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Ruling

Subject: GST apportionment methodology

QUESTIONS AT ISSUE:

1. Is the apportionment methodology proposed by Entity A, fair and reasonable for calculating the amount of input tax credits that Entity A is entitled to for its acquisitions for the purpose of Division 11 of the A New Tax System (Goods And Services Tax) Act 1999 (the GST Act)?

2. Can Entity A apply the revised apportionment methodology and claim input tax credits pursuant to the revised apportionment methodology from 1 July 2006 to 31 December 2010?

Answers

See below

Relevant facts and circumstances

Background

Entity A is registered for GST and its principal activities are offering a range of financial services including loans, various accounts, credit cards, general insurance and financial advisory services.

Entity A is an authorised deposit-taking institution.

The current methodology employed by Entity A, independently of acquisitions that are reduced creditable acquisitions, involves the utilisation of a revenue based formula.

Entity A has devised a new apportionment methodology it proposes to apply to its business operations for the purpose of determining its entitlements to input tax credits on acquisitions that it makes.

Revised Methodology

The revised methodology involves the collection of information concerning the allocation of expenditure to activity sectors and then to ascertain the extent to which those areas are involved in the making of taxable supplies.

Entity A provided a detailed, step by step outline of the revised methodology.

DECISION:

1. Is the apportionment methodology proposed by Entity A, fair and reasonable for calculating the amount of input tax credits that Entity A is entitled to for its acquisitions for the purpose of Division 11 of the A New Tax System (Goods And Services Tax) Act 1999 (the GST Act)?

The Commissioner confirms that the apportionment methodology proposed by Entity A is fair and reasonable for calculating the amount of input tax credits that Entity A is entitled to for its acquisitions for the purpose of Division 11 of the GST Act.

1. Can Entity A apply the revised apportionment methodology and claim input tax credits pursuant to the revised apportionment methodology from 1 July 2006 to 31 December 2010?

Yes, Entity A can apply the revised apportionment methodology and claim input tax credits pursuant to the revised apportionment methodology for the quarterly tax periods from 1 July 2006 to 31 December 2010.

REASONS FOR DECISION:

1. Is the apportionment methodology proposed by Entity A, fair and reasonable for calculating the amount of input tax credits that Entity A is entitled to for its acquisitions for the purpose of Division 11 of the A New Tax System (Goods And Services Tax) Act 1999 (the GST Act)?

Under section 11-20 of the GST Act, an entity is entitled to an input tax credit for any creditable acquisition that it makes.

An entity makes a creditable acquisition under section 11-5 of the GST Act when that entity:

(a) acquires anything solely or partly for a creditable purpose; and

(b) the supply of the thing to the entity is a taxable supply; and

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

(d) the entity is registered or required to be registered.

Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. Under subsection 11-15(2) of the GST Act 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.

Accordingly, to the extent that acquisitions made by Entity A relate to making supplies that would be input taxed, they are not acquired for a creditable purpose. Therefore, such acquisitions are not, to that extent, creditable acquisitions and Entity A is not entitled to input tax credits.

The exceptions to this general rule as provided for in section 11-15 of the GST Act are considered for the purpose of the methodology noted above. It is our understanding that Entity A has exceeded the financial acquisitions threshold provided for in subsection 11-15(4) of the GST Act. In this connection, the acquisition that relates to making financial supplies may attract a reduced input tax credit under Division 70 even though no input tax credit would arise under Division 11.

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) outlines the Commissioner's views on apportionment and the methods of calculating the extent of creditable purpose of your acquisitions or importations.

Paragraph 44 states that:

44. For the purpose of claiming input tax credits, you need to estimate the extent to which the acquisition or importation is for a creditable purpose. This means that at the time of acquisition or importation, it is your planned use of the acquisition for a creditable purpose that is relevant in working out your input tax credit. You may estimate the planned use of the acquisition or importation based on:

· records you already have available from a previous period;

· records kept since you made the acquisition or importation, but before you lodge your BAS, including your actual use (full or partial) of the acquisition;

· records kept for some other purpose of the enterprise, for example income tax, management accounting, profitability analysis, intra-entity transfer charging or cost accounting;

· your previous experience concerning the usage of similar acquisitions;

· your business plan; or

· any other fair and reasonable basis.'

The ruling referred to the High Court judgement in Ronpibon Tin NL v. FC of T (1949) 78 CLR 47; AITR 236 and at paragraphs 73 and 74 noted the following in relation to apportionment:

73. Following the principles set out by the High Court, the method you choose to allocate or apportion acquisitions between creditable and non-creditable purposes needs to:

· be fair and reasonable;

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

· be appropriately documented in your individual circumstances.

74. If you allocate or apportion acquisitions or importations using a method which meets all these principles, the Commissioner will not consider the fact that you choose the method that gives the most advantageous result to be, of itself, an arrangement to which Division 165 applies.

Methods of calculating the extent of creditable purpose are discussed in paragraphs 80 and 81 of GSTR2006/3:

80. To calculate the amount of your input tax credits, you need to adopt a method of estimating the extent of creditable purpose of your acquisitions and importations. The requirement that your estimation is fair and reasonable in your circumstances is a prerequisite for any decision you make.

81. The Commissioner considers that the use of direct methods, including direct estimation … best accords with the basic principles explained above (see paragraph 73). 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.

The ruling discusses direct estimation methods at paragraphs 93 and 94:

93. Direct estimation methods are preferable to indirect estimation methods ………… particularly if the direct estimation method used involves a detailed measure of the intended (or actual) use of the acquisition or importation. Measures based on inherent characteristics of, or factors directly connected with, the acquisition usually give a fair reflection of the use of the thing. These factors are sometimes referred to in management accounting and costing systems as 'drivers'.

94. The use of such characteristics or factors provides an estimation of a direct link between the acquisition or importation and its (or its intended) application. Some examples of these factors and characteristics are (relevantly):

· distance…

· time…

· volume…

· space…

· staff numbers (for example, measuring the actual use of acquisitions by identified staff).

Entity A may choose its own apportionment method, but the method it chooses needs to be fair and reasonable in the circumstances of the enterprise and must appropriately reflect the intended or actual use of its acquisitions or importations.

In this regard the Commissioner will accept any basis of apportionment of acquisitions which are applied indifferently to all supplies made, provided it is fair and reasonable in the given circumstances. In Entity A's circumstances, the ATO considers that on the basis of the information provided, the methodology it has submitted which incorporates direct methods and indirect methods as outlined in GSTR 2006/3, provides a fair and reasonable basis for calculating the extent of creditable purpose for acquisitions of Entity A's business under Division 11 of the GST Act.

The methodology is considered to be fair and reasonable in the circumstances applying at the time of issuing this ruling. If those circumstances should change you may be required to review this methodology to determine if it remains fair and reasonable.

1. Can Entity A apply the revised apportionment methodology and claim input tax credits pursuant to the revised apportionment methodology for the quarterly tax periods from 1 July 2006 to 31 December 2010?

ATO Interpretive Decision ATO ID 2008/75 - GST and a retrospective application of a changed apportionment method under Division 11 (ATO ID 2008/75) provides that an entity can change its apportionment method, and revise an earlier net amount, by applying a new apportionment method which is also fair and reasonable. The entity must notify the Commissioner of this change within four years after the end of the original tax period under section 105-55 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Section 93-5 of the GST Act provides a time limit on an entitlement to an input tax credit. Section 93-5 of the GST Act provides that an entity ceases to be entitled to an input tax credit for a creditable acquisition to the extent that it has not taken into account in working out its net amount for:

· The tax period to which the input tax credit would be attributable under subsection 29-10(1) or (2) of the GST Act or

· Any other tax period for which you give to the Commissioner a GST return during the period of 4 years after the day on which you were required to give to the Commissioner a GST return for the tax period referred to above.

Where the entity does not take an input tax credit into account in this time period, it generally ceases to be entitled to the credit.

There are however exceptions as set out in section 93-10 of the GST Act to the time limit on entitlement to input tax credits. Subsection 93-10(3) of the GST Act relevantly provides that you do not cease under section 93-5 of the GST Act to be entitled to an input tax credit to the extent an entity notifies the Commissioner of their entitlement under subsection 105-55(1) in Schedule 1 to the Taxation Administration Act 1953.

Entity A notified the Commissioner of its entitlement to input tax credits within the appropriate timeframe and hence the Commissioner confirms that it can apply the revised apportionment methodology and claim input tax credits where appropriate pursuant to this revised apportionment methodology for the quarterly tax periods from 1 July 2006 to 30 June 2010.