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Edited version of your written advice
Authorisation Number: 1051299963435
Disclaimer
You cannot rely on this edited version in your tax affairs. You can only rely on the advice that we have given to you or to someone acting on your behalf.
The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.
Date of advice: 25 October 2017
Ruling
Subject: Claiming input tax credits
Question
Are you entitled to input tax credits for the GST included in the price of supplies invoiced to you?
Answer
Yes, you are entitled to input tax credits for the GST included in the price of supplies invoiced to you.
Relevant facts and circumstances
● You are registered for Goods and Services Tax (GST).
● You report on a non-cash basis for GST.
● You are related to a company with a long history of successfully raising capital.
● You have entered into contracts with a supplier.
● The supplier will provide you with technical expertise under the contracts for a fee.
● You have engaged employees.
● You have implemented accounting software.
● You have engaged an accountant.
● You are currently preparing a Prospectus for issue within the next few weeks to raise capital.
● You have located prospective customers and agreed on trials of your products.
● You have implemented action to engage clients, suppliers, distributors and investors.
● You have engaged a full time sales and marketing consultant.
● You have appointed a distributor who will also provide you with assistance with the provision of certain work as required by you.
● You have developed strategic plans that consider funding, customers, technology, products and controls.
● So far you have:
● set up your company
● developed strategic plans
● located prospective customers
● taken steps to offer investment, and
● taken steps to offer careers and distribution opportunities to the public.
● Your intention is to be structured and financed as any services company.
● Based on successful implementation of your processes, you expect to be able to readily monetise your offering once successfully implemented, in a profitable way in a short timeframe.
● The contracts that you have entered into with the supplier specify an annual fee which you have agreed to pay in advance upon receipt of a tax invoice.
● The supplier is registered for GST and the supplies to you under the contracts are taxable supplies.
● Tax invoices were issued to you by the supplier for the annual fees which you agreed to pay under the contracts.
Reasons for decision
Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) provides that you are entitled to the input tax credit for any creditable acquisition that you make.
An acquisition is a creditable acquisition if section 11-5 of the GST Act is satisfied.
Section 11-5 of the GST Act provides that an acquisition is a creditable acquisition if:
● it is for a creditable purpose; and
● the supply to you is a taxable supply; and
● you are liable to provide consideration; and
● you are registered or required to be registered for GST.
Therefore, when you meet all of the requirements of section 11-5 of the GST Act, you make a creditable acquisition.
In your situation, you would acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise (refer to section 11-15 of the GST Act).
An enterprise is broadly defined in section 9-20 of the GST Act to be an activity or a series of activities done:
(a) in the form of a business; or
(b) in the form of an adventure or concern in the nature of trade; or
(c) ….
Section 195-1 of the GST Act defines business to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.
Furthermore, section 195-1 of the GST Act defines carrying on an enterprise to include doing anything in the course of the commencement or termination of the enterprise.
Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case. All activities need to be taken into account, including activities from the commencement to the termination of the enterprise.
Paragraph 1 of Goods and Services Tax Determination 2006/6 (GSTD 2006/6) provides that the guidelines in Miscellaneous Taxation Ruling 2006/1 (MT 2006/1) are to apply to the meaning of the terms 'entity' and 'enterprise' as used in the GST Act and can be relied upon for GST purposes. The meaning of business is discussed in MT 2006/1 and the ruling also provides some indicators that are relevant to determine whether or not an entity is carrying on a business.
According to MT 2006/1 some indicators of a business are:
● a significant commercial activity;
● a purpose and intention of the taxpayer to engage in commercial activity;
● an intention to make a profit from the activity;
● the activity is or will be profitable;
● the recurrent or regular nature of the activity;
● the activity is carried on in a similar manner to that of other businesses in the same or similar trade;
● activity is systematic, organised and carried on in a businesslike manner and records are kept;
● the activities are of a reasonable size and scale;
● a business plan exists;
● commercial sales of product; and
● the entity has relevant knowledge or skill.
There is no single test to determine whether a business is being carried on, it is generally the result of a process of weighing all the relevant indicators. In your situation the main indicators to consider are:
● whether there is a significant commercial activity
You have engaged staff. You have signed on prospective applications. You have implemented action to engage clients, suppliers, distributors and investors.
● whether there is a purpose and intention of the taxpayer to engage in commercial activity and whether the entity has relevant knowledge or skill
You have entered into contracts under which you have agreed to pay a fee. The supplier has staff with proven technical ability. You have the intention to structure and finance in the same way as any services company.
● whether there is an intention to make a profit from the activity and the activity is or will be profitable
Based on successful implementation of your processes, you expect to be able to readily monetise your offering once successfully implemented, in a profitable way in a short timeframe.
● the recurrent or regular nature of the activity
You are related to a company with a long history of successfully raising capital.
● whether the activity is carried on in a similar manner to that of other businesses in the same or similar trade
You intend to be structured and financed in the same way as any services company.
● Whether the activity is systematic, organised and carried on in a businesslike manner and records are kept, and whether a business plan exists
The following steps have been implemented by you:
● set up or the company and accounting software
● development of strategic plans
● commenced capital raising
● sought out potential customers
● employed staff, and
● offered careers and distribution opportunities to the public.
All of these steps suggest that the activity is carried on in a businesslike manner directed to making a profit.
● the activities are of a reasonable size and scale
You have engaged staff and located prospective clients. Significant time and resources have been dedicated to the business employment of arm’s length specialist skills.
In your case, weighing all of the indicators of a business, there is an intention by you to carry on your activities in a business-like manner.
Further, the acquisitions you made were acquired by you in the course of carrying on your enterprise, and you were registered for GST at the time.
In addition, the supplies made to you were taxable supplies for which, under the terms of the contracts, you are liable to provide consideration.
As you have met all of the requirements for a creditable acquisition, you are thus entitled to input tax credits for the GST included in the price of supplies invoiced to you.
As you use the non-cash method of accounting to report your GST, you are able to attribute the input tax credits to the first tax period for which you give to the Commissioner a GST return at a time when you hold the tax invoices.
Additional information:
Adjustment Events
When accounting for GST on a non-cash basis, you may have an adjustment for a debt you owe for an acquisition that you claim an input tax credit for that has been overdue for 12 months or more, or is written off as a bad debt by the supplier.
For more information, please refer to Goods and Services Tax Ruling 2000/2 (GSTR 2000/2) and also the fact sheet When to make adjustments.
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