Edited version of your written advice

Authorisation Number: 1012789663138

Ruling

Subject: GST and the financial acquisitions threshold

Question 1

Is the proposed apportionment method fair and reasonable for allocating indirect expenses for the purposes of section 189-5 of A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes, the proposed apportionment method is fair and reasonable.

Relevant facts and circumstances

The relevant scheme includes any facts contained in documents and materials provided in the private ruling application in addition to the Project Deed (including any schedules and attachments).

The entity makes mainly taxable supplies. The entity has supplied a licence and has assigned the licence payments to another party.

The assignment of the licence payments is an input taxed financial supply.

The following method is proposed for determining whether the entity exceeds the financial acquisitions threshold:

1. Acquisitions which that directly relate to the financial supplies are identified first.

2. Acquisitions which relate to both the financial supplies and other supplies (indirect costs) are apportioned using the ratio of costs wholly and directly relating to financial supplies to costs wholly and directly relating to taxable & GST-free supplies.

3. The acquisitions which directly relate to making financial supplies is added to the proportion of indirect costs to determine if the entity exceeds the financial acquisitions threshold.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Division 189.

Reasons for decision

Ordinarily, an entity is not entitled to input tax credits to the extent that an acquisition relates to making input taxed financial supplies under section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). However, subsection 11-15(4) of the GST Act provides that an entity which does not exceed the 'financial acquisitions threshold' is entitled to input tax credits even though the acquisitions relate to making input taxed financial supplies.

Division 189 of the GST Act provides for a test based on current acquisitions and a separate test based on future acquisitions to determine whether an entity exceeds the financial acquisitions threshold at a particular time. If the threshold is exceeded under either the current or future acquisitions test, the entity will not be entitled to input tax credits on acquisitions to the extent that they relate to the making of input taxed financial supplies.

To test whether an entity exceeds the financial acquisitions threshold at a time during a particular month, the entity is required to assume that all the financial acquisitions4 it has made, or is likely to make, during the 12 months ending at the end of that month were made solely for a creditable purpose. The entity will exceed the financial acquisitions threshold if either or both of the following would apply:

• the amount of all the input tax credits to which the entity would be entitled for its financial acquisitions would exceed $150,000; and

• the amount of the input tax credits to which the entity would be entitled for its financial acquisitions would be more than 10% of the total amount of input tax credits to which it would be entitled for all its acquisitions and importations (including the financial acquisitions) during that 12 months.

When considering the application of the financial acquisitions threshold, an entity must identify acquisitions which directly relate to making financial supplies as well as those acquisitions which indirectly relate to making financial supplies. In determining the extent to which acquisitions indirectly relate to making financial supplies, a fair and reasonable basis of apportionment must be used. Goods and Services Tax Ruling GSTR 2006/3 provides guidance on apportionment methods and, at paragraph 73, states:

73. Following the principles set out by the High Court, the method you choose to allocate or apportion acquisitions between creditable and non-creditable purposes needs to:

• be fair and reasonable;

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

• be appropriately documented in your individual circumstances.

The apportionment methodology you have proposed takes the ratio of costs wholly and directly attributable to input taxed supplies to costs wholly and directly attributable to taxable and GST-free supplies. This ratio is then applied to the indirect costs to determine the extent to which they relate to input taxed supplies and included within the calculation of whether the financial acquisitions threshold has been passed or the extent to which input tax credits can be claimed.

The entity only makes a limited number of financial supplies and identifying the direct costs for these supplies is relatively straightforward. The majority of acquisitions made by the entity are directly referable to taxable supplies that it makes. GSTR 2006/3 explains when an input based apportionment methodology is fair and reasonable:

125. Input based indirect methods employ a measure based on the already established use of some inputs ('directly allocated inputs') to estimate the use of other inputs not able to be allocated in this way ('remaining inputs'). These methods are only useful if a direct method (such as direct estimation) has already been used in respect of a majority of acquisitions or importations, so as to provide a reliable basis for their use in calculating the creditable use of the remaining inputs.

126. The proportion of directly allocated inputs would be calculated as the proportion of total inputs to inputs used in making non-input taxed supplies. This could then be used to establish the extent of creditable purpose in respect of the remaining inputs.

127. This method will provide the most accurate results if the percentage of remaining inputs does not exceed the proportion of directly allocated inputs. Some examples of input based methods are:

• the cost of acquisitions directly allocated to non-input taxed supplies relative to the total costs of all acquisitions directly allocated; or

• input tax directly allocated to acquisitions used to make non-input taxed supplies relative

The methodology proposed by entity to apportion its indirect acquisitions is fair and reasonable for the purposes of determining whether the entity exceeds the financial acquisitions threshold.