Edited version of your written advice

Authorisation Number: 1051505128275

Date of advice: 18 April 2019

Ruling

Subject: GST and apportionment methodology

Question

Is a floor space based formula a fair and reasonable method for establishing the taxpayer’s extent of creditable purpose for the purpose of subsection 11-30(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The Commissioner considers a floor space based formula a fair and reasonable method for determining the taxpayer’s extent of creditable purpose for the purpose of subsection 11-30(3) of the GST Act.

Relevant facts and circumstances

The taxpayer operates a foreign exchange currency business at an airport. The taxpayer buys and sells foreign and Australian currencies to customers departing from and arriving to Australia.

The taxpayer has kiosks located in the Departure and Arrival areas of the airport. The Departure and Arrival areas are located on different floor levels of the airport.

The taxpayer makes acquisitions that relate to both the supply of currency that is input taxed and GST-free. For the purpose of determining its extent of creditable purpose on those acquisitions, the taxpayer proposes to use the following formula:

[Floor space of kiosks in the Departure area] / [Total floor space leased] x 100

The taxpayer will use the following process in calculating its entitlement to input tax credits:

● Determine whether a particular acquisition solely relates to the Departure or Arrival area;

● Where a particular acquisition solely relates to the Departure area, the taxpayer will claim 100% of the GST payable on the supply.

● Where a particular acquisition solely relates to the Arrival area, the taxpayer will not claim an input tax credit because its extent of creditable purpose is 0%.

● Where a particular acquisition relates to both the Departure and Arrival areas, the taxpayer will claim an input tax credit using the percentage of arrived at using the above formula.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 sections 11-5, 11-15, 11-25, 11-30, 40-5

A New Tax System (Goods and Services Tax) Regulations 2019 section 40-5.09

Reasons for decision

Relevant legislation

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity is entitled to the input tax credit for any creditable acquisition it makes.

Section 11-5 of the GST Act provides that an entity makes a creditable acquisition if:

a) the entity acquires the thing solely or partly for a creditable purpose

b) the supply of the thing to the entity is a taxable supply

c) the entity provides, or is liable to provide, consideration for the supply, and

d) the entity is registered, or required to be registered, for GST.

Section 11-15 of the GST Act provides that an entity acquires a thing for a creditable purpose to the extent that the entity acquires it in carrying on its enterprise. However, the acquisition is not for a creditable purpose to the extent that the acquisition:

a) relates to making supplies that would be input taxed or

b) is of a private or domestic nature.

Section 11-25 of the GST Act provides that the amount of input tax credit for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount is reduced if the acquisition is only partly creditable.

Section 11-30 of the GST Act provides that an acquisition is partly creditable if one or both of the following applies:

a) the entity acquires the thing only partly for a creditable purpose,

b) the entity provides, or is liable to provide, only part of the consideration for the acquisition.

Section 40-5 of the GST Act provides that a financial supply is input taxed. Financial supply has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations).

Item 9 in the table under subsection 40-5.09(3) of the GST Regulations provides that the supply of Australian currency and the currency of a foreign country is input taxed if all of the requirements in subsection 40-5.09(1) of the GST Regulations are satisfied.

Section 38-190 of the GST Act provides that supplies of things other than goods or real property for consumption outside the indirect tax zone are GST-free. Item 4(a) in the table in subsection 38-190(1) of the GST Act provides that a supply that is made in relation to rights is GST-free if the rights are for use outside the indirect tax zone.

In Travelex Ltd v Commissioner of Taxation [2010] HCA 33, the High Court determined that the supply of a banknote is a supply that is made in relation to rights because the banknote has value only because of the rights that attach to it as a currency in at least the country or area of issue.

When a supplier sells foreign currency to an acquirer, the acquirer obtains the rights that attach to, or are constituted by, the ability to use the currency. Where it is evident that the currency is to be used overseas, the rights that attach to the currency are for use outside the indirect tax zone and the supply is a GST-free supply under item 4(a) in the table in subsection 38-190(1) of the GST Act. [paragraphs 26, 27 and 35]

ATO view

In the Decision Impact Statement issued on the Travelex decision, the Commissioner accepts that the decision of the High Court is not confined to supplies of foreign currency in a currency conversion transaction that takes place on the departures side of the Customs barrier: a supply of foreign currency in a currency conversion transaction that takes place elsewhere in Australia is GST-free, if the foreign currency is for use outside the indirect tax zone. Whether the foreign currency is for use outside the indirect tax zone in any particular transaction is a question of fact.

In Goods and Services Tax Ruling GSTR 2006/3, the Commissioner provides guidance on methods that can be used for calculating input tax credits by providers of financial supplies.

Paragraph 24 of GSTR 2006/3 states that the first step in determining the creditable purpose of an acquisition is to establish a sufficient connection between the acquisition and the enterprise such that it can be said to have been made ‘in carrying on your enterprise’.

If it is established that an acquisition is made in carrying on an enterprise, paragraph 11-15(2)(a) of the GST Act will preclude it being for a creditable purpose to the extent that it 'relates to' making supplies that would be input taxed.

If an acquisition made in carrying on an enterprise does not relate to the making of an input taxed supply, the acquisition is solely for a creditable purpose and no apportionment is required.

If an acquisition made in carrying on an enterprise relates partly to the making of an input taxed supply, an apportionment is required (paragraph 42 of GSTR 2006/3).

A fundamental requirement in whatever apportionment method is used to calculate the input tax credits is that the method must be fair and reasonable, and appropriately reflect the intended use of the acquisitions (paragraph 26 of GSTR 2006/3).

The use of a direct method of allocating or apportioning the intended use of acquisitions, such as direct estimation, will best reflect the intended use of the acquisition. To the extent that it is not possible or practicable to use a direct method, some other fair and reasonable basis such as an indirect estimation method may be used (paragraph 35 of GSTR 2006/3).

Application to your case

The supplies of currency that the taxpayer makes are input taxed under section 40-5 of the GST Act because the supplies fall within item 9 in the table under subsection 40-5.09(3) of the GST Regulations. However, to the extent it is evident that a supply of foreign currency is for use outside the indirect tax zone, the supply is a GST-free supply under item 4(a) in the table in subsection 38-190(1) of the GST Act.

Given the physical configuration of airport wherein the Departure and Arrival Areas are on different floor levels, the Commissioner accepts it is sufficiently evident that all currency exchanges in the Departure Area are to customers who are set to depart Australia and would therefore use the currency outside the indirect tax zone.

On this basis, the Commissioner considers the taxpayer’s floor space based apportionment formula is a fair and reasonable method of determining its extent of creditable purpose for the purpose of section 11-30 of the GST Act.

The taxpayer is to use the rate determined under its floor space based formula to calculate its input tax credit entitlement where a particular creditable acquisition does not solely relate to either the Departure or Arrival Areas.

Where a particular acquisition is solely relates to the Departure Area, the taxpayer’s extent of creditable purpose is 100%. Where a particular acquisition solely relates to the Arrival Area, the taxpayer’s extent of creditable purpose is 0%.

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