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Ruling

Subject: GST and entitlement to input tax credits

Question

Is Entity A entitled to a full input tax credit for it's acquisition of the commercial property?

Answer

Yes, Entity A is entitled to a full input tax credit for it's acquisition of the commercial property.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 subsections 11-15(1) and (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 11-25

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity A is registered for GST and is the representative member of a GST group.

The GST group exceeds the Financial Acquisition Threshold.

Entity A's core business involves the provision of financial services to its members, who are both customers and shareholders. Its business profits are reinvested into the organisation to strengthen its functions and return value to members.

Entity A acquired a commercial property which it settled 45 days from the date of signing of the contract of sale.

Entity A intended that the commercial property would in part be used in Entity A's business, with the remaining portion of the property being leased out to third parties. In this regard, it was intended that as a minimum 30% of the property will be leased to independent third parties.

Due to the short timeframe between signing and settlement of the contract of ale of the commercial property, Entity A did not have sufficient time to consider where the property should reside within its corporate structure. Such consideration is necessary given leasing of the commercial property to third parties is an activity which falls outside its core business functions.

Entity A is not sufficiently equipped to operate as a property manager. Ownership of the commercial property within Entity A may lead to inefficiencies in its core business operations with some personnel required to divide their time between the provision of financial services to members and the management of property activities. In addition, some outsourced assistance will be required as part of the ongoing leasing activity.

Given this change in business operations, Entity A now considers its commercial interests would be best served by ensuring that a separate entity is responsible for holding all property assets, for the provision of all property management services and for acquiring all relevant assets required to provide these services.

Entity A anticipates that by utilising a separate property holding entity within the corporate group, it will be able to achieve the following aims:

· improved focus on its core business of financial services to members;

· consolidation of the property holding activities and knowledge of the corporate group in one entity;

· simplified financial accounting and regulatory reporting for the financial services and property services operations on an individual entity basis;

· ability to sell an interest (or interests) in the relevant property holding entity, to provide the group with quick access to capital or cash at any point in time if required; and

· effectively quarantining any commercial risks associated with the operation of Entity A's financial services business from the significant capital assets held by the corporate group and vice versa.

Entity A has nominated its existing wholly owned subsidiary, Entity B to be the entity solely responsible for the provision of property services to the Entity A corporate group and/or third parties.

Entity B is a GST registered entity that, at the time of this ruling application, was not trading and has never been a member of Entity A's GST group.

Entity A intends to sell the commercial property to Entity B at its current market value which is the purchase price paid by Entity A.

Entity B will lease a portion of the premises (up to approximately 70%) to Entity A as its new business premises at an arm's length market rate which will be determined by independent valuers. At least 30% of the premises will be leased to independent third parties, also at market rental.

Entity A claims the proposed supply of the commercial property from Entity A to Entity B will satisfy the criteria of a 'taxable supply' for the purpose of Division 9 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

While the commercial property will be the first property acquired by Entity B, Entity A considers it necessary that its other properties should also be transferred to Entity B in order to streamline the property activities of the corporate group and achieve the above-stated aims. It is intended that these transfers should take place in due course.

At the time of this ruling application, the construction of the commercial property is in the process of being completed and Entity A will not occupy the building prior to its transfer to Entity B.

Reasons for decision

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

Section 11-25 of the GST Act provides that the amount of the input tax credit for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired.

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 under the general rule.

However, Entity A submits that the proposed supply of the commercial property from Entity A to Entity B will satisfy the criteria of a 'taxable supply' for the purpose of section 9-5 of the GST Act. Section 9-5 of the GST Act provides that you make a taxable supply if:

(a) you make the supply for consideration; and

(b) the supply is made in the course of 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.

As such, the supply of the commercial property from Entity A to Entity B at its current market value will be a taxable supply of commercial premises for consideration, in the course of its enterprise, the supply of which is connected with Australia and it is registered for GST.

Following on from the above, the acquisition of the commercial property by Entity A would meet the requirements of paragraphs (b) to (d) of section 11-5 of the GST Act.

The question that remains to be determined is whether the acquisition of the commercial property by Entity A meets the requirements of paragraph 11-5(a) of the GST Act.

Based on the facts of the case, the commercial property was settled one day prior to the date of this ruling application and as such is in the same tax period of the acquisition of the commercial property by Entity A.

As Entity A makes predominantly input taxed financial supplies as a result of its provision of financial services to members, the acquisition of the commercial property for its own use would ordinarily not qualify for a creditable purpose in accordance with the principles above.

However, at the time of the acquisition, the commercial property was still under construction and as such whilst it had been acquired in the course of carrying on Entity A's enterprise, it had not been applied to Entity A's business.

Entity A has stated that it does not intend to occupy the building prior to its sale to Entity B. Entity A has also stated that it will supply the commercial property to Entity B on the basis that it will be making a taxable supply of a commercial property in accordance with the requirements of section 9-5 of the GST Act.

Given the above, we accept that the commercial property was acquired by in carrying on of its enterprise and the acquisition did not relate to making supplies that were input taxed or of a private or domestic nature.

As such the acquisition of the commercial property by Entity A will meet the requirements of section 11-15 of the GST Act and Entity A will be entitled to an input tax credit in accordance with section 11-25 of the GST Act in relation to its acquisition of the commercial property.

Application of the general Anti-avoidance rule

The object of Division 165 is to deter schemes that give an entity a GST benefit. If the dominant purpose or principal effect of a scheme is to give an entity such a benefit, the Commissioner may negate the benefit an entity gets from the scheme by declaring how much GST or refund would have been payable, and when it would have been payable, apart from the scheme.

Section 165-5 outlines when the Division operates. It states:

165-5 When does this Division operate?

General rule

(1) This Division operates if:

(a) an entity (the avoider) gets or got a *GST benefit from a *scheme; and

(b) the GST benefit is not attributable to the making, by any entity, of a choice, election, application or agreement that is expressly provided for by the *GST law, the *wine tax law or the *luxury car tax law; and

(c) taking account of the matters described in section 165-15, it is reasonable to conclude that either:

(i) an entity that (whether alone or with others) entered into or carried out the scheme, or part of the scheme, did so with the sole or dominant purpose of that entity or another entity getting a *GST benefit from the scheme; or

(ii) the principal effect of the scheme, or of part of the scheme, is that the avoider gets the GST benefit from the scheme directly or indirectly; and

(d) the scheme:

(i) is a scheme that has been or is entered into on or after 2 December 1998; or

(ii) is a scheme that has been or is carried out or commenced on or after that day (other than a scheme that was entered into before that day).

Territorial application

(2) It does not matter whether the *scheme, or any part of the scheme, was entered into or carried out inside or outside Australia.

Accordingly, for Division 165 to apply to the arrangement outlined in the Entity A private ruling application, three elements would need to be satisfied:

· there is a "scheme";

· a "GST benefit" is obtained from the scheme; and

· the dominant purpose or principal effect of the scheme is to obtain the GST benefit identified.

Scheme

Subsection 165-10(2) exhaustively defines a "scheme" as:

(a) any arrangement, agreement, understanding, promise or undertaking:

(i) whether it is express or implied; and

(ii) whether or not it is, or is intended to be, enforceable by legal proceedings; or

(b) any scheme plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise'.

The arrangement described in the private ruling application would constitute a scheme for the purposes of Division 165.

The scheme would, in general terms, consist of the following steps:

· The acquisition of the property asset with the GST group;

· The sale of the property asset by Entity A to Entity B; and

· The leaseback of the premises to Entity A by Entity B.

GST Benefit

Under paragraph 165-10(1)(d), a GST benefit includes a benefit where:

'all or part of an amount that is payable to the entity under this [GST] act apart from this Division is, or could reasonably be expected to be, payable earlier than it would have been apart from the scheme or part of the scheme'.

In the ruling request lodged, Entity A indicate that there may be a GST benefit arising from the proposed arrangement.

Dominant Purpose / Principal Effect

Division 165 must be considered on a case by case basis to determine whether it would be concluded that the dominant purpose or principal effect of the scheme would be to get a GST benefit. This requires an objective assessment of the scheme against the twelve matters set out in subsection 165-15(1).

The ruling request indicates that there are significant commercial reasons for holding the Commercial Property in a separate entity to the financial services business. The company chosen to facilitate this is an existing company that has always been held outside the GST group. No additional steps will be taken to place the company outside the GST group. As such, the Commissioner is satisfied that the most likely scenario, absent the scheme, would be for the property to have been acquired directly by the property company. The ruling request and the scheme itself points towards this being the most logical and straightforward way for the group to achieve its commercial outcomes. In this regard it is significant that the property was newly acquired by the group and indeed, was under construction at the time of its acquisition.

Therefore the Commissioner considers that in the factual circumstances outlined in the ruling request, including the desire of the group to hold the new company in a stand alone entity and the fact that consideration was not able to be given in sufficient time to achieve this, the dominant purpose of the scheme could not be said to be the obtaining of a GST benefit.

In summary, based on the information contained in the ruling request and further information provided to the Commissioner, it is considered that the Entity A scheme/arrangement described with its particular facts and circumstances, in particular relating to:

· the form and substance of the scheme;

· the manner in which the scheme was/will be carried out;

· the timing of the scheme;

· the period in which the scheme was/will be carried out;

· the overall change in the applicants financial position and

· the circumstances surrounding the scheme

will not be entered into or carried out with the dominant purpose or principal effect of securing a GST benefit and therefore Division 165 will not apply.