Edited version of your private ruling

Authorisation Number: 1012612261019

Ruling

Subject: GST and input tax credit

Question 1

Can you claim the full goods and services Tax (GST) input tax credit on the acquisition of the property?

Answer

No

Relevant facts and circumstances

• You are a sole trader and registered for goods and services tax (GST).

• You operate a service business.

• You purchased a commercial building in Australia (Property) as tenants in common with your relatives.

• The contract of sale and the transfer document states that you own a X% share of the property and your relatives each own a Y% share.

• You hold a tax invoice in all names.

• The purchase of the property was for an amount of $XXXXXX plus GST of $XXXXX.

• You borrowed funds from a commercial bank to finance the purchase.

• The bank loan is in all names.

• You intent to operate your service business from the premises.

• Under an arrangement with your relatives, you are solely responsible to pay all rates and taxes for the property and all loan repayments.

• Your relatives are a party to the loan as the bank required it to approve the funding.

• You and your relatives (other co-owners) have not received any joint income from the property as it is solely used for your business.

• Your relatives do not receive any payment from you in relation of their interest in the property whilst it is being wholly used by your business.

Relevant legislative provisions

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

Section 7-1

Section 9-5

Section 9-10

Section11-5

Section 11-15

Section 11-30

Reasons for decision

Entitlement to ITC

Under section 11-20 A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are entitled to an input tax credit for any creditable acquisition that "you" make.

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;

(b) the supply of the thing to you is a *taxable supply;

(c) you provide, or are liable to provide,* consideration for the supply; and

(d) you are *registered, or required to be registered.

An asterisk denotes a defined term in the GST act

Section 11-15(1) of the GST Act states:

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

Who is "you" for the purposes of the GST Act?

The term you is defined in section 195-1 of the GST Act as:

If a provision of this Act uses the expression you, if applies to entities generally, unless its application is expressly limited.

Subsection 184-1(1) of the GST Act explains the meaning of the term 'entity'. This subsection states:

Entity means any of the following:

(a) an individual;

(b) a body corporate;

(c) a corporation sole;

(d) a body politic;

(e) a partnership;

(f) any other unincorporated association or body of persons;

(g) a trust;

(h) a superannuation fund.

Subsection 184-5(1) of the GST Act states:

For the avoidance of doubt, a supply, acquisition or importation made by or on behalf of a partner of a partnership in his or her capacity as a partner:

(a) is taken to be a supply, acquisition or importation made by that partnership; and

(b) is not taken to be a supply, acquisition or importation made by that partner or any other partner of the partnership.

A partnership is defined in section 195-1 of the GST Act as having the meaning by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 97).

Section 995-1 of ITAA 97 states:

partnership means:

(a) as association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

(b) a limited partnership.

Are you a tax law partnership?

Goods and Services tax Ruling 2004/6 (GSTR 2004/6) explains how the GST Act applies to transactions involving tax law partnerships.

Paragraph 24 of GSTR 2004/6 states:

Persons who are in receipt of income jointly are, therefore, an association of persons and a tax law partnership for GST purposes.

In your circumstances you use the property to carry on your business and there is no intention between you and your relatives to carrying on any business together to gain joint income.

There has been no joint commencement of an activity by you and the other co-owners for an income producing purpose which gives rise to, or will give rise to, a right or entitlement to receive jointly an amount or payment of a revenue nature. Accordingly, there is no formation of a tax law partnership.

It is considered that:

• The arrangements between the parties owning the property as tenants in common, is not a tax law partnership as there is no joint entitlement to income.

• Based on the contract of sale and the transfer documents, it is considered that you and your relatives are co-owners in their own right. Each co-owner has an interest in the property proportion to the interest held.

Therefore, the purchase of the property by you and the co-owners is considered to be a purchase in individual capacities.

As tenants in common, you and the other co-owners each have an interest in the property. For the acquisition of each co-owner's interest in the property to be a creditable acquisition, all the requirements in section 11-5 of the GST Act must be satisfied.

Is the arrangement a bare trust arrangement?

It is considered that your relatives are co-owners of the property and they obtained the interest in the property in their own right. There cannot be a bare trust arrangement in your circumstances because other co-owners are also the co-borrowers for the funding of the property.

Your entitlement to an input tax credit arising from the acquisition

In this case, the purchase of your interest in the property will be for consideration and the supply is a taxable supply, you are registered for GST and you have purchased the property to use in your service business. As such, the requirements in section 11-5 of the GST Act will be satisfied.

Paragraph 11-25 of the GST provides that the input tax credit for a creditable acquisition is an amount equal to the GST payable on the supply of the thing. However, the amount of the input tax credit is reduced if the acquisition is only partly creditable.

Paragraph 11-30(1)(b) of the GST Act explains further that an acquisition that you make is partly creditable if you provide, or liable to provide, only part of the consideration for the acquisition. Paragraph 11-30(3) of the GST Act outlines the formula that is used to calculate the input tax credit for an acquisition that is partly creditable. The full input tax credit needs to be multiplied by the extent of creditable purpose and the extent of consideration provided. It explains that the extent of consideration provided is the extent to which you provide, or are liable to provide consideration for the acquisition as a percentage of the total consideration for the acquisition.

In your circumstances, you are a co-borrower with your relatives, and the amount you are liable for the acquisition is the corresponding proportion of your interest in the property. The private arrangement with your relatives for you to pay the whole mortgage repayment cannot alter your liability under the loan. That is the three co-owners have provided consideration for the acquisition, not just you.

Therefore, you are entitled to an input tax credit up to your share of the interest in the property of X% not 100%. 

It is noted that the other co-owners are not entitled to any input tax credit as they:

• do not acquire their interest solely or partly for a creditable purpose (they do not conduct any business with you or in their own right);

• are not registered, or required to be registered for GST.

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