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Edited version of your written advice
Authorisation Number: 1012697744477
Ruling
Subject: Input tax credits on a settlement amount
Question
Are you entitled to claim input tax credits on the payment of a settlement amount of $xx?
Answer
Yes, you are entitled to claim input tax credits on the payment of a settlement amount. The amount of the input tax credits that you are entitled to claim is 1/11th of the $xx.
Relevant facts and circumstances
You are the tenant of a commercial property.
Due to a miscalculation of the rental amount, you have been paying a lesser amount of rent to the landlord than the amount that you were required to pay under the tenancy agreement. That is, you have been paying the GST exclusive amount of the rent until the error was discovered.
You have been claiming input tax credits on the lesser amount of rent as per the tax invoices that have been issued to you by the landlord.
You and the landlord have agreed to settle the dispute over the rental amount by entering in a Deed of Settlement (the Deed) under which you were required to pay $xx to the Landlord.
A clause of the Deed provides that the sum of $xx is in full and final settlement of the unpaid GST.
You have been issued with a tax invoice by the landlord for the payment of $xx which states that the $xx is inclusive of GST. The tax invoice depicts the relevant amount of GST payable as 1/11th of $xx.
Relevant legislative provisions
Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999
Reasons for decision
Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to claim input tax credits on creditable acquisitions that you make. Section 11-25 of the GST Act provides:
The amount of the input tax credit for a *creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired.
(the terms marked with asterisks (*) are defined in section 195-1 of the GST Act)
In this case, what has been supplied to you is a rental property. Therefore, the amount of GST should be equal to the GST payable on the consideration for the supply of the rental property to you.
Therefore, what needs to be determined here is whether the $xx forms part of the consideration for the supply of the rental property to you.
You have underpaid rent as the rent you have been paying, until the error was discovered, was not inclusive of GST. You have entered into an agreement to pay $xx in settlement of this underpaid rent. The fact that a particular clause of the Deed provides that the sum of $xx is in full and final settlement of the unpaid GST doesn't mean that it is the amount of the GST that you were entitled to claim. This clause merely provides that the settlement sum represents the unpaid rent (which was calculated based on the unpaid GST that should have been taken into account when calculating the rent). The GST on the lesser amount of rent for which the tax invoices have been issued have already been claimed by you (and it is assumed that the landlord has also remitted the GST on the lesser amount to the ATO).
On this basis, the settlement amount of $xx merely represents the underpaid rent that should've been paid had the GST been included in the rent. Therefore, the $xx forms part of the consideration for the supply of the rental property to you.
The GST payable on the $xx is shown on the tax invoice issued to you by the landlord as 1/11th of $xx).
Therefore, the amount of GST that you are entitled to claim is 1/11th of $xx as per the tax invoice.
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