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Date of advice: 8 December 2017

Ruling

Subject: Eligibility to claim input tax credits and approval of apportionment method to claim input tax credits.

Question 1

Can you claim the input tax credits (ITCs) on the earlier supplies of motor vehicles you purchased from a floorplan financier where the consideration you were liable to provide was settled in accordance with a Deed of settlement and no invoice was issued for the purchase?

Answer

Yes. You can claim to the ITCs on the earlier supplies of motor vehicles you purchased from a floorplan financier where the consideration you were liable to provide was settled in accordance with a Deed of settlement and no invoice was issued for the purchase.

Question 2

Can an apportionment method based on the ‘floorplan finance balance’ as a percentage of the ‘total outstanding amount owed’ be used to calculate the input tax credit claim?

Answer

Yes. An apportionment method based on the ‘floorplan finance balance’ as a percentage of the ‘total outstanding amount owed’ can be used to calculate the input tax credit claim.

Relevant facts and circumstances

You operated a new and used car dealership enterprise.

You are registered for good and service tax (GST) and have an ABN. You account for GST on an accruals basis and report for GST on a quarterly basis.

You have a Floorplan Arrangement with the financier where you purchase the vehicle from the financier at the time you make a sale to a customer.

The acquisitions of the vehicles by you from the financier are in the course of your enterprise. Your acquisitions are creditable acquisitions and therefore you are entitled to ITC’s.

You did not claim ITC’s on the acquisitions of vehicles from the financier. You contend the financier did not provide you with a tax invoice for your purchases of vehicles.

You did not provide any consideration for the purchases made from the financier.

You sold the new car dealership however retained and continued to operate the wholesale car dealership after the sale.

After the sale you owed an amount to the financier the liability which you were unable to meet due to the declining state of your business.

The ‘floorplan finance balance’ component represents the consideration owed on your purchases of vehicles from the financier. All other components represent the value of loans made by the financier to you.

Proceeding commenced in the courts and as a consequence you and the financier agreed to settle the disputes on terms contained in a Deed of settlement and release (Deed).

The Deed was executed to settle the disputes between you and the financier, without any admission of liability and according to the terms of the Deed.

The financier did not issue an invoice for the amounts paid despite your requests.

The settlement sum represents an undissected amount agreed to between the parties to the Deed for settlement of the components owed.

Relevant legislative provisions

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

Section 11-5 What is a creditable acquisition?

Section 11-20 Who is entitled to input tax credits for creditable acquisitions?

Section 11-25 How much are the input tax credits for creditable acquisitions?

Section 29-70 Tax Invoices

GSTR 2001/4 Goods and Services Tax: GST consequences of court orders and out-of-court settlements

Reasons for decision

Question 1

Are you entitled to ITCs on the earlier supplies of motor vehicles you purchased from a floorplan financier where the consideration you were liable to provide was settled in accordance with a Deed of settlement (out of court settlement)?

Section 11-20 of A New Tax System (Goods and Services Tax) Act 1999 (the Act) states that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the Act defines what is a creditable acquisition? It 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.

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

For your acquisition of vehicles to be creditable it needs to meet all the conditions of section 11-5 of the Act.

As your acquisitions were made in the course of your enterprise (trading stock), your acquisitions were taxable supplies of the vehicles to you, and you were registered for GST, you therefore meet the requirements at paragraphs 11-5(a), (b) and (d) of the Act.

In this case, you did not remit the proceeds of the sale of vehicles, under the Bailment Agreement between you and the financier, which subsequently were subject to a dispute and proceedings were commenced in the courts.

You and the financier agreed to settle the disputes without any admission of liability by way of a Deed of settlement (out of court settlement).

The Deed states that the financier will reduce the Debt, and accept the Settlement Sum in full and final satisfaction of the Debt.

The Debt included a sum of money owed by you for the purchase of vehicles under the Bailment Agreement.

Goods and Services Tax Ruling GSTR 2001/4 Goods and services tax: GST consequences of court orders and out of court settlements (GSTR 2001/4) analyses the concept of supply and the nexus that must exist between payment and supply in order to establish the relationship of a ‘supply for consideration’.

GSTR 2001/4 considers ‘Supplies’ related to an out of court settlement in paragraphs 42 to 44. We consider that the out of court settlement between you and the financier will fall in the category of “Earlier supply”.

Paragraphs 45 to 47 of GSTR 2001/4 explains the characterisation of an earlier supply as follows:

45. Each and every supply is subject to GST provided the supply satisfies the requirements of a taxable supply. The GST Act does not prescribe any sequencing or hierarchy of supplies for taxing purposes. GST becomes payable on the relevant supply.

46. In these circumstances, where the subject of the dispute is an earlier transaction in which a supply was made involving the parties, that supply is referred to in this ruling as an 'earlier supply'.

Example - Earlier supply

47. Widget Company supplies toys to a retailer. A dispute between the parties over payment for the toys is subsequently resolved through an out-of-court settlement, with the retailer paying all monies owed. The supply of the toys, that is the subject of the dispute, is an earlier supply because it occurred before the dispute arose.

Importantly is whether there is a sufficient nexus that exists between the earlier supply and the payment (consideration) made under the Deed.

GSTR 2001/4 at paragraph 100 to 103 explains which supply has the nexus with the consideration, it states:-

100. … a sufficient nexus between a payment made under a court order or out-of-court settlement and a supply must exist to create the 'supply for consideration' relationship…

Earlier supply

101. Where the only supply (other than a 'discontinuance' supply) in relation to a court order or out-of-court settlement is an earlier supply and a sufficient nexus exists between the payment made under that order or settlement and the earlier supply, the payment will be consideration for that supply.

Example - payment for an earlier supply

102. In the Widget Company example at paragraph 47, the out-of-court settlement reached with the retailer provides for the retailer to make payment in full to Widget for the toys. The supply of the toys is an earlier supply and there is a sufficient nexus between it and the payment. The payment is consideration for that supply.

103. A payment made under a court order or out-of-court settlement may also result in an effective reduction in the price of an earlier supply, perhaps to nil. Where this happens, an adjustment event may be required (refer paragraphs 126 to 136 on GST consequences).

In your case the Settlement Sum to settle the dispute in part relates to the earlier supply of vehicles made to you by the financier for which you had not provided consideration.

The Settlement Sum in your case represents an undissected amount for settlement of all the components of debt owed. The sum relates to more than one supply, with more than one being input taxed (e.g. loans) and was for each of the relevant components. Apportionment on a reasonable basis will need to be undertaken to determine the extent to which the settlement sum is consideration for your acquisitions of vehicles from the supplier. This is discussed in further detail at question 2.

With regard to the requirement at paragraph 11-5(c) of the Act, we consider that it is satisfied. In this case, we note that despite any liability for you to provide consideration that you may have had when you acquired the vehicles, you have not provided consideration. It is also noted that you have not claimed any ITCs on the acquisitions of the vehicles. In light of this and on the basis that the consideration for the vehicles is represented by a part of the settled sum which you have now provided, we consider that the requirement at paragraph 11-5(c) of the Act is satisfied. As such, you are entitled to the ITCs on the earlier supplies of motor vehicles you purchased from a floorplan financier where the consideration you were liable to provide was settled in accordance with the Deed of settlement.

Note that entities are required to hold a valid tax invoice to claim the ITCs. In this regard, subsection 29-70(1) of the Act provides that:

29-70 Tax invoices

(1) A tax invoice is a document that complies with the following requirements:

(a) it is issued by the supplier of the supply or supplies to which the document relates, unless it is a *recipient created tax invoice (in which case it is issued by the *recipient);

(b) it is in the *approved form;

(c) it contains enough information to enable the following to be clearly ascertained:

(i) the supplier's identity and the supplier's *ABN;

(ii) if the total *price of the supply or supplies is at least $1,000 or such higher amount as the regulations specify, or if the document was issued by the recipient - the recipient's identity or the recipient's ABN;

(iii) what is supplied, including the quantity (if applicable) and the price of what is supplied;

(iv) the extent to which each supply to which the document relates is a *taxable supply;

(v) the date the document is issued;

(vi) the amount of GST (if any) payable in relation to each supply to which the document relates;

(vii) if the document was issued by the recipient and GST is payable in relation to any supply - that the GST is payable by the supplier;

(viii) such other matters as the regulations specify;

(d) it can be clearly ascertained from the document that the document was intended to be a tax invoice or, if it was issued by the recipient, a recipient created tax invoice.

(1A) A document issued by an entity to another entity may be treated by the other entity as a *tax invoice for the purposes of this Act if:

(a) it would comply with the requirements for a tax invoice but for the fact that it does not contain certain information; and

(b) all of that information can be clearly ascertained from other documents given by the entity to the other entity.

…

In this case, while documentation supplied by the supplier to you at the time of acquisitions would comply with the requirements of a tax invoice but for the fact that they don’t contain certain information, other documentation including the Deed will allow the information to be ascertained.

As such, you can claim the ITCs on the earlier supplies of motor vehicles you purchased from a floorplan financier where the consideration you were liable to provide was settled in accordance with the Deed of settlement and no invoice was issued for the purchase.

The issue of determining the way in which such ITCs is calculated is addressed at question 2.

Question 2

Can an apportionment method based on the ‘floorplan finance balance’ as a percentage of the ‘total outstanding amount owed’ be used to calculate the input tax credit claim?

You are entitled to the ITCs on the earlier supplies of motor vehicles you purchased from a floorplan financier where the consideration you were liable to provide was settled in accordance with a Deed of settlement (out of court settlement).

You are eligible to claim ITCs of 1/11^th of the amount paid as consideration for your creditable acquisitions.

Paragraphs 115 to 119 of GSTR 2001/4 provide the ATO’s view on how apportionment is applied to payments made under a court order or out-of-court settlement and provides that:

Apportionment

115. Where payment made under a court order or out-of-court settlement has a sufficient nexus with more than one supply, with one or more supplies being taxable and one or more being GST-free or input taxed, the payment will be for each of the relevant parts. This will also be the case where the payment is partly for an item of damages which is not a supply.

116. Where a court order (issued in accordance with the court's judgment on the case) itself dissects and itemises the payment into the heads of claim relating to the individual supplies and / or item of damages, that itemisation will be accepted as representing the amounts of these relevant parts.

117. In the case of an out-of-court settlement, where the terms of the settlement include a dissection and itemisation of the payment into the heads of claim, that itemisation will be accepted as representing the amounts of these relevant parts to the extent that it is made on a reasonable basis.

118. Where no dissection is made, even though the payment has a sufficient nexus with more than one supply, or to a supply and an item of damages which is not a supply, the payment should be apportioned into amounts representing these relevant parts in order that the correct GST consequences result.

119. The apportionment should be determined by the parties on a reasonable basis. Where a payment is apportioned in a manner that cannot be justified in terms of reasonableness, the general anti-avoidance provisions of the GST Act^F63 may have application.

Furthermore, paragraphs 123 to 125 of GSTR 2001/4 provide an example in relation to apportionment where there is an earlier supply. It states:

123. Just before Valentines Day, Flowerbox, a GST registered gift shop, receives a supply of wilted flowers for which it has paid $5,500 and claimed an input tax credit of $500. The supplier refuses to refund any part of this amount. Flowerbox sues the supplier for damages, in the amount of $12,000. Flowerbox has based the amount of its claim on the cost of the flowers ($5,500) plus an amount of $6,500 that it asserts is equal to the loss of profits it would have made from the sale of the flowers. The court rules in favour of Flowerbox, but the total award is reduced to $9,900. The court does not dissect the amount of the award.

124. To apportion this amount it is reasonable that $5,500 is applied to the reduction in the price of the flowers and the balance ($4,400) to the damages for loss of business. As an alternative, it might be appropriate to use the relative proportions of the original heads of claim as the basis for dissecting the amounts awarded by the court.

125. Flowerbox has an increasing adjustment because its previously attributed input tax credit amount is greater than the corrected input tax credit amount as a result of the court award. No GST is payable on the amount for damages for loss of business.

You have also asked whether an apportionment method based on the ‘floorplan finance balance’ as a percentage of the ‘total outstanding amount owed’ can be used to calculate the ITC claim.

We have not considered the accuracy and/or correctness of the amounts above in this private ruling. However, we consider that your proposed apportionment method would accord with the principles contained in GSTR 2001/4 stated above. Therefore, we consider that your proposed apportionment method based on the ‘floorplan finance balance at’ as a percentage of the ‘total outstanding amount owed’ can be used to calculate the ITC claim.

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