable acquisitions you make. These rules depend on whether you are accounting for GST on a cash or non-cash basis.

If you are accounting on a non-cash basis subsection 29-10(1) of the GST Act states that the input tax credit to which you are entitled to for a creditable acquisition is attributable, to:

· the tax period in which you provide any of the consideration for the acquisition, or

· if, before you provide any of the consideration, an invoice is issued relating to the acquisition - the tax period in which the invoice is issued.

If, however, you account on a cash basis, the attribution rules that are applicable to creditable acquisitions you make are given in subsection 29-10(2) of the GST Act. Under this subsection you are entitled to input tax credit for creditable acquisitions you make in the tax period you provide consideration - but only to the extent of consideration you provide.

Tax invoices

Under subsection 29-10(3) of the GST Act, you can claim input tax only when you hold a tax invoice.

Thus, if you are issued with a tax invoice for the supply of the property to you, you can claim input tax credit under the rules listed in section 29-10 of the GST Act if you satisfy the relevant requirements of division 11 of the GST Act which were explained previously.

The requirements of a tax invoice are provided in subsection 29-70(1) of the GST Act.

Conclusion

Whether or not you can claim the whole of the initial deposit you make as input tax credit would depend on several factors. These are:

1. Whether the supply is made as a taxable supply where the GST is calculated as 1/11^th of the price.

2. Whether you are registered and whether you make the acquisition wholly for creditable purposes.

3. Whether you account for GST on a non-cash basis.

4. Whether you have a tax invoice for this acquisition and whether the deposit amount is shown as the GST amount calculated on the basis of 1/11^th of the price.

If the answer to all of the above is in the affirmative, then you would be able to claim the GST amount shown in the tax invoice (the deposit amount) on the tax period you hold the tax invoice.

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