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Edited version of your written advice
Authorisation Number: 1012760745384
Date of advice: 04 February 2015
Ruling
Subject: GST and input tax credits
Question 1
Is the Partnership entitled to the input tax credits on the deposit it paid to the Supplier for the purchase of a custom-built item?
Answer
Yes, the Partnership is entitled to the input tax credits on the deposit it paid to the Supplier for the purchase of a custom-built item. Based on the circumstances of this case and the Tax Office’s view at paragraph 51 of Goods and Services Tax Ruling GSTR 2006/2 Goods and services tax: deposits held as security for the performance of an obligation, we are of the opinion that for GST purposes the deposit paid by the Partnership to the Supplier is a part payment for the purchase of the custom-built item and not a ‘security deposit’.
Entitlement to input tax credits on an acquisition arises if the requirements of a creditable acquisition, set out in section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), are met. In this case, the requirements are met when the Partnership paid the deposit to the Supplier for the purchase of a custom-built item. The amount of input tax credits attributable is limited to the GST within the amount of deposit paid under a cash basis of accounting for GST.
Relevant facts and circumstances
The Partnership is registered for GST and reports for GST on a cash basis.
The Partnership’s enterprise activity involves the supply of engineering services.
The Partnership entered into a contract with the Supplier to build a custom made item costing $X.
The item was acquired solely for the purposes of carrying out the Partnership’s enterprise of supplying engineering services.
The events leading up to the purchase of the item were as follows:
● The Partnership contacted the Supplier and had discussions regarding their requirements for a custom made product.
● Design specifications and costings were discussed and the final design and cost was agreed upon.
● Before the works would commence, the Supplier advised the Partnership that an amount of $Y was required to be paid upfront so that they could pay their subcontractor who manufactured parts of the item.
● Such a payment represented a part payment of the total consideration with the balance payable being due upon completion.
There are no formal contacts or agreements between the Partnership and the Supplier other than an invoice given to the Partnership by the Supplier.
The Partnership paid a deposit to the Supplier totalling $Y via 3 amounts.
There has never been a mutual intention between the Partnership and the Supplier to make the deposit subject to forfeiture. As advised, the Partnership would not have paid the deposit amount if there was a hint that they would forfeit the deposit amount.
There are no documented terms and conditions under which the deposit would be refunded. The Partnership was of the understanding that if the purchase was not able to be fulfilled then the deposit would be refunded to them. A refund has not occurred.
The Partnership subsequently received notification that the Supplier had gone into liquidation. The Partnership is not covered for such an event under their insurance policy.
The Partnership has not received the item and the Partnership decided to buy an existing item instead as a replacement.
There is a contractual obligation on the Supplier’s part to build the item. However, with the liquidation of the Supplier, the manufacturer will not be in a position to fulfil its obligations under the contract.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 11-5
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