Edited version of private advice

Authorisation Number: 1051826941161

Date of advice: 16 April 2021

Ruling

Subject: GST and creditable purpose

Question

Is Entity A entitled to input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for acquisitions made to build a new residence on the Property?

Answer

No.

Relevant facts and circumstances

Entity A (You or the Fund) is a self-managed super fund (SMSF) registered for GST.

The Fund owns the Property. The Property is X hectares in a remote area of Australia.

The Fund uses the Property to carry on a leasing enterprise. The entire Property is leased to the Partnership pursuant to an Agreement to Lease Rural Property (the Lease). You have provided a copy of the Lease.

The Fund receives market value rent based on a market valuation.

The Partnership uses the Property wholly and exclusively to carry on a farming enterprise (farming business).

The nature of the large-scale farming business and the location require the parties engaged in the day to day farming business to live in a residence on the Property.

The Property includes a residential area of less than X hectares with an existing residence (residential area) currently used and occupied by Fund members and related parties to the Fund that are engaged in the farming business.

There is no separate lease or payment for the residence.

The Fund is building new residential premises within the existing residential area to replace the old residence with a new residence that will be occupied by the same Fund members and related parties to the Fund that are engaged in the day to day farming business.

The Lease will remain the same. There will be no rent increase.

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

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

A New Tax System (Goods and Services Tax) Act 1999 Section 40-35

Reasons for decision

In this reasoning, please note:

•         all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

•         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

•         all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

Section 11-20 provides that an entity is entitled to an input tax credit for any creditable acquisition that it makes.

Section 11-5 lists the requirements that must be satisfied for an entity to make a creditable acquisition. One of those requirements is that the entity must acquire the thing solely or partly for a creditable purpose (see paragraph 11-5(a)).

Section 11-15 defines the meaning of creditable purpose and states, in part:

11-15 Meaning of creditable purpose

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) However, you do not acquire the 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.

...

Relevantly, paragraph 11-15(2)(a) provides that an entity does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

The Fund's acquisitions relate to building new residential premises on the Property to be occupied by related parties to the Fund who are engaged in the day to day farming business.

Under section 40-35, the supply of premises by way of lease, hire or licence is input taxed where the supply is of residential premises. Section 195-1 defines residential premises to mean, in part, land or a building that is occupied as a residence or for residential accommodation; or is intended to be occupied and is capable of being occupied, as a residence or for residential accommodation.

In this case, the new residential premises are intended to be occupied and will be occupied as a residence by related parties to the Fund who are engaged in the day to day farming business carried on by the Partnership.

Accordingly, the Fund is providing the Partnership with residential premises.

The Lease to the Partnership of the Property includes the buildings and improvements and the rental (a single amount) is for the entire Property.

In relation to the residential premises to be built on the Property, we consider that the Fund will be supplying those residential premises to the Partnership by way of lease which is input taxed under section 40-35.

As the Fund will be making an input taxed supply of the residential premises to the Partnership, the acquisitions made to build the residential premises are acquisitions that relate to the making of an input taxed supply. The Fund is not making the acquisitions for a creditable purpose (see paragraph 11-15(2)(a)) and the acquisitions are not creditable acquisitions under section 11-5.

The Fund is not entitled to an input tax credits under section 11-20 for acquisitions made to build the residence.

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