Edited version of your written advice

Authorisation Number: 1012671532895

Ruling

Subject: Goods and services tax and the purchase of trade debtors and other assets

Question 1

Is the purchase of trade debtors by Entity A, as set out in the Contract, a creditable acquisition in accordance with section 11-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the purchase of trade debtors by Entity A, as set out in the Contract, is not a creditable acquisition in accordance with section 11-5 of the GST Act.

Question 2

Is Entity A entitled to the input tax credit on the purchase of the Assets?

Answer

No, Entity A is not entitled to the input tax credit on the purchase of the Assets.

Question 3

If Entity A is not entitled to the full input tax credits on the purchase of the Assets, will Entity A be entitled to Reduced Input Tax Credits (RITCs) for the GST included in the purchase price of the Assets?

Answer

No, Entity A is not entitled to RITCs for the GST included in the purchase price of the Assets.

Question 4

Are recoveries of debts from the trade debtors purchased by Entity A, financial supplies and therefore input taxed?

Answer

No, the recovery of debts from the trade debtors purchased by Entity A is not itself a supply and therefore is not a financial supply.

Question 5

If recoveries of debts from trade debtors are financial supplies, is Entity A entitled to RITCs on acquisitions it makes in relation to the recovery of those debts?

Answer

The recovery of debt is not a supply. However, Entity A may be entitled to RITCs. See 'Reasons for decision' for further details.

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.

On XX March 2014, you signed a Contract for the purchase of trade debtors and other assets ("Assets") of two companies ("the Companies") that have had Receivers and Managers appointed. The other assets consist of office furniture and equipment.

The sale price for the Assets purchased as stated in the Contract included an amount plus GST.

The Contract states the sale of the Assets is a taxable supply and a tax invoice will be provided by the vendor to the purchaser at the completion of the sale.

The book value attributed in the Contract to the trade debtors is substantially higher than the sale price under the Contract.

You purchased the other assets, which comprise of office furniture and equipment, to be used in your enterprise rather than for resale.

The only activity carried out by you in your enterprise will be the recovery of the trade debtors that have been purchased from the Companies

You exceed the financial acquisitions threshold.

The supply of the Assets by the Companies meets the requirements of subregulation 40-5.09(1)(a) and (b) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)

You have made acquisitions directed towards recovery of debts, like solicitor costs for letter of demands. You have also incurred some general costs like rent of office premises, phones, stationery etc.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999:

Section 9-5

Section 11-5

Section 11-15

Section 40-5

Division 70

Section 189-5

Section 189-10

Section 189-15

Section 195-1

A New Tax System (Goods and Services Tax) Regulations 1999:

Subregulation 40-5.09(1)

Subregulation 40-5.09(3) and (4)

Subregulation 70-5.02(2)

Reasons for decision

Question 1

All legislative references in this ruling are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless stated otherwise.

The GST Act provides that an entity is entitled to an input tax credit for any creditable acquisition that it makes.

Section 11-5 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 this case, paragraphs 11-5(c) and (d) are satisfied in respect of both the purchase of trade debtors and other assets (collectively the 'Assets').

Is the supply of trade debtors to you a taxable supply?

Section 9-5 provides that an entity makes a taxable supply when the supply is made for consideration, in the course of furtherance of its enterprise, is connected with Australia and the entity is registered or required to be registered. However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

Section 40-5 provides that a financial supply is input taxed and that financial supply has the meaning given by the GST Regulations.

The GST Regulations provide that the provision, acquisition or disposal of an interest mentioned in subregulation 40-5.09(3) or (4) is a financial supply where it satisfies the requirements of subregulation 40-5.09(1) of the GST Regulations.

Subregulation 40-5.09(1) of the GST Regulations state:

(1) The provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if:

(a) the provision, acquisition or disposal is:

(i) for consideration; and

(ii) in the course or furtherance of an enterprise; and

(iii) connected with Australia; and

(b) the supplier is:

(i) registered or required to be registered; and

(ii) a financial supply provider in relation to supply of the interest.

This ruling is provided on the basis that the requirements at subregulation 40-5.09(1)(a) and (b) are met in respect of the supply of the Assets by the supplier, that is, the Companies.

An interest in a debt is an interest listed in item 2 in the table in subregulation 40-5.09(3) of the GST Regulations ("Item 2"). The supply of the trade debtors to you will fall within Item 2 and therefore is an input taxed financial supply. Accordingly the supply of the trade debtors is not a taxable supply to you and is therefore not subject to GST.

It follows then that your acquisition of the trade debtors from the Companies will not meet the requirements of 11-5(b) and therefore will not be a creditable acquisition in accordance with section 11-5 by you.

Question 2

As stated above, paragraphs 11-5(c) and (d) are satisfied in respect of the purchase of the Assets.

However, as established in question 1, your acquisition of the trade debtors from the Companies will not be a creditable acquisition and therefore no entitlement to input tax credit on the purchase of trade debtors would arise.

Your purchase of other assets

The supply of the other assets to you, which comprise of office furniture and equipment, do not come within any items listed in subregulation 40-5.09(3) and therefore do not constitute a financial supply and is not input taxed. There are no provisions in the GST Act that will make this supply to you GST-free.

In this case, the supply of the other assets to you would satisfy all the relevant requirements of section 9-5 and is not GST-free or input taxed supply. Therefore, the supply of other assets to you would be a taxable supply and will be subject to GST.

Are the other assets acquired by you acquired for a creditable purpose?

Section 11-15 discusses the meaning of creditable purpose and states:

Meaning of creditable purpose  

(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.

Enterprise and private or domestic

Section 195-1 provides that 'carrying on and enterprise' includes doing anything in the course of the commencement or termination of an enterprise. Subsection 9-20(1) provides that an enterprise, amongst other things, is 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.

Goods and Services Tax Ruling GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose (GSTR 2008/1) provides the Commissioner's view on the creditable purpose requirement.

Paragraphs 60 and 70 of GSTR 2008/1 state:

60. In determining the enterprise that is being carried on relevant indicators include:

• the activities that generate income for the entity;

• formation documents;

• contracts;

• business records such as receipts and invoices;

• business plans; and

• minutes of meetings.

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.

Accordingly, your purchase of the other assets in carrying on your enterprise that involves the recovery of debts will meet the requirement under subsection 11-15(1).

Your acquisition of the other assets is not private or domestic in nature. Therefore what remains to be determined is if the acquisition of the other assets relates to making supplies by you that would be input taxed.

Making supplies that would be input taxed

Paragraphs 110 to117 of GSTR 2008/1 discusses the decision in the HP Mercantile case in considering supplies that would be input taxed. Of particular relevance, paragraphs 109 to 112 of GSTR 2008/1 state:

110. HP Mercantile Pty Ltd (as trustee) acquired certain debts by way of legal assignment and set about recovering those debts. The debts were acquired in a single transaction. For GST purposes, the acquisition of the debts by HP Mercantile Pty Ltd was both an acquisition and a financial supply by HP Mercantile Pty Ltd and is referred to as an acquisition-supply.

111. Before acquiring the debts, HP Mercantile Pty Ltd acquired advice by way of a feasibility study as to whether it should acquire the debts. Once HP Mercantile Pty Ltd acquired the debts, it also acquired debt collection services. As the recovery of the debts is not itself a supply, the only supply made by HP Mercantile Pty Ltd to which the acquisitions could relate was the earlier single acquisition-supply of the debts.

112. For the acquisition of debt collection services, the issue was whether there existed a relevant connection between the acquisition of the debt collection services and the earlier acquisition-supply of the debt. In the course of considering this issue, Hill J considered the nature of the connection required.

Also paragraph 115 of GSTR 2008/1 state:

115. Thus the Court held that the acquisition of the debt collection services related to making supplies that would be input taxed even though the relevant supply (the acquisition-supply of the debts) was made before the acquisition. In making this finding, Hill J stated that there was no reason why the words 'relates to making supplies that would be input taxed' required that the connection between acquisitions and supplies be made at some future time. Instead, the connection could be between an acquisition and a supply that was made before the acquisition.

You have advised that the only activity that you will have after the initial purchase of the trade debtors and the other assets is the recovery of the trade debtors that you have purchased. It has been established above that the supply of the trade debtors to you is an input taxed financial supply.

In applying the principles established in GSTR 2008/1 to your case, the acquisition of the trade debtors by you is an acquisition of a financial interest that is a financial supply in itself and is referred to by the Commissioner as an 'acquisition-supply'. The concept of an acquisition-supply by the acquirer is discussed in greater detail at paragraphs 22 to 26 of Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2). These paragraphs are not reproduced here but essentially provide that an acquisition of a financial interest is regarded as a supply because of the 'supply' is broadly defined under the GST Act to include a financial supply and a financial supply includes an 'acquisition' of a financial interest.

The recovery of the trade debtors by you is not itself a supply and the only supply made by you to which your acquisitions could relate is the earlier acquisition-supply of the trade debtors. Therefore, your acquisition of other assets will be denied creditable purpose under paragraph 11-15(2)(a).

However, an exception is provided in subsection 11-15(4) which treats acquisitions that would otherwise relate to making supplies that would be input taxed as not relating to making of such supplies. Subsection 11-15(4) state:

An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be *input taxed if:

a) the only reason it would (apart from this subsection) be so treated is because it relates to making *financial supplies; and

b) you do not *exceed the financial acquisitions threshold

Division 189 deals with exceeding the financial acquisitions threshold (FAT). Section 189-5 deals with exceeding the financial acquisition threshold in relation to current acquisitions and relevantly subsection 189-5(1) states:

(1) You exceed the financial acquisitions threshold at a time during a particular month if, assuming that all the *financial acquisitions you have made, or are likely to make, during the 12 months ending at the end of that month were made solely for a *creditable purpose, either or both of the following would apply:

(a) the amount of all the input tax credits to which you would be entitled for those acquisitions would exceed $150,000 or such other amount specified in the regulations;

(b) the amount of the input tax credits referred to in paragraph (a) would be more than 10% of the total amount of the input tax credits to which you would be entitled for all your acquisitions and importations during that 12 months (including the financial acquisitions).

Similarly section 189-10 deals with exceeding the financial acquisition threshold in relation to future acquisitions. In particular subsection 189-10(1) states:

(1) You exceed the financial acquisitions threshold at a time during a particular month if, assuming that all the *financial acquisitions you have made, or are likely to make, during that month and the next 11 months were made solely for a *creditable purpose, either or both of the following would apply:

(a) the amount of all the input tax credits to which you would be entitled for those acquisitions would exceed $150,000 or such other amount specified in the regulations;

(b) the amount of the input tax credits referred to in paragraph (a) would be more than 10% of the total amount of the input tax credits to which you would be entitled for all your acquisitions and importations during those months (including the financial acquisitions).

A financial acquisition is an acquisition that relates to the making of a financial supply (see section 189-15).

As the only activity carried out by you in your enterprise will be the recovery of the trade debtors that you have purchased from the Companies, the only supply you will make is the input taxed acquisition-supply of these trade debtors.

Accordingly, all your acquisitions will be financial acquisitions and you will exceed the FAT in accordance with paragraphs 189-5(1)(b) and 189-10(1)(b).

In conclusion, your acquisition of the other assets relates to the making of an input taxed financial supply by you and therefore you do not acquire the other assets for a creditable purpose. It would follow then that your acquisition of the other assets does not meet the requirements of section 11-5 and are not creditable acquisitions.

For the reasons stated, neither the acquisition of trade debtors nor other assets are creditable acquisitions. You are therefore not entitled to input tax credits on the purchase of the Assets.

Question 3

In some cases, acquisitions relating to financial supplies can attract a reduced input tax credit, even though no input tax credit could arise under the basic rules.

Division 70 provides an extended meaning of creditable purpose and essentially provides that where you make a 'reduced credit acquisition' in relation to making financial supplies, it will not be denied creditable purpose to the extent that it relates to making financial supplies. Division 70 further provides that a reduced input tax credit will be available for making such a reduced credit acquisition.

The table in subregulation 70-5.02(2) of the GST Regulations provides an exhaustive list of acquisitions that are reduced credit acquisitions for Division 70 purposes.

It was established in Question 1, that your acquisition of the trade debtors is not subject to GST and therefore no imputation credits arise in relation to this acquisition.

It was also established in Question 2 that the acquisition of the other assets comprising of the office furniture and equipment for use in your enterprise are financial acquisitions. However, the other assets do not fall within the exhaustive list of reduced creditable acquisitions as listed in subregulation 70-5.02(2). Therefore, your purchase of the other assets is not a reduced credit acquisition and you are therefore not entitled to RITCs for the purchase of the other assets.

The supply of trade debtors to you is not a taxable supply and not subject to GST. Therefore no entitlement to input tax credits or RITCs would arise for you in respect of the acquisition of trade debtors.

You are therefore not entitled to RITCs for the GST included in the purchase price of the Assets.

Question 4

As discussed in Question 2, the recovery of the trade debtors is not itself a supply by you and therefore is not a financial supply.

Question 5

As discussed in Question 2, the recovery of the trade debtors is not itself a supply by you. However your purchase of the trade debtors constitutes an acquisition-supply of the trade debtors which is an input taxed financial supply by you.

As such your acquisitions will relate to making supplies that would be input taxed. As discussed in Question 3, Division 70 provides an extended meaning of creditable purpose where you make reduced credit acquisitions.

The table in subregulation 70-5.02(2) of the GST Regulations provides an exhaustive list of acquisitions that are reduced credit acquisitions for Division 70 purposes. Where your acquisitions fall within the list as provided in the table in subregulation 70-5.02(2), they will be reduced credit acquisitions and therefore will be subject to RITCs.

Item 17 in the table in subregulation 70-5.02(2) ("Item 17") of the GST Regulations lists as reduced credit acquisitions the following debt collection services:

(a) debt recovery;

(b) litigation;

(c) lodgement of documents;

(d) by financial supply facilitator, managing the recovery of sums due by borrowers

Item 17 is discussed in greater detail at paragraphs 424 to 442 of Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1).

Therefore your acquisitions directed towards recovery of debts, like solicitor costs for letter of demands and debt recovery costs, will fall within Item 17 of the GST Regulations. These acquisitions are therefore reduced credit acquisitions and you will be entitled to RITCs for these acquisitions.

On the other hand, your enterprise costs like rent of office premises, phones, stationery etcetera will not fall within any items of the exhaustive list as set out in the table in subregulation 70-5.02(2) of the GST Regulations. Therefore these acquisitions will not qualify as reduced credit acquisitions and you will not be entitled to RITCs on these types of acquisitions.