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Ruling

Subject: GST and apportionment methodology

Question

Is the transaction based apportionment methodology fair and reasonable?

Answer

Yes, the Commissioner of Taxation considers that the transaction based apportionment methodology that takes into account the time spent by the staff of the entity is fair and reasonable to apportion it's input tax credits in relation to acquisitions with the particular GST code.

Relevant facts and circumstances

The entity carries on an entity that makes both input taxed supplies and non-input taxed supplies.

Costs are allocated to various business areas.

This allocation allows the entity to allocate tax codes and claim input tax credits

As outlined in the table above, currently the entity claims 50% of input tax credits of costs that cannot be directly attributable to a supply.

The entity exceeds the financial acquisition threshold.

The result of a particular analysis is that the input taxed supplies take longer to assess than the non-input taxed supplies. However, the number of input taxed supplies is a small number compared to the non-input taxed supplies.

The entity considers that the following formula to apportion the costs that cannot be directly allocated to a supply is a fair and reasonable methodology to apportion its input tax credits:

number of times the non-input taxed supplies are made x
time spent by staff to administer those supplies

ECP = ------------------------------------------------------------------------------------------ x 100

total number of the supplies x time spent by staff to administer the total supplies

Other investments

The entity has invested its surplus cash in term deposits with a number of major financial institutions.

It is estimated that the entity currently spends only a very minimal number of hours every few months in administering the investments.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Division 11

Reasons for decision

Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) deals with entitlement to input tax credits. Section 11-20 provides that an entitlement to an input tax credit arises for any 'creditable acquisition' made by an entity. Section 11-5 states that an entity makes a creditable acquisition if:

· it acquires anything solely or partly for a creditable purpose; and

· the supply to it is a taxable supply; and

· it provides, or is liable to provide, consideration for the supply; and

· it is registered or required to be registered for GST.

Relevantly, a creditable acquisition is one which is acquired solely or partly for a creditable purpose. Section 11-15 of the GST Act states:

(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.

……………..

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

Accordingly, the entity acquires a thing for a creditable purpose to the extent that it acquires the thing in carrying on its enterprise. However, the entity does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. As advised, the entity exceeds the financial acquisition threshold.

The entity's enterprise involves making a combination of supplies that are input taxed and supplies that are non-input taxed.

Where acquisitions made by the entity are used or intended to be used only for a creditable purpose, such acquisitions are fully creditable and do not require apportionment.

Similarly, where acquisitions made by the entity are used or intended to be used only for a non-creditable purpose, these acquisitions are not fully creditable and the entity is not entitled to claim input tax credits in relation to these acquisitions except to the extent that reduced input tax credits are available.

We have been advised that the above two types of acquisitions are not part of this ruling application.

As outlined in the table in the 'facts' the entity has acquisitions that are both for a creditable purpose (ie: those that relate to making supplies that are not input taxed) and a non-creditable purpose (ie; those that relate to making or intending to make financial supplies). Therefore, these acquisitions are partly creditable and the amount of input tax credits to which the entity is entitled depends upon the extent of creditable purpose as provided for in section 11-30 of the GST Act.

The phrase 'extent of creditable purpose' is defined in subsection 11-30(3) to mean 'the extent to which the creditable acquisition is for a creditable purpose, expressed as a percentage of the total purpose of the acquisition'.

On this basis, an apportionment of these acquisitions would need to be made by the entity to determine the extent of creditable purpose.

The Commissioner's views on apportionment and the methods of calculating the extent of creditable purpose of an entity's acquisitions or importations are outlined in Goods and Services Tax Ruling: GSTR 2006/3: Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3).

Specifically paragraphs 33 and 73 of GSTR 2006/3 provide that the method chosen to allocate or apportion acquisitions between creditable and non-creditable purpose needs to:

· be fair and reasonable;

· reflect the intended use of the acquisition (or in the case of an adjustment, the actual use); and

· be appropriately documented in your individual circumstances.

Further, paragraphs 81 and 103 of GSTR 2006/3 explore the Commissioner's views on direct and indirect methods of estimation and circumstances where these methods may be considered appropriate:

81. The Commissioner considers that the use of direct methods, including direct estimation…best accords with the basic principles explained above…. If it is not possible or practicable to use a direct method, you may use some other fair and reasonable basis, including an indirect estimation method.

…

103. Indirect estimation methods may be appropriate in circumstances where there are overhead expenses that are not directly referable to particular supplies or activities. They may also be appropriate if the direct methods do not apportion acquisitions or importations to the level of supplies, or groups of supplies, that require different treatment for GST purposes. It may also be the case that the direct attribution of a large number of small acquisitions or importations is not cost effective. In all cases where indirect methods are used, the method chosen should be fair and reasonable in the context of your enterprise.

Therefore, the apportionment methodology adopted by the entity must be fair and reasonable in the circumstances of the enterprise and must appropriately reflect the intended or actual use of its acquisitions or importations.

We are of the view that the following formula is a fair and reasonable method to determine the extent of the creditable purpose of the acquisitions of the entity.

number of times the non-input taxed supplies are made x
time spent by staff to administer those supplies

ECP = ------------------------------------------------------------------------------------------ x 100

total number of the supplies x time spent by staff to administer the total supplies

Other investments

If the entity continues to only use very minimal/negligible resources for the purpose of maintaining other input taxed investments, we consider that the non-inclusion of the time spent on maintaining such investment in the apportion methodology is immaterial

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