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Ruling

Subject: Goods and services tax (GST) input tax credits

Question 1:

Is it possible to claim GST even if you have not started to get sales?

Answer 1:

Yes. You can claim the GST on acquisitions when you commence a new business activity and you are registered, or required to be registered, for GST.

Relevant facts and circumstances

You are an individual who is registered for GST.

You are commencing an activity.

You have acquired a machine from a supplier in Australia to enable you to carry our this activity.

You have paid monetary consideration for this machine, and this price includes GST.

You intend to carry out this new adventure to supplement your pension.

You have previously carried on another enterprise, but you have ceased the operation of this enterprise.

You have maintained your GST registration from this former enterprise rather than cancelling your GST registration, and you submit nil activity statements as required.

It is your stated intention to make a profit from this activity.

At different times you have described your proposed activity as a business, a hobby, and a hobby business.

If your planned activity does not eventuate you will investigate the possibility of other trading activities.

Our records show that your annual turnover is less than $75,000.

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 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

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

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

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

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 23-10

A New Tax System (Goods and Services Tax) Act 1999 section 23-15

Reasons for decision

Question number 1:

Input tax credits, creditable acquisitions and taxable supplies

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

You make a creditable acquisition under section 11-5 of the GST Act if:

· you acquire something solely or partly for a creditable purpose

· the supply of the acquisition to you is a taxable supply

· you provide, or are liable to provide, consideration for the supply, and

· you are registered, or required to be registered, for GST.

You make a creditable acquisition under section 11-15 of the GST Act to the extent that you acquire it in carrying on your enterprise.

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

· you make a supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia, and

· you are registered, or required to be registered, for GST.

Enterprise

The term 'enterprise' is defined in section 9-20 of the GST Act so as to include an activity or series of activities done:

· in the form of a business

· in the form of an adventure or concern done in the nature of trade, or

· in the form of a lease, license or other grant of property on made on a regular or continuous basis.

The definition of 'business' in section 195-1 is the same as that used in subsection 6(1) of the Income Tax Assessment Act 1936 for income tax purposes.

The use of the phrase 'in the form of' a business or an adventure or concern in the nature of trade means that this definition has a broader meaning than the term 'business' phrase 'an adventure or concern in the nature of trade'. Thus a commercial activity that does not amount to a business or an activity in the nature of trade has the characteristics of an enterprise for the purposes of the GST legislation.

Whether or not an activity or series of activities amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case. There is no simple answer to whether you are in business or not, it depends upon the facts in each case. However consideration of the following factors from case law will assist in determining whether an activity is actually a business:

· Does an activity have a significant commercial purpose or character?

· Is there more than just an intention to engage in business?

· Is there an intention or purpose to make a profit as well as a prospect of profit?

· Is there repetition and regularity to the activity carried on?

· Is the activity carried on in a similar manner to other businesses in your industry?

· Is the activity planned, organised and carried on in a business-like manner?

· Does an activity have the characteristics of size, scale and permanency?

· Would it be true to say an activity is really better described as a business, rather than a hobby, recreation or sporting activity?

Although no one indicator is decisive, they must be considered in combination and as a whole. With the exception of the last of the above questions, each time that one of these questions is answered by 'yes', it increases the likelihood that a business or an adventure in the nature of trade is being carried on.

However, under subsection 9-20(2) of the GST Act the definition of the term enterprise does not include an activity or series of activities done as a recreational pursuit or hobby.

Your enterprise

It is your stated intention to make a profit from your intended activity to provide additional income. In doing so, you have also indicated that your intended activity has a significant commercial character. This view is supported by the fact that you intend to make a turnover of the maximum amount per week allowable without detriment to your pension, then you will have a significant annual turnover. This amount is indicative of an activity of some size and scale. Thus there is more than just an intention on your part to engage in business

To undertake this activity on an ongoing basis to generate the desired turnover indicates that your intended activity will have both regularity, and also that it will be permanent and repetitive in nature.

Further, you have already purchased the necessary equipment to undertake your intended activity. In addition you have also indicated that if your planned activity of does not eventuate you will investigate the possibility of other trading activities.

Thus there are a number of factors which indicate that your intended activity will be carried on as an enterprise rather than as a hobby or a private recreational pursuit. Therefore you are carrying on an enterprise provided the activities are as described in the facts provided.

Your registration, creditable acquisition and input tax credits

It is noted that you have already purchased the necessary equipment to undertake your intended enterprise. In doing so, you have acquired something for a creditable purpose.

Further, you have paid monetary consideration for this equipment. In addition, you have also indicated that the supply of the acquisition to you was a taxable supply, as the price you paid for this equipment included an amount of GST.

You are also registered for GST.

Under section 23-5 of the GST Act you are required to be registered for GST if you carry on an enterprise and your turnover reaches the registration turnover threshold, which is currently $75,000. Section 23-15 of the GST Act provides that you may choose to register for GST if you carry on an enterprise even though your turnover is less than the registration turnover threshold.

As your projected turnover is less than the registration turnover threshold you are not required to be registered for GST. However, in maintaining your GST registration you have chosen to remain registered for GST.

Thus you have made a creditable acquisition under section 11-5 of the GST Act, and so you are entitled to claim an input tax credit for the amount of GST included in the price of the equipment.

Further information: your registration, taxable supplies and input tax credits

The fact that you are registered for GST has two consequences for any enterprise that you carry on. These consequences are:

· that you are liable to remit GST on any taxable supply that you make, and

· that you are entitled to claim an input tax credit on any creditable acquisition that you make.

However, if you choose to cancel your registration you are not:

· liable to remit GST on any supplies that you make as they would no longer be taxable, and

· entitled to claim an input tax credit on acquisitions that you make as they would no longer be creditable acquisitions.

If you carry on any activity as a recreational pursuit or hobby, it is not done in the course or furtherance of an enterprise that you carry on. You are not liable to remit GST on any supplies that you make in the course of pursuing such activities, but you are not entitled to claim an input tax credit on acquisitions made in the pursuit of such activities.

Please find enclosed a copy of our publication GST for small business (NAT 3014) for your reference.