Edited version of private advice

Authorisation Number: 1052247238582

Date of advice: 6 June 2024

Ruling

Subject: GST - methodology to determine extent of creditable purpose

Question

Is the apportionment methodology you propose to determine the extent of creditable purpose under section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for claiming input tax credits (ITCs) in relation to acquisitions made fair and reasonable?

Answer

Yes, the proposed apportionment methodology to determine the extent of creditable purpose under section 11-15 of the GST Act for claiming ITCs in relation to acquisitions is fair and reasonable.

Relevant facts and circumstances

You are registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC) and are endorsed to access goods and services tax (GST) concessions and income tax exemptions.

You are registered for GST.

As part of your broader enterprise, you operate a number of residential colleges where you make supplies of, amongst other things, student accommodation (SA).

You have enged a manager( Manager) to operate and manage your facility which includes student accommodation.

The Manager supplies you the Services as set out in the Agreement. These Services will involve the management and operation of the accommodation in SA, self-contained apartments, asset management and maintenance of the facilities as well as non-operating services of entry into certain obligations.

You have determined that most, but not all, of the SA to be rented in the calendar year will be for consideration that is less than 75% of the GST inclusive market value of the accommodation and as such is treated as GST-free supplies of accommodation under section 38-250 of the GST Act.

As the operation of the facilities have been outsourced to the Manager the acquisitions from the Manager relate to all supplies made by you using the:

Service Payment:

The major expense will be the service payments (SP) that you pay to the Manager. The terms of the Agreement provide that you will pay the Manager the SP in consideration for the Manager making the following supplies:

•         Services

•         Entry into an obligation.

In carrying on your enterprise you make taxable supplies (retail and commercial rentals, operating licence, car parking and other supplies), GST-free supplies of accommodation pursuant to subsection 38-250(1) of the GST Act and input taxed supplies of accommodation under subsection 40-35(1) of the GST Act.

Proposed apportionment methodology

In allocating your acquisition costs between those that relate to creditable and non-creditable purposes on a direct basis, you have proposed a two-step apportionment methodology to determine the creditable purpose of your acquisitions.

The steps in the apportionment methodology are as follows.

Step 1 - Revenue based formula

• Calculate total revenue for each category of supplies you make for the period in question.
• Calculate the accommodation rental revenue (being the GST-free and input taxed accommodation)
• Adjust the revenue amounts as follows:
  • Increase all accommodation rental revenue to market value; and
  • Increase the revenue for any other supplies made for nominal consideration (i.e. GST-free supplies pursuant to section 38-250 of the GST Act) to market value.
• Calculate accommodation revenue as a percentage of total revenue (as adjusted by the above step).

The percentage derived using the revenue formula is then used to allocate acquisition costs between your supply of accommodation and other non-accommodation supplies.

As all non-accommodation supplies are taxable or GST-free no further apportionment is required. The portion of acquisition costs allocated to non-accommodation supplies will be for a creditable purpose.

Step 2 - Bed count

• Calculate total number of beds in relation to accommodation
• Calculate total number of GST-free beds
• Divide number of GST-free beds by total beds.

This gives the extent of creditable purpose for those acquisition costs that will relate to you making the supply of accommodation (student accommodation that is GST-free).

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 11-25

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-250(1)

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

Reasons for decision

Entitlement to input taxed credit

You are entitled to ITCs for any creditable acquisition that you make (section 11-20 of the GST Act). Section 11-5 of the GST Act provides that you make a creditable acquisition if:

• you acquire anything solely or partly for a creditable purpose
• the supply of the thing to you is a taxable supply
• you provide, or are liable to provide, consideration, and
• you are registered or required to be registered for GST.

On the facts provided:

• you are registered for GST
• you will provide consideration (service payment) for the supply by the Manager
• the supply by the Manager are a taxable supply of operating and non-operating services for which tax invoices are held.

The issue that arises under section 11-5 of the GST Act in your circumstances is whether you acquire something from the Manager and if so whether those acquisitions were solely or partly for a creditable purpose.

An acquisition is defined under section 11-10 to the GST Act as any form of acquisition whatsoever and includes, amongst other things, an acquisition of services or an acquisition of a right to require another person to do anything. Under the terms of the Agreement you acquire the Services and entry into obligations from the Manager.

Creditable purpose

Under subsection 11-15(1) of the GST Act you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

There is no issue in the present case that the Services and entry into obligations you acquire from the Manager are acquired in carrying on your enterprise. That enterprise involves activities or series of activities done by you:

•         in the form of a business

•         on a regular and continuous basis in the form of a lease, licence or other grant of interest in property

•         as a charity.

However, subsection 11-15(2) of the GST Act provides that you do not acquire the thing for a creditable purpose to the extent that:

• the acquisition relates to making supplies that would be input taxed or
• the acquisition is of a private and domestic nature.

With regards to the second requirement of subsection 11-15(2) of the GST Act the acquisitions in question for which the service payments are consideration are not of a private or domestic nature.

With regards to the first requirements of subsection 11-15(2) of the GST Act you make supplies of input taxed residential accommodation.

Accommodation supplies

Input Taxed supplies

Prima facie, those supplies of accommodation in the SA and self contained apartments are input taxed supplies of residential premises in accordance with subsection 40-35(1) of the GST Act.

This will be the case unless some of the supplies of accommodation in the residential premises satisfy the requirements of a GST-free supply.

GST-free supplies

Section 38-250 of the GST Act, provides that a supply of accommodation by an endorsed charity will be GST-free where:

• the consideration for the supply of the accommodation:
  • is less than 75% of the GST inclusive market value of the supply (subparagraph 38-250(1)(b)(i) of the GST Act), or
  • is less than 75% of the cost to the supplier of providing the accommodation (subparagraph 38-250(2)(b)(i) of the GST Act).

You are an ACNC registered charity and are endorsed to access GST concessions including those under section 38-250 of the GST Act.

To the extent the requirements of section 38-250 of the GST Act are satisfied in relation to supplies of accommodation in the residential premises, those supplies are treated by you as GST-free under section 38-250 of the GST Act.

To the extent those supplies of accommodation in residential premises do not satisfy the GST-free requirements of section 38-250 of the GST Act those supplies are treated by you as input taxed under subsection 40-35(1) of the GST Act.

Non accommodation supplies

To the extent the non-accommodation supplies you make satisfy the requirements of section 9-5 of the GST Act those supplies are taxable supplies and to the extent the non-accommodation supplies satisfy the requirements of GST-free provisions of the GST Act they are GST-free.

Extent of creditable purpose

A creditable acquisition is partly creditable where the extent of creditable purpose is greater than 0% but less than 100%. This will be the case if the acquisitions are made in carrying on your enterprise, but relate partly to making supplies that would be input taxed (input taxed supplies of accommodation in the RA).

As you will acquire services and other obligations from the Manager that will relate to your GST-free, taxable and input taxed supplies your planned extent of creditable purpose will be less than 100% (but greater than zero) and as such your acquisitions will be partly creditable. You need to apportion the total purpose between that which, on your estimate, is creditable (GST-free and taxable supplies) and that which is not (input taxed supplies).

Apportionment methodology

Goods and Services Tax Ruling GSTR 2006/4 Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose (GSTR 2006/4) provides guidance on how to determine the extent of your creditable purpose in making acquisitions to enable you to claim the correct amount of ITC's.

GSTR 2006/4 explains that you may choose your own apportionment method, but the method you choose needs to:

•         be fair and reasonable;

•         reflect the planned use of that acquisition (or in the case of an adjustment, the actual use); and

•         be appropriately documented in your individual circumstances.

You propose that a two-step apportionment methodology involving an initial revenue based formula applied in order to determine the proportion of acquisitions that will relate to accommodation and the proportion of acquisitions that will relate to non-accommodation supplies followed by a direct bed-count formula in order to determine the proportion of those acquisitions that relate to accommodation in RA that are input taxed and the proportion of those that are GST-free, fair and reasonable in determining the extent the acquisitions are not for a creditable purpose.

Is a revenue based formula fair and reasonable for step one?

On the facts provided, the use of a revenue based formula as a first step in apportioning the estimated use of acquisitions that will relate to supplies of non-accommodation supplies from the acquisitions that relate to supplies of accommodation, is based on a fair and reasonable expectation of their use.

Is a bed-count method fair and reasonable for step two?

On the facts provided the bed-count formula applied as the second step in apportioning the estimated use of acquisitions that will relate to supplies of input taxed accommodation in residential premises (non-creditable purpose) and those that will relate to supplies of GST-free accommodation in residential premises (creditable purpose) is fair and reasonable to determine the extent of creditable purpose.

Conclusion

On the facts provided the proposed apportionment methodology to determine the extent of creditable purpose under section 11-15 of the GST Act for claiming ITCs in relation to acquisitions for which the service payment is consideration is fair and reasonable.

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