Edited version of private ruling

Authorisation Number: 1011806476321

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Ruling

Subject: GST, grouping and input tax credits for acquiring second-hand goods

Question

Are you entitled to an input tax credit as representative member for your GST group in respect of the acquisition of second-hand goods?

Answer: No.

Relevant facts and circumstances

You are the GST group representative for Entity B and have been from a date later than 1 July 2000. Entity B is a non-resident entity.

Entity B was also registered for GST as a non-resident company for a single tax period which was earlier than its membership of your GST group.

You are the GST group representative for Entity C and have been from a date later than 1 July 2000. Entity C is a non-resident entity.

You advise that Entity B in the course of carrying on its enterprise of the leasing and sale of second-hand goods as a non-resident company acquired outside of Australia second-hand goods with the intention to lease and sell.

The second-hand goods were sold to Australian entities as taxable supplies.

You were advised by the ATO that you were not entitled to an input tax credit for the acquisition of the second-hand goods by Entity B under Subdivision 66-A of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). This decision was based on the application of section 18 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (GST Transition Act) as Entity B acquired the second-hand goods prior to 1 July 2000.

You requested that the ATO consider whether you are entitled to an input tax credit in respect of any of the transactions involving the second-hand goods undertaken by members of your GST group.

The detail pertaining to the second-hand goods is as follows:

Second-hand good D (Good D)

Good D was originally sold by Entity E to Entity B prior to 1 July 2000.

After this date but prior to 1 July 2000, Entity B entered into an agreement with Entity F to sell and leaseback Good D.

The sale of Good D to Entity F and subsequent leaseback took place prior to 1 July 2000.

The lease from Entity F to Entity B provided for an option to purchase Good D at the end of the lease term. You advise that this was a hire purchase agreement. You also advise that the time of the acquisition the goods were second-hand as they had been previously owned and used. You also advise that no GST was charged to Entity B by Entity F as the transaction took place prior to the introduction of GST.

Entity B onward leased the Good D to Entity C which sub-leased Good D to Entity G. You advise that Entity G acted as the importer of the Good D into Australia after 1 July 2000.

Under the terms of the 'Hire Purchase/lease agreement', the full title in the Good D transferred from Entity F to Entity B on after 1 July 2000. Good D was located in Australia at the time of the title being transferred to Entity B. Neither Entity F nor Entity B accounted for GST in respect of the title transfer on the basis that the relevant supply and acquisition occurred prior to 1 July 2000 for GST purposes in respect of hire purchase arrangements.

Entity B onward sold the Good D to Entity C after this, while Good D was in Australia. As Entity B and Entity C were members of the same GST group at the time of the sale, no GST was accounted for on the sale.

Entity C then sold Good D to Entity G. GST was accounted for by Entity G via a reverse charge in accordance with Division 83 of the GST Act.

Second-hand good H (Good H)

Good H was originally sold by Entity E to Entity F on prior to 1 July 2000.

On the same date, Entity F leased Good H to Entity B. The lease provided for an option for Entity B to purchase Good H at the end of the lease term. You advise that this was a hire purchase agreement. You also advise that at the time of the acquisition the goods were second-hand as they had been previously owned and used. You also advise that no GST was charged to Entity B on the acquisition as the transaction took place prior to the introduction of GST.

Entity B onward leased Good H to Entity C which sub-leased Good H to Entity G. You advise that Entity G acted as the importer of Good H into Australia after 1 July 2000.

Under the terms of the 'Hire Purchase/lease agreement', the full title in Good H transferred from Entity F to Entity B after 1 July 2000. Good H was located in Australia at the time of the title being transferred to Entity B. Neither Entity F nor Entity B accounted for GST in respect of the title transfer on the basis that the relevant supply and acquisition occurred prior to 1 July 2000 for GST purposes in respect of hire purchase arrangements.

Entity B onward sold Good H to Entity C after this, while Good H was in Australia. As Entity B and Entity C were members of the same GST group at the time of the sale, no GST was accounted for on the sale.

Entity C then sold the Good H to Entity G. GST was accounted for by Entity G via a reverse charge in accordance with Division 83 of the GST Act.

Reasons for decision

Summary

You are not entitled to an input tax credit for the acquisition of Goods D & H by Entity B under Subdivision 66-A of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) because Entity B had previously held them for the purpose of leasing. Subsection 18(1) of the A New Tax System (Goods and Services Tax Transition) Act 1999 (GST Transition Act) states that Division 66 of the GST Act only applies to goods acquired before 1 July 2000 if they had not been previously held for any other purpose than sale or exchange.

You are not entitled to an input tax credit for the acquisition of Goods D & H by Entity C under Subdivision 66-A of the GST Act. Entity C acquired Goods D & H from Entity B, who is a member of the same GST group. Subsection 48-45(3) of the GST Act states that an acquisition made from a member of the same GST group is not a creditable acquisition unless the supply of the thing acquired was a taxable supply because of Division 84 of the GST Act which relates to offshore supplies other than goods or real property. Goods D & H are goods and therefore Division 84 of the GST Act does not apply.

Detailed reasoning

Who is entitled to input tax credits?

Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.

You are the representative member for a GST group, of which Entity B and Entity C are members. Subdivision 48-B of the GST Act addresses the consequences of GST groups and relevantly, subsection 48-45(1) states:

If an entity makes a *creditable acquisition or *creditable importation the input tax credit for which is attributable to a tax period during which the entity is a member of a *GST group:

(a) the *representative member is entitled to the input tax credit on the acquisition or importation; and

(b) the entity making the acquisition or importation is not entitled to the input tax credit on the acquisition or importation (unless the entity is the representative member).

Note: *asterisk denotes a term defined in the GST Act.

Therefore, you are entitled to the input tax credits on the creditable acquisitions that Entity B and Entity C make while they are members of the GST group for which you are the representative member.

Creditable acquisitions

According to section 11-5 of the GST Act, you make a creditable acquisition if you acquire something solely or partly for creditable purpose and for consideration, you are registered or required to be registered for GST and the supply of the thing to you is a taxable supply.

Despite this definition, Division 66 of the GST Act contains special rules about the acquisition of second-hand goods. It provides that an acquisition of second-hand goods you make may be a creditable acquisition despite the fact that the supply of the thing to was not a taxable supply.

Acquisition of Goods D & H by members of your GST group

Acquisition by Entity B from Entity F

In a prior ruling, you were advised by the ATO that you were not entitled to an input tax credit for the acquisition of Goods D & H by Entity B under Subdivision 66-A of the GST Act. This decision was based on the application of section 18 of the GST Transition Act, as Entity B acquired Goods D & H prior to 1 July 2000 and Goods D & H had been held prior to 1 July 2000 for another purpose other than sale or exchange, namely leasing.

Therefore, this issue has not been considered any further.

Acquisition by Entity C from Entity B

Section 66-5 of the GST Act states:

(1) If you acquire *second-hand goods for the purposes of sale or exchange (but not for manufacture) in the ordinary course of *business, the fact that the supply of the goods to you is not a *taxable supply does not stop the acquisition being a *creditable acquisition.

(2) However, this section does not apply, and is taken never to have applied, to the acquisition if:

(a) the supply of the goods to you was a *taxable supply, or was *GST-free; or

(b) you *imported the goods; or

(c) the supply of the goods to you was supply by way of hire; or

(d) Subdivision 66-B applies to the acquisition; or

(e) you make a supply of the goods that is not a taxable supply.

(3) This section has effect despite section 11-5 (which is about what is a creditable acquisition).

Note: *Asterisk denotes a term that is defined in the GST Act.

The explanatory memorandum that accompanied the A New Tax System (Goods and Services Tax) Bill 1998 explained the reasoning behind Division 66 as follows:

6.68 If you acquire second-hand goods from an unregistered entity the supply to you will not be a taxable supply. Even if you acquire the goods for creditable purpose you would not be entitled to an input tax credit under the general rules because the supply to you was not taxable. This also applies if you acquire second-hand goods from someone who is registered but the supply is not taxable, such as the supply of a car that has only been used privately.

6.69 If you acquire second-hand goods from an unregistered entity, that entity has paid GST on the supply of the goods to them. They were not entitled to an input tax credit. There is some GST included in the price you pay for those second-hand goods. If you subsequently supply those goods in a taxable supply, GST is payable on the supply. This would mean that there is GST charged on GST.

6.70 Division 66 allows you an input tax credit in such situations to offset the GST included in the price paid for acquisitions.

The purpose or object of the GST Act was explained in the Executive Summary of the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 as follows:

Broadly speaking, the GST is a tax on private consumption in Australia. The GST taxes the consumption of most goods, services and anything else in Australia, including things that are imported.

This is generally achieved by:

· imposing tax on supplies made by entities registered for GST; but

· allowing those entities to offset the GST they are liable to pay on supplies they make against input tax credits for the GST that was included in the price they paid for their business inputs.

The purpose of Division 66 of the GST Act is to prevent GST being payable on GST where goods are sold in the ordinary course of business, that were previously acquired as second-hand goods. This is in line with the object of the GST Act that entities can claim input tax credits to offset the GST they are liable to pay on their supplies to the extent that GST was included in the price they paid for their inputs.

We consider Goods D & H to be second-hand goods at the time of acquisition for the purposes of this provision and that Goods D & H were acquired for the purposes of sale or exchange in the ordinary course of Entity C's leasing and selling business.

Subsection 66-5(2) sets out the circumstances in which you will not be entitled to an input tax credit on the acquisition of second-hand goods.

We consider that:

· The supply of Goods D & H by Entity B to Entity C was not a taxable supply or a GST-free supply. Subsection 48-40(2) of the GST Act provides that a supply made to another member of the same GST group is treated as if it were not a taxable supply except in specific circumstances that do not apply in this case.

· Entity C did not import Goods D & H in to Australia. Goods D & H were imported by Entity G.

· Entity B did not supply the goods to Entity C by way of hire. Entity B sold Goods D & H to Entity C.

· Subdivision 66-B does not apply to the acquisition of Goods D & H by Entity C, as they are not acquisitions of second-hand goods that are divided for re-supply.

· The supplies of Goods D & H by Entity C to Entity G were taxable supplies and the GST payable arising from those supplies was 'reversed charged' in accordance with Division 83 of the GST Act.

Therefore, subsection 66-5(2) of the GST Act does not apply to prevent the acquisitions of Goods D & H made by Entity C from being creditable acquisitions, despite that the supplies of the goods to Entity C were not taxable supplies. However, there are other requirements in section 11-5 of the GST Act that need to be met for the acquisitions to be creditable.

Section 48-45 of the GST Act discusses the rules surrounding the entitlement to input tax credits when an entity is a member of a GST group.

Specifically, subsection 48-45(3) of the GST Act states:

However, an acquisition that an entity makes from another *member of the same *GST group is not a *creditable acquisition unless the supply of the thing acquired by the entity was a *taxable supply because of Division 84 (which is about offshore supplies other than goods or real property).

Entity C acquired Goods D & H from Entity B. Division 84 of the GST Act did not apply to the supply of Goods D & H from Entity B to Entity C because the underlying supply was goods. Given that Entity C and Entity B are both members of the same GST group, the acquisition of Goods D & H by Entity C from Entity B are not creditable acquisitions in accordance with subsection 48-45(3) of the GST Act. Subsection 48-45(4) emphasises that subsection 48-45(3) applies despite sections 11-5 and 11-20 of the GST Act.

Therefore, you are not entitled to an input tax credit in respect to any transaction involving Goods D & H.