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Ruling

Subject: Entitlement to input tax credits

Question 1

Did you make a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to a payment made to a Contractor?

Answer

Yes.

Question 2

Are you entitled to claim the input tax credit (GST refund) in relation to the payment of an amount, exclusive of GST, under the Amendment Deed?

Answer

Yes.

This ruling applies for the following periods:

NA

The scheme commences on:

NA

Relevant facts and circumstances

The Corporation was privatised in 2001 with Entity A acquiring certain rights and leases. The deeds and contract relevant to this discussion are:

§ the Capital Expenditure and Maintenance Deed (Capex Deed);

§ the Capex Deed Amendment (the Amendment Deed);

§ the dredging contract; and

§ the funding deed.

Under the terms of the Capex Deed, Entity A agreed to undertake particular capital works as a condition for being granted the operating lease for the infrastructure. The works relate to dredging and facilities upgrades. If Entity A failed to undertake the works within the time limits prescribed in the Capex deed they could be required to make a termination payment.

Under the Capex Deed You and Entity A agreed that, following completion of facilities upgrades and associated dredging, Entity A would be obligated to deposit into a trust an amount for capital expenditure incurred by the You and that the trust would be expended on related infrastructure.

The terms of the Amendment Deed vary the terms of the original Capex Deed.

You released Entity A from the obligation to make the payment for works defined in the original Capex Deed for the facilities and associated dredging.

In return, Entity A is obligated under the Amendment Deed to undertake dredging and facilities upgrades, subject to You paying $XX million of the cost of the work involved.

The Amendment Deed provides:

The lessee (Entity A) must by the Dredging completion date carry out and complete the dredging and other work described and:

(a) the lessor (You) must pay directly to the dredging contractor an amount (exclusive of GST) of the cost of the dredging on the terms of the funding deed; and

(b) the lessee (Entity A) must bear the balance of the cost of the dredging.

Under the Amendment Deed Entity A and You agreed to enter into a new agreement to extend the boundaries of the land following completion of the proposed dredging.

Entity A has entered into a dredging contract. You are not party to the contract except for the provision of an amount of consideration as outlined in the dredging contract and further detailed in the funding deed.

The funding deed, is a tripartite agreement between Entity A, the dredging contractor and you. The funding deed recognises that you are the owner of the infrastructure and have leased the land to Entity A.

The parties acknowledge that you and the State will receive a benefit as a result of the dredging, including the increase in value of the infrastructure and the potential for economic growth for the State.

The deed specifically provides that your liability only extends to the payment of the amount (exclusive of GST) agreed, and only after Entity A has spent at least an equal amount (exclusive of GST) in connection with the project. Entity A is liable for all other payments to the contractor under the dredging contract.

The Funding Deed further provided you with a right to be indemnified by Entity A for any loss or liability You suffered or incurred as a result of having entered into this funding arrangement.

In 2005, the Commissioner ruled that you were not entitled to an input tax credit. This was on the basis that the payment was consideration for the supply of dredging services made by the contractor, but as you were not a party to the contract, you were not the recipient of the supply.

In 2009, at your request, we reviewed our ruling of 2005 and confirmed that it was consistent with our view of the law.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

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

Taxation Administration Act 1953, Schedule 1, section 105-55

Reasons for decision

Question 1

Summary

You made a creditable acquisition under section 11-5 of the GST Act in relation to a payment made to a dredging contractor. Accordingly you are entitled to the input tax credits.

Detailed reasoning

You have requested a review of the Commissioner's advice of 2009 that confirmed the Commissioner's advice of 2005.

The Commissioner advised that you had not made a creditable acquisition under section 11-5 of the GST Act when making the payments as prescribed in the funding deed. We ruled that a creditable acquisition did not occur because you did not acquire anything. With no supply of a thing there cannot be a taxable supply. Therefore, two requirements for a creditable acquisition were not satisfied.

You have sought a further review as a result of the Full Federal Court's decision in Commissioner of Taxation v Secretary to the Department of Transport (Vic), [2010] FCAFC 84; 2010 ATC 20-196; 76 ATR 306 (Victorian Department of Transport case). You have been advised that changes in GSTR 2006/9 and the decision impact statement strengthen the argument that you should be entitled to an input tax credit which would be passed back to Entity A. A copy of the advice was provided with your request.

Entitled to an input tax credit

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

You make a creditable acquisition if you satisfy all of the requirements of section 11-5 of the GST Act.

The two requirements of the section at issue are:

§ that you are the recipient of a taxable supply (paragraph 11-5(b)) and

§ that you provide or are liable to provide consideration for the supply (paragraph 11-5(c)).

Recipient of a Taxable Supply

The basic rules

Under the basic rules, Division 9 of the GST Act defines taxable supplies, states who is liable for the GST, and describes how to work out the GST on supplies.

Under section 9-5 of the GST Act you make a taxable supply if:

(a) you make a supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed under the exemptions.

Note: Definitions of asterisked terms are provided in the Dictionary under section 195-1 of the GST Act.

The question at issue is whether the consideration was exchanged for a supply.

Is there a supply?

Section 9-10 of the GST Act provides the definition of supply as follows:

9-10 Meaning of supply

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment or surrender of *real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) a *financial supply;

(g) an entry into, or release from, an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Goods and Services Tax Ruling GSTR 2006/9: GST supplies, examines the meaning of 'supply' in the GST Act. The 'Background' section of the Ruling discusses the general context of the GST Act and outlines how this informs the meaning of the term 'supply' in the GST Act including its relevance to input tax credit entitlements.

At page 27, in relation to Proposition 6, GSTR2006/9 states

Proposition 6: 'supply' usually, but not necessarily, requires something to be passed from one entity to another

92. The fact that 'supply' requires something to be passed from one entity to another is largely self-evident in a transaction based tax. However, not all forms of supply have this characteristic. For instance, paragraph 9-10(2)(e) includes a creation of a right as a supply. The 'creation' of a right does not involve a passing of the right from one entity to another. In this case, the action of the supplier causes the recipient to make an acquisition but without anything passing between them.

93. Also, a comparison of subsection 9-10(2) with its corresponding provision, subsection 11-10(2), shows that the thing supplied is not necessarily the thing acquired. For example, a supply that is 'an entry into an obligation' is mirrored by an acquisition that is 'an acquisition of a right'. The obligation remains with the supplier, while the 'right' is created in the hands of the recipient, rather than there being a thing that passes from one entity to another

Entity A is obligated under the Amendment Deed to undertake the following work (subject to you paying a specific amount for the cost of the work involved):

Under the Amendment Deed, Entity A and you agreed to enter into a new agreement to extend the boundaries of the land following completion of the proposed dredging. Under the agreement, Entity A entered into an obligation to perform or arrange for certain works to be completed. You acquired the right to have the works completed. You also entered into an obligation to extend the boundaries of the land area under lease and make a GST exclusive payment.

GSTR 2006/9 considers a number of propositions for characterising and analysing supplies. Proposition 15 considers that One set of activities may constitute the making of two (or more) supplies (paragraphs 217 to 221). The ruling provides, at paragraphs 217 and 217A, as follows:

217. Examining the levels of contractual or reciprocal relationships between the entities in a tripartite arrangement may reveal two or more supplies being made based upon the one set of activities.

217B This proposition is illustrated by Federal Commissioner of Taxation v. Secretary to the Department of Transport (Vic) [2010] FCAFC 84; 2010 ATC 20-196; (2010) 76 ATR 306 (Department of Transport), where the activity undertaken by the taxi operator of transporting the eligible passenger resulted in two supplies being made:

(i) the supply of transport to the passenger; and

(ii) the supply to the Department of the service of transporting the eligible passenger (Per Kenny and Dodds-Streeton JJ at paragraph 56).

Entity A has entered into an agreement with a dredging contractor to have the dredging works completed. The works will benefit both the land area leased to Entity A and the area controlled by you, an area that will be included in the proposed new agreement following completion of the dredging to your satisfaction.

In effect, dredging contractor is making supplies of services to both Entity A and you. In addition, both the dredging contractor and Entity A have entered into obligations to undertake certain activity to your satisfaction.

In our view, you were the recipient of a taxable supply by way of the obligation entered into by Entity A.

Are you liable to provide consideration for the supply.

Under the Amendment Deed you agreed that Entity A would carry out and complete the dredging and other work described and that you (lessor) would pay directly to the dredging contractor an amount (exclusive of GST).

In relation to third party payments in connection with a supply, GSTR 2006/9 states at paragraph 177 as follows:

177. Subsection 9-15(1) provides that the consideration for a supply includes any payment 'in connection with', 'in response to' or 'for the inducement of' a supply of anything. Subsection 9-15(2) provides that the payment does not have to come from the recipient of the supply.

The consideration provided by you, directly to the dredging contractor, has a sufficient nexus with the supply you received under the Amendment Deed.

You satisfy all of the requirements of section 11-5 of the GST Act because:

§ you acquired the dredging services and the obligations entered into by the dredging contractor and Entity A for a creditable purpose

§ the supply of the rights to you under the Amendment Deed was a taxable supply

§ you provided and were liable to provide, consideration of an amount exclusive of GST for that supply; and

§ you are registered or required to be registered for GST.

You are entitled to the input tax credits for the creditable acquisition that you made.

Question 2

Summary

You are entitled to a GST refund in relation to the Amendment Deed which was executed in 2005 because you notified us of your entitlement to the refund within a four year period of your entitlement.

Detailed reasoning

Prior to 12 May 2009 (the 2009 Federal Budget night), there was effectively no time limit on claiming GST credits for purchases that had not been taken into account either fully or partially in an earlier activity statement.

Under section 105-55 of Schedule 1 to the Taxation Administration Act 1953 (TAA) a four year time limit now applies to claiming all GST credits unless one of the exceptions applies.

Your entitlement to an outstanding indirect tax refund will expire four years from the end of the tax period to which the refund relates unless you notify us of your entitlement to the refund, or we notify you of your entitlement to the refund, during the four year period.

You wrote to us in 2005 seeking a goods and services tax (GST) private ruling concerning an entitlement to a GST refund or credit in relation to the Amendment Deed which was executed in 2005.

In 2009 you sought a review of the private ruling. We reviewed the ruling and confirmed that it was consistent with our view of the law.

Your application for a ruling and subsequent review request both constitute notice of your entitlement to the refund.

We acknowledge receipt of your notification for the monthly tax periods from (date) 2005 and confirm that it was made within the appropriate time.