Edited version of your private ruling

Authorisation Number: 1012469402859

Ruling

Subject: GST apportionment methodology

Question

Does the Commissioner of Taxation (Commissioner) agree that the proposed apportionment method set out in the facts for determining the extent of creditable purpose (ECP) in respect of car-parking expenditure incurred by Entity A is fair and reasonable?

Answer

Yes, the Commissioner agrees that the proposed apportionment method set out in the facts for determining the ECP in respect of car-parking expenditure incurred by Entity A is fair and reasonable.

Relevant facts and circumstances

Entity A carries on a business in Australia and is registered for GST.

Entity A makes supplies which are taxable supplies, input taxed supplies and GST-free supplies under the GST Act.

Entity A exceeds the Financial Acquisition Threshold

Entity A incurs GST on leasing expenses in relation to a number of car parking spaces located on and off its business premises.

In general, there are two ways car parking spaces are acquired by Entity A:

1. For some locations car parking is usually acquired separately from the lease of the office/ commercial accommodation itself. These acquisitions are 'external car parking' costs and thus the car parking leasing costs are separately identifiable on invoices issued by building owners.

2. on-site parking spaces (if any) are generally acquired as part of the building master lease. As a result, the actual underlying cost of the car parking spaces is not readily available as it is not generally separately disclosed.

Car parks are used to park three categories of vehicles. These are:

Category 1: "pool" vehicles

These cars are registered in Entity A's name and allocated to an individual or a business unit (pool car). They are available to employees of the business unit during business hours for business use. In practice, minor personal use of such vehicles occurs but not in the case of all vehicles (i.e. some vehicles are 100% business use). Drivers are required to complete logbook entries for all trips undertaken in a pool car to substantiate its use. Normally Entity A ensures that pool cars are able to be parked at the work location (or within close proximity) of the business unit to which it is assigned.

Category 2: Employee's personal or novated lease vehicles

Such parking is provided solely for the personal use of the employee (i.e. primarily in order to facilitate the employee travelling to and from work).

Category 3: Customer/ external suppliers parking (visitor parking)

Parking is made available to customers or for vehicles driven by service providers to Entity A.

Car Parking Fringe Benefits Tax

Entity A pays Fringe Benefits Tax (FBT) in respect of car parking benefits that are caught under the relevant provisions of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). However, not all of the car-parking benefits Entity A provides are subject to FBT as some are exempt benefits.

In some locations employees are asked to contribute to the cost of providing private use car-parks. Generally, in locations where car-parking would otherwise attract FBT, this contribution is taken from their post-tax salary. For car-parking that does not attract FBT, it is taken from their pre-tax salary as a salary sacrifice amount.

In accordance with subsection 9-75(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Entity A accounts for its GST liability on post-tax contributions received from employees whilst pre-tax contributions do not represent consideration for a taxable supply.

Record Keeping

In respect of records that are maintained by Entity A, it is not possible to objectively determine whether a particular car-park has been used for a private and/or business purpose as:

· No records are kept (nor are they required for FBT or other tax purposes) to document the use of the car-park;

· In relation to Entity A's pool vehicles, no records are kept of where each car is parked on a day-to-day basis;

· In some locations each car park is assigned to an individual employee (i.e. the car parking data does not record what car is assigned to the car park nor whether the car is a private car or pool car);

· In some locations a large number of car-parks may be assigned to one business unit.

Car Parking GST

Entity As current ECPs do not take into account any ITC entitlement that exists in relation to remuneration benefits that are provided to employees in respect of car-parking fringe benefits (i.e. any private car-parking component), nor do they take into account the extent to which ITC entitlement is limited by the application of division 71 of the GST Act.

Entity A will determine a unique car parking ECP rate at each Business Unit (BU) level which is to be applied to acquisitions of external car parking costs. All other acquisitions will continue to apply the existing ECPs according to the existing method used by Entity A.

Proposed apportionment method

The ECP which will apply to the external car parking costs is determined based on the following steps:

Step 1: Determine the Adjusted total number of car parking spaces

Entity A receives car parking reports for the purposes of completing its FBT return each year. These reports identify car parks that are set aside in each location for visitor parking. Accordingly, Step 1 involves the identification and removal of visitor parking spaces from the total number of available car parking spaces for each geographic location (as determined under Step 2 below) i.e. a separate calculation is performed for each geographic location.

Entity A will apply the ECPs under its existing apportionment method to the visitor parking spaces that are removed in this step.

Step 2: Identify "remuneration benefit" creditable acquisitions

The purpose of this step is to split the remaining car parking costs between:

a) Remuneration benefits which qualify for an ECP of 100%; and

b) Remaining costs which require a further split.

In summary this split is determined by estimating the percentage of car-parking spaces that are not occupied by pool vehicles assuming that all such vehicles are assigned a car-parking space (using the adjusted number of car parking spaces) in each locality.

Whilst it is possible to identify the location of the car parks leased by Entity A, under Entity A's current process, it is not possible to identify the precise car parking location of all of Entity A's pool vehicles. The latter's location may only be determined at the end of each FBT year (31 March) by reference to the location of the employee(s) recorded as the driver of the vehicle through the FBT year. This information allows the location of the vehicle to be identified at a geographic level consistent with Entity A's internal car parking reporting so that all such vehicles are assigned an available car park.

Step 3: Identify "Division 71" acquisitions

This step splits the remaining car-parking costs that are not related to remuneration benefits into:

a) Non- creditable Division 71 acquisitions; and

b) Remaining costs subject to normal ITC rules in accordance Entity A's existing apportionment method.

To ensure consistency with the formula under Step 2, this step involves the calculation of the percentage of remaining car-parking costs in each geographic location that are subject to FBT i.e. to estimate the non-creditable Division 71 percentage. The weighted average of all geographic locations is determined based on cost.

Step 4: Calculate Car Parking ECP by Business Unit

The ECP for each business unit (BU) will be calculated as follows:

a) The weighted average of remuneration benefits creditable acquisitions calculated in Step 2 is applied to the BU's car-parking costs; and

b) The BU's ECP, reduced by the weighted average of Division 71 acquisitions calculated at Step 3, is applied to the remainder.

After performing the calculations in Steps 1, 2 and 3, unique ECPs are proposed to be calculated for each BU.

The BU car parking ECP would be applied in respect of car parking incurred by the BU that is separately identifiable / invoiced and processed through the internal property transfer charge system. It will not be applied to other car parking costs such as ad-hoc car parking incurred by employees in the course of, for example, travelling for business.

Relevant legislative provisions

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

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

Reasons for decision

Section 11-20 of the GST Act allows an entity to claim an input tax credit for any creditable acquisition, and the term creditable acquisition is defined in section 11-5 of the GST Act.

Relevantly, a creditable acquisition is one which is acquired solely or partly for a creditable purpose. Section 11-15 of the GST Act states:

1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

2) 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.

In this case, Entity A makes acquisitions of car parking. Further some of the car parking is acquired by Entity A to make a supply of car parking fringe benefits to employees.

Goods and services tax ruling, GSTR 2001/3, Goods and Services Tax: GST and how it applies to supplies of fringe benefits (GSTR 2001/3) explains the Commissioner's view on the entitlement to input tax credits for acquisitions and importations related to providing fringe benefits. In particular paragraph 50 states:

50. You acquire a thing for a creditable purpose if you acquire it in carrying on your enterprise. You import goods for a creditable purpose if you import the goods in carrying on your enterprise. If you acquire or import something to provide a fringe benefit in respect of employment in your enterprise, you have acquired it in carrying on your enterprise.

Further paragraph 54 of GSTR 2001/3 states:

54. In ascertaining the GST implications of the provision of a fringe benefit, a distinction can be drawn between two concepts, namely 'work benefit' and 'remuneration benefit'. This distinction does not apply for the purposes of the FBTAA. Although these terms are not defined in the GST Act, they are important concepts in determining input tax credit entitlement for entities that make both input taxed supplies and provide fringe benefits.

Consistent with paragraph 54 of GSTR 2001/3 Entity A is therefore required to identify whether the acquisition of the car parking to employees consists of a 'remuneration benefit' or 'work benefit'. The meaning of these terms is explained in the following relevant paragraphs of GSTR 2001/3 which state:

Remuneration benefits

55. 'Remuneration benefits' are benefits provided to employees which, together with salary and wages, are provided by employers in return for employee services. Acquisitions that relate to providing these remuneration benefits will not relate to other supplies that an entity makes, such as input taxed supplies that an entity makes to clients or customers.

56. Examples of Remuneration Benefits would include:

· Use of a car to be used for employee's private travel;

· Entertainment provided to employees;

· Employee holiday travel and accommodation.

Work benefits

60. In contrast, a 'work benefit' is not provided for consideration (in the form of the employee's services) because the purpose of the benefit is to serve genuine and legitimate ends of the employer's enterprise, and any incidental advantage to the employee is disregarded as a minor outcome.

61. With a work benefit, the provision by an employer of pleasant working premises for employees clearly benefits an employee (when compared to unpleasant working conditions) but primarily serves the employer's purpose of creating an efficient working environment. An employee does not provide his or her services as consideration for the use of a desk or an office or other similar conditions of employment. Employee services are provided for the employer's provision of salary and wages, plus remuneration benefits.

In this case, consistent with the above paragraphs we accept that where Entity A makes an acquisition of car parking which is provided as:

· a remuneration benefit, the acquisition will be related to providing the particular benefit (the car parking) and does not relate to other supplies Entity A makes (such as input taxed supplies),

· work benefit, the acquisition will be considered to relate to Entity A's enterprise

Subsection 71-5(1) of the GST Act provides that an acquisition that solely or partly relates to making financial supplies is not a creditable acquisition if the acquisition would, but for this section, be a GST creditable benefit on which the provision of fringe benefits tax is payable. Division 71 will generally not apply to deny any input tax credits where the acquisition relates to a benefit that is intended to be used wholly for private purposes.

However, where the benefit is intended to be or is actually used for some enterprise purposes by an employee of the entity, Division 71 operates to deny entitlement to all input tax credits on the acquisition of the thing provided as the fringe benefit. That is, the whole of the input tax credit is disallowed where Division 71 applies.

Submissions

It is Entity A's submission that Entity A is entitled to full input tax credits on the GST it incurs in acquiring car-parks which are provided to employees for their own private use. This includes car-parking that is a fringe benefit under the FBTAA and car parking that is exempt from FBT. Entity A also considers that it is entitled to claim input tax credits on car parking costs where Division 71 of the GST Act does not apply to such acquisitions (relevantly an FBT liability does not arise). This is to the extent of creditable purpose as detailed in Entity A's apportionment method.

Further as Entity A does not retain records to identify the direct use of car parks or where cars are parked on a daily basis, Entity As submits that the proposed apportionment method set out in the fact to determine its entitlement to input tax credits for the external car parking costs is fair and reasonable.

Application of the GST Law to Entity As circumstances

Based on the facts and circumstance in this case we agree with the submissions by Entity A.

In this case Entity A has acquired car parking which is used for three categories of vehicles. Category 1, consist of car parking which is acquired to park pool vehicles, Category 2 consist of car parking which is acquired for the private use of employees and Category 3 is visitor car parking spaces.

According to the Commissioner's view set out above, where the acquisition is made to provide a remuneration benefit, in this case the acquisition of car parking, it will be a creditable acquisition and does not relate to an input taxed supply. That is, the acquisition is in respect of the car parking remuneration benefit. Therefore, this acquisition will be a creditable acquisition and Entity A will be entitled to claim input tax credits.

In practice, these acquisitions are those related to category 2. That is, they are the car parks acquired by Entity A which are used to provide the remuneration benefit to the employee (the employee personal use car parks).

Car park acquisitions made by Entity A which are not related to providing a remuneration benefit, (i.e. those in Category 1 and Category 3) will relate to Entity A's enterprise, even where there is a minor benefit. This is consistent with the Commissioner's view in paragraph 60 of GSTR 2001/3.

In the case of any car parks acquired relating to parking use in Category 3, Division 71 of the GST Act can not apply as there is no particular benefit in respect of which fringe benefits tax is or will be payable. On this basis, for acquisitions in this category, Entity A will be denied input tax credits under paragraph 11-15(2)(a) of the GST Act, to the extent that they relate to making supplies that would be input taxed.

However the same can not be concluded in respect of acquisitions made in relation to Category 1. Therefore Division 71 of the GST Act will apply to deny an input tax credit on acquisition of car parks to the extent the requirements of subsection 71-5 of the GST Act are satisfied.

In the current circumstance Entity A is not in a position to directly determine the ECP in respect of its car parking expenditure. Therefore it is proposing the use of an apportionment methodology for the purpose of claiming it's entitlement to input tax credits.

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 an entity's acquisitions or importations.

Paragraphs 33 and 73 of GSTR 2006/3 make it clear that the method chosen to allocate or apportion acquisitions between creditable and non-creditable purpose needs to: 

· be fair and reasonable;

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

· be appropriately documented in your individual circumstances.

Accordingly, the apportionment method adopted must be fair and reasonable in Entity A's circumstances and must appropriately reflect the intended or actual use of it's acquisitions or importations.

Paragraphs 81 and 103 of GSTR 2006/3 explore the Commissioner's view on direct and indirect methods of estimation and circumstances where these methods may be considered appropriate:

81. The Commissioner considers that the use of direct methods, including direct estimation (see paragraphs 92 to 101 of this Ruling) 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.

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103. Indirect estimation methods may be appropriate in circumstances where there are overhead expenses that are not directly referable to particular supplies or activities. They may also be appropriate if the direct methods do not apportion acquisitions or importations to the level of supplies, or groups of supplies that require different treatment for GST purposes. It may also be the case that the direct attribution of a large number of small acquisitions or importations is not cost effective. In all cases where indirect methods are used, the method chosen should be fair and reasonable in the context of your enterprise.

Consistent with the above paragraphs, the Commissioner accepts that the proposed basis of apportionment of car parking acquisitions is fair and reasonable in Entity A's circumstances.

In this case Entity A has used an indirect estimation method. Amongst other things this method uses the weighted average of remuneration benefit percentages calculated for each geographical location to provide a proxy for the overall use of car-parking spaces.

As such, we consider that the theoretical aspect of Entity A's GST apportionment method will be fair and reasonable. Therefore, provided the practical application does not result in a distortive outcome, we consider the method used by Entity A will fall within the ambit of being fair and reasonable in accordance with GSTR 2006/3.

This is based on the facts as presented to us in Entity A's submissions. However, if those circumstances change, Entity A may be required to review this methodology to determine if it remains fair and reasonable and accurately reflects the intended use of relevant acquisitions.