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Edited version of your written advice
Authorisation Number: 1051318017405
Date of advice: 8 December 2017
Ruling
Subject: GST and input tax credits
Question 1
Is Entity A entitled to claim input tax credits of $xxx through its Business Activity Statement for the specified tax period?
Answer
Yes. Entity A is entitled to claim input tax credits of $xxx for its acquisitions through its Business Activity Statement for the specified tax period, but only the extent of the consideration provided in the tax period.
Question 2
Is Entity A entitled to claim input tax credits for the costs amounting to $XXX on-charged to it by Entity B?
Answer
No. Entity A is not entitled to claim input tax credits for the costs on-charged to it by Entity B as the supplies acquired are not taxable supplies.
Question 3
How much input tax credits can Entity A claim for GST paid on operating and entity maintenance expenses?
Answer
Entity A can claim full input tax credits for the GST paid on operating and entity maintenance expenses.
Relevant facts and circumstances
Entity A is a resident entity that is registered for GST. Entity A accounts for GST on a cash basis.
Entity A is subsidiary of Entity B which is a non-resident entity.
Entity A is the holding entity for two other subsidiaries namely, Entity C and Entity D.
Entity A, together with an unrelated Entity X, has interest in Entity C.
Entity C, together with an unrelated Entity Y, has interest in Entity D.
Entity A also has interest in Entity E.
Several costs amounting to $xxx were incurred to establish the viability of the underlying business of entity D and in the drafting of Shareholders Agreements for Entity C and Entity D.
As Entity A did not have an Australian bank account and some of the expenses were incurred prior to the incorporation of Entity C and/or Entity D, then 100% of these costs were initially invoiced by the third party service providers to Entity X.
Entity X then invoiced Entity A for its share of these third party fees as per the Shareholders Agreement.
Legal costs amounting to $XXX were incurred to draft the various agreements of which Entity A was a party, including licensing, pre-incorporation, strategic alliance and guarantee agreements.
As Entity A did not have an Australian bank account and some of the expenses were incurred prior to the incorporation of Entity A, 100% of these costs were initially invoiced by the legal firm to Entity B.
The legal firm did not charge GST on these invoices to Entity B.
Entity B raised a ‘back-to-back’ invoice to Entity A for these costs (no GST).
Entity A incurs GST-inclusive running expenses such as accounting fees, telephone fees, travel expenses and insurance.
Entity A has no active involvement in Entity E.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 11-5
A New Tax System (Goods and Services Tax) Act 1999 section 11-15
Reasons for decisions
Creditable acquisitions give rise to entitlement to input tax credits.
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.
1. For the purpose of paragraph 11-5(a) of the GST Act, it must be determined whether Entity A is carrying on an enterprise for the purpose of which the acquisitions were made.
It was submitted that Entity A is actively involved in the management of Entity C and Entity D. Entity A provides Entity C and Entity D rights to intellectual property. Entity A also provides specific management services to its group including secretarial, financial, obtaining legal and taxation advice, product development, consulting, risk management, information technology, recruitment and human resources expertise. These indicate that Entity A, as a holding entity, is carrying on an enterprise and the acquisitions were made for the purpose of that enterprise. Paragraph 11-5(a) of the GST Act is satisfied.
The supplies acquired are taxable supplies and Entity A is liable to provide consideration for the supplies. Furthermore, Entity A is registered for GST. Paragraphs 11-5(b) to 11-5(d) of the GST Act are also satisfied. Therefore, the acquisitions are creditable acquisitions.
Accordingly, Entity A is entitled to claim input tax credits for the acquisitions, but only to the extent of the consideration provided in the tax period.
2. The supplies of legal services by the legal firm were not treated as taxable supplies; and thus, there was no GST included in the price. Paragraph 11-5(b) is not satisfied. Therefore, the acquisition of the legal services is not a creditable acquisition. Accordingly, Entity A is not entitled to input tax credits for the acquisition.
It may be argued whether the supplies of legal services were treated correctly. This is a matter for the supplier to determine.
It was submitted that Entity B did not make a supply or provide any services to Entity A for which the invoices were issued. Therefore, the amount paid to Entity B would not be consideration for a taxable supply and would not be subject to GST.
Where the legal firm treated the supplies as GST-free under subsection 38-190(1) of the GST Act, the supplies may remain GST-free despite the services being provided to Entity A which is an Australian-based business recipient.
3. Subsection 11-15(2) of the GST Act provides that an entity does not acquire a 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.
Based on the information provided, Entity A does not make input taxed suppliers; thus the acquisitions would not be related to making input taxed supplies. Furthermore, the acquisitions are not of a private or domestic nature. Therefore, the acquisitions are made for a creditable purpose.
Accordingly, Entity A is entitled to full input tax credits for the GST paid on operating and entity maintenance expenses. Apportionment would not be necessary.
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