Edited version of your written advice

Authorisation Number: 1012714062087

Ruling

Subject: GST and acquisitions

Question

Are you entitled to input tax credits on the purchase of land, and the construction of a house on that land to use partly in your business?

Answer

Yes. To the extent that they are applied to making taxable or GST free supplies in the course of your enterprise, your acquisitions will be creditable acquisitions.

Relevant facts and circumstances

You are registered for GST. You currently provide supplies that are GST free in your enterprise.

You have engaged a builder to build a house on a block you acquired. The block of land is X square metres (sqm) and the house occupies some 6% of the land area. You are building a house on this block which is larger than the house you are currently operating from. You will use the house to live in and to operate your enterprise from. You advised that the larger size of the house will enable you to increase the number of services you provide. You plan to fence the whole block and use the whole backyard for the business.

The house is a 4 bedroom 2 bathroom home with a front lounge room a double garage with a rear home theatre and play area between bedroom 3 and the laundry.

Bedroom 1 is the master bedroom and will not be used for the business. The rest of the house will be used partly for your business and partly for your private usage. You have an area out the front where clients can park their cars and you will park your own vehicle their also. You plan to convert the garage for business use.

There will be modifications made to the house and surrounds to ensure it complies with industry requirements.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 11-5 and

A New Tax System (Goods and Services Tax) Act 1999 11-15.

Reasons for decision

You are entitled to GST credits for any creditable acquisition you make.

Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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.'

From the facts provided subsections 11-5(b), (c) and (d) of the GST Act are satisfied. Therefore, we must consider whether pursuant to subsection 11-5 (a) of the GST Act your acquisitions are acquired 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.

In your case, you have acquired the property partly for private purposes and partly to be used in carrying on your enterprise. Therefore your acquisitions will be creditable to the extent that you apply those acquisitions in carrying on your enterprise but not to the extent that you apply the acquisitions to private purposes.

Section 11-25 of the GST Act goes on to say that your entitlement to an ITC for creditable acquisitions 'is reduced if the acquisition is only partly creditable.

Subsection 11-30(1) of the GST Act states in this regard:

'An acquisition that you make is partly creditable if it is a ^*creditable acquisition to which one or both of the following apply:

(a) you make the acquisition only partly for a creditable purpose;

(b) you provide, or are liable to provide, only part of the consideration for the acquisition.'

Goods and Services Tax Ruling GSTR 2006/4 (GSTR 2006/4) explains the Commissioner's view on the meaning of 'creditable purpose' and 'extent of creditable purpose' in Divisions 11, 15 and 129 of the GST Act.

Paragraphs 17 to 19 of GSTR 2006/4 provide a general explanation of how to apportion your credits.

17. When you make an acquisition or importation, the extent of your creditable purpose is based on your planned use of the acquisition or importation in your enterprise expressed as a percentage of its total use. For example, if you acquire a computer which you plan to use 60% in your enterprise for a creditable purpose, you are entitled to claim 60% of the full input tax credit. The extent of your creditable purpose is 60%.

18. The use of the expression 'to the extent that' in the context of input tax credit recoverability in the GST legislation contemplates the apportionment of acquisitions between multiple uses, as well as exclusive allocation to specific uses.

19. If your actual use of the thing acquired or imported varies over time from your planned use, there is a change in the extent of your creditable purpose. If this occurs, you may need to make an adjustment to the amount of input tax credits you claimed. In this event, your net amount for the adjustment period is increased or decreased by the resulting adjustment. The amount of the adjustment depends on the change in the extent of your creditable purpose.

Paragraphs 25 and 44 are reproduced below to assist you in working out a fair and reasonable method.

25. To correctly calculate the amount of your input tax credit entitlement on creditable acquisitions or creditable importations that you make, you need to determine the extent of your creditable purpose for those acquisitions and importations. It is your planned extent of creditable purpose that is relevant for calculating input tax credits. You need to determine your planned extent of creditable purpose on a basis that is fair and reasonable (see paragraph 45 of this Ruling).

44. Formulae are specified in the GST Act for the calculation of input tax credits for acquisitions and importations that are partly creditable. A different formula is specified for importations, as the extent to which consideration is provided is not relevant for importations. The formulae are:

For acquisitions:

Full input tax credit x Extent of creditable purpose x Extent of consideration

Paragraph 45 of GSTR 2006/4 provides that you may estimate the planned use of the acquisition or importation based on:

• records you already have available from a previous period;

• records kept since you made the acquisition or importation, but before you lodge your BAS for the tax period in which you made the acquisition or importation including your actual use (full or partial) of the acquisition;

• records kept for some other purpose, for example, income tax, management accounting, profitability analysis, intra-entity transfer charging or cost accounting;

• your previous experience concerning the usage of similar acquisitions;

• your business plan; or

• any other fair and reasonable basis.

Therefore, you may claim input tax credits in respect of your acquisitions to the extent that you intend to apply those acquisitions in making taxable or GST-free supplies in the course of your enterprise. If the actual use of the things acquired varies over time from your planned use, there will be a change in the extent of your creditable purpose and an adjustment may be required.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).