Edited version of your private ruling

Authorisation Number: 1012134974573

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Subject: GST and input tax credits

Question 1

Can you claim an input tax credit in respect of the purchase of a specified race car (the car)?

Answer

No.

Question 2

If so, does the motor vehicle depreciation cost limit apply to reduce the amount that can be claimed as a GST credit?

Answer

Not applicable.

Relevant facts and circumstances

Our records show that you are registered for GST.

You were carrying on an enterprise of renting specified equipment for a number of years.

Currently, you earn rental income from leasing specified commercial and residential premises.

On a specified date you purchased the car for a specified amount which included GST.

You provided a copy of an online advertisement of the car for sale. The car was advertised for a price equal to the GST exclusive amount that you paid, or near offer.

You provided a copy of a tax invoice issued by the supplier for the amount that you paid.

The acquisition of the car was financed from a line of credit in your name for the full amount of the purchase price. The lender is a specified financial institution which has a fixed and floating charge over your assets.

You acquired the car for the purposes of earning income from rental and sponsorship of the car.

Although you are based in one State, the car has been located in another State since it was purchased, for the sole intention of earning income from hiring and sponsorship. The car is garaged at a specified place in the other State where it is maintained ready for hire. The majority of races (rounds) are in this region and most teams and drives are located in this region also.

One of your related entities, Mr X, undertook market research on the business of hiring the car, via speaking to a number of people in the industry who hire racing cars. He also researched similar businesses on the internet. He has drawn on his numerous years of experience in the car racing industry to determine the feasibility that the hire of the car is commercially viable. Mr X has also been in the equipment hire business for a number of years and understands the hire industry.

A projected cashflow forecast was prepared prior to the purchase of the car. You stated that this cashflow has been updated each financial year to show the potential income and profit for each financial year since the car was acquired to 30 June 20ZZ. The Projected Cashflow Forecast indicates that a profit was expected through income from the hire of the car at $X plus GST per race. The relevant championships have a specified number of races (rounds) per year, this equates to a total amount of $Y plus GST per year. There was also the expectation of earning $Z from sponsorship per year. The projected cashflow includes interest, repairs, maintenance and marketing but does not include depreciation.

The car was available for hire from the date of acquisition. The car competed in early 20XX with Mr X driving, to promote that the car was available for hire.

The car was hired in early 20YY by a specified entity (the hirer) for one round. The car was hired by the hirer at arms length. The rent received was $X plus GST. You issued a tax invoice to the hirer.

The car remained available for hire after this date. The car competed at a couple of other races during early 20YY with Mr X driving. A specified entity (the sponsor), provided signage and sponsorship of specified amount, to promote its business and also that the car was available for hire. The sponsor is not related to you. You issued a tax invoice to the sponsor.

There are no written contracts between you and the hirer or the sponsor.

The hiring fees received from the hirer and the sponsorship fees received from the sponsor were deposited into your bank account.

The car was damaged at a specified race and was returned to the other State to be repaired. This repair was due to be completed in early 20ZZ.

The car has been actively marketed by the word of mouth and by competing in the races mentioned above. You have been in the specified equipment hire business and have concluded that the most effective way to advertise your products is by meeting with prospective clients at trade shows or events. You believe that the other forms of advertising are quite expensive and more of a scatter-gun approach only to promote your name, product or service to the general public.

You purchased a winning car, which you thought would give you the unique selling position to rent the car for the entire championship.

Car racing competition derives enormous income via sponsorship, which is well documented.

There are three main types of competitors who contest the championship:

· owner-drivers

· sponsored drivers who use the sponsorship to rent the car and team, and

· wealthy individuals who may own a car, but usually rent the car and team.

A new rule introduced by the organisers of the championship in 20XX stated that only a specified number of each type of car are eligible to enter the championship and must contest all the specified rounds of the championship. This rule did not apply when you did your research and purchased the car. For this reason the car was not able to be rented in the championship, as there were more than the specified number of the makes of the car entered and you could not guarantee that the car would be rented in all specified rounds.

The Profit and Loss statement for the period since the car was acquired through to June 20YY showed a substantial loss.

The car was manufactured in a specified year. The effective life of the car is X years of racing and possibly another X years as a promotion car for display and ride days at racing circuits.

The intention is to sell the car in the future. The expected GST inclusive sale price as of December 20YY was less than half the car's acquisition cost.

The car is specifically designed as a race car. The car has not been registered for use on the public roads by the previous owner(s) as it cannot be registered for use on public roads in Australia or anywhere in the world. The car is not a road car converted to a race car. The car was manufactured purely for car racing championship. The car cannot be converted to a road going car.

The car has not been subject to the luxury car tax.

Mr X has been involved in the motor racing industry, world-wide, for a specified number years. You have supplied a table outlining where Mr X competed and his achievements in motor racing since a specified year.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(a).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(b).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(c).

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 11-5(a).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 11-5(b).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 11-5(c).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 11-5(d).

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(1).

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(2).

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Reasons for decision

Question 1

Summary

You cannot claim an input tax credit in respect of the purchase of the car, as the purchase of the car was not a creditable acquisition.

Detailed reasoning

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act sets out the requirements of a creditable acquisition. This section states:

You make a creditable acquisition if:

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

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

(c) you provide, or are liable to provide, *consideration for the supply; and

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

(* denotes a term defined in section 195-1 of the GST Act)

In your case, you meet the requirements of paragraphs 11-5(b), 11-5(c) and 11-5(d) of the GST Act. This is because you advised that the supply of the car was a taxable supply to you, you provided consideration for the supply and you are registered for GST.

What is left to determine is whether the requirement of paragraph 11-5(a) of the GST Act is also met.

Paragraph 11-5(a) of the GST Act requires that the thing acquired is acquired for a 'creditable purpose'.

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. However, pursuant to subsection

11-15(2) of the GST Act, 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.

The Commissioner's guidelines for determining whether an acquisition is acquired for a 'creditable purpose' are set out in Goods and Services Tax Ruling GSTR 2008/1.

Paragraph 70 of GSTR 2008/1 states:

70. Whether an acquisition is acquired in carrying on an enterprise is a question of fact and degree, making it impractical to provide an exhaustive list of all the factors that may be relevant to determining whether an acquisition is made in carrying on an enterprise. However, some factors that would suggest that an acquisition is made in carrying on an enterprise include that:

· the acquisition is incidental or relevant to the commencement, continuance or termination of the enterprise;

· the thing acquired is used by the enterprise in making supplies;

· the acquisition secures a real benefit or advantage for the commencement, continuance or termination of the enterprise;

· the acquisition is one which an ordinary business person in the position of the recipient would be likely to make for the enterprise;

· the acquisition does not meet the personal needs of individuals such as partners or directors;

· the acquisition helps to protect or preserve the enterprise entity, structure or organisation; and

· the acquisition is made by the entity in accordance with, or to satisfy, a statutory requirement imposed on the enterprise.

Paragraph 55 of GSTR 2008/1 states:

Subsection 11-15(1) requires that you acquire a thing in carrying on your enterprise. It is therefore necessary firstly to identify the enterprise that is being carried on and secondly to determine whether there is a connection between the acquisition and the enterprise being carried on.

Enterprise is defined in subsection 9-20(1) of the GST Act to include an activity or series of activities, done:

· in the form of a *business; or

· in the form of an adventure or concern in the nature of trade; or

· on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or …

In the form of a business

Section 195-1 of the GST Act defines 'business' to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

The definition is the same as the definition of 'business' in subsection 6(1) of the Income Tax Assessment Act 1936, and section 995-1 of the Income Tax Assessment Act 1997.

Miscellaneous Taxation Ruling MT 2006/1 explains the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number (ABN). This ruling equally applies to definition of enterprise for the purposes of the GST Act.

Paragraphs 176 to 179 of MT 2006/1 state:

176. As the definition of 'business' is identical in the GST Act and the ITAAs, it can be interpreted in a similar way. The meaning of 'business' is considered in Taxation Ruling TR 97/11. Although TR 97/11 deals with carrying on a primary production business, the principles discussed in that Ruling apply to any business.

Indicators of a business

177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are:

· a significant commercial activity;

· a purpose and intention of the taxpayer to engage in commercial activity;

· an intention to make a profit from the activity;

· the activity is or will be profitable;

· the recurrent or regular nature of the activity;

· the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

· activity is systematic, organised and carried on in a businesslike manner and records are kept;

· the activities are of a reasonable size and scale;

· a business plan exists;

· commercial sales of product; and

· the entity has relevant knowledge or skill.

179. There is no single test to determine whether a business is being carried on. Paragraph 12 of TR 97/11 states that 'whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators'. TR 97/11 can be referred to for a fuller discussion on whether a particular activity constitutes the carrying on of a business

Your activities lack the required element of regularity and repetitiveness. Since the acquisition of the car a number of years ago, you rented the car once and the car was sponsored once. No other hiring or sponsorship activities were actually conducted.

The facts of your case do not support the notion that the dominant purpose for acquiring the car was to earn income from hiring and sponsorship to make a profit. It is apparent that it was highly unlikely that a profit would ever be made from the activity which would make it commercially viable. Apart from the projected profit and loss statements, there is no evidence suggesting that the activity was ever going to be profitable.

You acquired the car on the specified date. You stated that in 20XX the rules changed as a result of which the car was not able to be rented in the championship and you could not guarantee that the car would be rented in all specified rounds. However, you did not take any action to minimise your losses and to ensure that the activity was commercially viable. This change was not reflected in your cashflow forecasts which you said were updated each financial year to show the potential income and profit from the activity. This indicates a lack of intention to make a profit or gain.

Whilst the car was acquired for substantial amount of money, your activities did not have a commercial purpose. The car was acquired a number of years ago but the first rental income was received in early 20YY.

Your activities were on a very small scale and in an ad hoc manner. Since its acquisition, the car was rented once and sponsored once.

Furthermore, your activities did not appear to be sufficient to attract hirers or sponsorship interest to achieve commercial success. You did not enlist the support of any agency or business to attract corporate sponsorship or secure any formal sponsorship agreements. The only sponsorship income you received was a one-off $A. No evidence has been provided regarding how the amount was calculated and how it related to the value of the services that you provided to the sponsoring entity.

Furthermore, the lack of written contracts indicates that your hiring and sponsorship activities were not conducted in a suitably organised and business-like manner. It would seem commercially unviable to rent the car without written documentation setting out the terms and conditions of the rental agreement and specifying the entitlements and obligations of the parties.

You stated that you performed considerable research before acquiring the car. However, you have not provided any evidence of such research.

In your case the amount of the income is disproportionate to the level of expenses which necessitates a closer examination of your purpose or intention to engage in this activity.

The information available suggests that Mr X was held out to be the owner of the car. Mr X is a racing car enthusiast who has, except on one occasion where the car was rented out, raced the car since its acquisition. The facts of your case indicate that you purchased the car for the use of Mr X in various racing competitions allowing him to pursue a personal interest.

After taking into account all the facts of your case, we consider that your activities in relation to the car were not conducted for commercial reasons or in a commercially viable manner as an organised business. Therefore, your activities cannot be properly classified as a business.

It should also be noted that the receipt of income from the lease of an asset does not of itself amount to the carrying on of a business. Instead, provided the activity is considered to be of a commercial nature, it would generally be the passive receipt of income from property.

For the above reasons you are not carrying on an business pursuant to paragraph 9-20(1)(a) of the GST Act.

In the form of an adventure or concern in the nature of trade

Paragraph 235 of MT 2006/1 provides that ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or a one-off transaction that does not amount to a business but which has the characteristics of a business deal.

This includes situations where a property is acquired for the purpose of profit-making by way of sale or the carrying on or carrying out of any profit-making undertaking or scheme.

Paragraph 304 of MT 2006/1 provides that the term 'property' covers all types of property. It includes tangible assets such as land, cars and boats as well as intangible assets such as copy right and patents.

The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business.

Goods and Services Tax Determination GSTD 2000/9, which discusses whether an entity needs an ABN for PAYG purposes, states at paragraphs 5 and 6:

Paragraphs (a) and (b) of the definition of 'enterprise'

5. Whether the letting of a property can be regarded as an activity or activities in the form of a business or an adventure or concern in the nature of trade will always be a question of fact and degree.

6. Use of the phrase 'in the form of' broadens the concept of business or concern in the nature of trade. It has the effect of including activities that have the appearance or characteristics of a business or an adventure or concern in the nature of trade, even if they are not undertaken for profit. However, it is not wide enough to cover the letting of a property by itself, which is an activity in the nature of investment rather than a business, or an adventure or concern in the nature of trade. Therefore, paragraphs (a) and (b) do not need to be considered any further.

In your case, your activities do not amount to an enterprise in the form of an adventure or concern in the nature of trade pursuant to paragraph 9-20(1)(b) of the GST Act as they do not have the characteristics of a business deal.

On a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property

At paragraph 306, MT 2006/1 provides that to be an enterprise the grant of lease, licence or other grant of an interest in property must be done on a regular or continuous basis. The grant does not need be done on both a regular and continuous basis. An activity is continuous if there is no significant cessation or interruption to the activity. An activity is regular if it is repeated at reasonably proximate intervals. The intervals need not to be fixed. Whether an activity is repeated over time on a regular or continuous basis is a question of fact and degree.

Further, a period of time during which a property was available for letting is only taken into account where it is established that active and bona fide efforts to let the property at a commercial rental were made during the relevant period.

Based on the information that you have provided you are not carrying on a leasing enterprise pursuant to paragraph 9-20(1)(c) of the GST Act as the leasing of the car is neither on a regular nor on a continuous basis. Since its acquisition, the car was leased once in early 20YY. Additionally, there is no evidence that indicates that you actively marketed the car for commercial rental.

Conclusion

In summary, your activities in relation to the car so far do not amount to an enterprise for the purposes of the GST Act. It follows that you did not acquire the car in the course of an enterprise that you carry on. The acquisition of the car is not for a creditable purpose and does not meet the requirements of paragraph 11-5(1)(a) of the GST Act. Therefore, you are not entitled to an input tax credit under section 11-20 of the GST Act as the acquisition does not meet all the requirements of section 11-5 of the GST Act.

Question 2

Reasoning

As the purchase of the car is not considered to be a creditable acquisition this question is not relevant for consideration.