Edited version of private ruling

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Ruling

Subject: Goods and services tax and apportionment methodology

Question 1

Is the goods and services tax (GST) apportionment methodology set out below considered to be fair and reasonable in accordance with the Commissioner's view as set out in Goods and Services Tax Ruling: GSTR 2006/3: Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3)?

Answer

Yes, the entity's general apportionment formula is considered to be fair and reasonable for calculating the amount of input tax credits it is entitled to for its acquisitions in accordance with

Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and GSTR 2006/3.

Relevant facts and circumstances

Entity Q:

· is an authorised deposit-taking institution (ADI) in accordance with the Banking Act 1959.

· is registered for GST and carries on general ADI activities which include the provision of banking services, term deposits and lending.

· also provides brokerage services in respect of insurance and other financial products.

· does not make any GST-free supplies and exceeds the financial acquisition threshold.

The proposed apportionment methodology

For acquisitions that relate wholly to the making of what is or would be a taxable supply, Entity Q will directly allocate the acquisitions and claim a full input tax credit.

For acquisitions that relate wholly to the making of what is or would be an input taxed supply, Entity Q will not claim any input tax credits.

For acquisitions that can not be directly allocated to either taxable or input taxed supplies, Entity Q will need to use an apportionment formula to calculate their extent of creditable purpose (ECP).

Entity Q has provided a specific formula to calculate the ECP rate to be applied to acquisitions which can not be directly allocated.

The formula should exclude any transaction which would unnecessarily distort the resultant ECP.

To the extent that any input tax credits are not for a creditable purpose, Entity Q will consider any entitlement to reduced credit acquisitions under Division 70 of the GST Act.

Reasons for decision

Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) deals with entitlement to input tax credits. Section 11-20 provides that an entitlement to an input tax credit arises for any creditable acquisition made by an entity. The term creditable acquisition is defined by section 11-5 which states:

You make a creditable acquisition if: 

· you acquire anything solely or partly for a *creditable purpose; and

· the supply to it is a *taxable supply; and

· you provide, or is liable to provide, *consideration for the supply; and

· you are *registered or *required to be registered.

* denotes a term defined in section 195-1.

Relevantly, a creditable acquisition is one which is acquired solely or partly for a creditable purpose. Section 11-15 of the GST Act states:

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

However, 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 or domestic nature.

Accordingly, Entity Q acquires a thing for a creditable purpose to the extent that it acquires the thing in carrying on its enterprise.

You have told us that Entity Q exceeds the financial acquisitions threshold referred to in subsection 11-15(4) and therefore does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

In this case, Entity Q's enterprise involves making a combination of financial supplies that are input taxed and taxable supplies.

Where acquisitions made by Entity Q are used or intended to be used only for a creditable purpose, such acquisitions are fully creditable and do not require apportionment. Entity Q has adopted such an approach in the proposed apportionment methodology set out above.

Similarly, where acquisitions made by Entity Q are used or intended to be used only for a non-creditable purpose, these acquisitions are not fully creditable and Entity Q will not claim input tax credits in relation to these acquisitions, except to the extent that reduced input tax credits are available.

However, there are acquisitions made by Entity Q that are both for a creditable purpose (making taxable supplies) and an input taxed purpose (making financial supplies). These acquisitions are partly creditable and the amount of input tax credits to which Entity Q is entitled depends upon the extent of creditable purpose as provided for in section 11-30 of the GST Act.

The phrase extent of creditable purpose is defined in subsection 11-30(3) of the GST Act to mean the extent to which the creditable acquisition is for a creditable purpose, expressed as a percentage of the total purpose of the acquisition. On this basis, an apportionment of these acquisitions would need to be made by Entity Q to determine their extent of creditable purpose.

The Commissioner's view on apportionment and the methods of calculating the extent of creditable purpose of an entity's acquisitions or importations are outlined in GSTR 2006/3.

Specifically paragraphs 33 and 73 of GSTR 2006/3 provide that the method chosen to allocate or apportion acquisitions between creditable and non-creditable purposes need to:

· be fair and reasonable;

· reflect the intended use of the acquisition (or in the case of an adjustment, the actual use); and

· be appropriately documented in your individual circumstances.

Further, paragraphs 81 and 103 of GSTR 2006/3 explore the Commissioner's view on direct and indirect methods of estimation and circumstances where these methods may be considered appropriate:

'81. The Commissioner considers that the use of direct methods, including direct estimation best accords with the basic principles explained above. If it is not possible or practicable to use a direct method, you may use some other fair and reasonable basis, including an indirect estimation method.

103. Indirect estimation methods may be appropriate in circumstances where there are overhead expenses that are not directly referable to particular supplies or activities. They may also be appropriate if the direct methods do not apportion acquisitions or importations to the level of supplies, or groups of supplies, that require different treatment for GST purposes. It may also be the case that the direct attribution of a large number of small acquisitions or importations is not cost effective. In all cases where indirect methods are used, the method chosen should be fair and reasonable in the context of your enterprise.'

Application of the GST law to Entity Q's circumstances

In accordance with the above paragraphs of GSTR 2006/3, we would accept any basis of apportionment provided it is fair and reasonable in the given circumstances, reflects the intended use of the acquisitions and is appropriate in the individual circumstances of the enterprise.

In this case, Entity Q proposes to use a revenue based formula as its indirect estimation method.

This formula identifies the revenue (income) from supplies Entity Q makes as part of its business activities.

In this case and on the basis of the information provided by Entity Q, we consider that the proposed GST apportionment methodology is fair and reasonable, reflects the intended use of the acquisitions, is appropriately documented and based on your circumstances at the time of issuing this ruling.

Our acceptance of the above apportionment methodology is based on the facts presented to us.

However, if those circumstances change, Entity Q may be required to review this methodology to determine if it remains fair and reasonable and accurately reflects the intended use of its acquisitions.