Edited version of your written advice

Authorisation Number: 1013135303413

Date of advice: 3 December 2016

Ruling

Subject: Creditable acquisitions

Question 1

Are acquisitions made by X Ltd which relate to works undertaken on land formerly owned by X Ltd but resumed by the Council creditable acquisitions where X Ltd was required by the Council to undertake the works on that land as a condition of the Council approving a Development Assessment (DA) lodged by X Ltd in respect of land owned by X Ltd of which the resumed land formerly formed part?

Answer

Yes.

Relevant facts and circumstances

X Ltd owns a property at (Property).

The Council approved a DA in respect of the Property which allows the Property to be used for a specific purpose and storage and for an existing dwelling on the Property to be used as a maintenance facility.

X Ltd provided a copy of an Approved Plan which shows a part of the Property adjacent to a road being resumed by the Council for future widening of the road.

When approving the DA the Council imposed a number of Conditions.

One Condition required X Ltd to submit and lodge with the Relevant Body a Plan of Subdivision showing the land which was resumed by the Council.

Another Condition obliged X Ltd to construct road works and various drainage in accordance with approved drawings on the land resumed by the Council and maintain those works until acceptance by the Council.

A third Condition obliged X Ltd to provide a drainage system to collect stormwater run-off both from the Property and onto the Property from adjacent areas.

X Ltd advised that an entity related to X Ltd (the Trustee) will arrange and manage completion of the works required by the Condition of the DA because the Trustee holds building/construction and public liability indemnity insurance policies.

X Ltd provided copies of a Subcontractor Agreement between the Trustee (as contractor) and B Ltd (as subcontractor) for road widening works and a Quote for drainage works issued to Trustee by J Ltd.

To date no invoices have been issued by subcontractors and no Input Tax Credits (ITCs) claimed by X Ltd in respect of the works. X Ltd's representative advised that it is intended that the subcontractors will issue tax invoices to the Trustee (which is registered for GST and will claim ITCs) and that the Trustee will then issue a tax invoice to X Ltd.

X Ltd confirmed that the dwelling on the Property is currently vacant and available for lease, that it was anticipated that the dwelling will be leased to a tenant which leases all or part of the Property hardstand from X Ltd and used as an office (consistent with the DA) and that all enquiries about the dwelling to date have been made by specific operators. However X Ltd did acknowledge that the dwelling plus a small area of appurtenant land possibly could be leased as residential premises.

Relevant legislative provisions

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

Reasons for decision

Summary

As the requirements in paragraphs (a) to (d) of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied, the acquisition made by X Ltd is a creditable acquisition.

Detailed reasoning

Subsection 7-1(2) of the GST Act provides that entitlements to input tax credits (ITCs) arise on creditable acquisitions and creditable importations. Section 11-5 of the GST Act defines a creditable acquisition:

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.

Paragraphs (b), (c) and (d) of section 11-5 will be satisfied in relation to the acquisitions made by X Ltd. The issue is whether those acquisitions are made for a creditable purpose. Subsections 11-15(1) and (2) of the GST Act state:

(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.

The approach to be taken in determining whether an acquisition is acquired in carrying on an entity's enterprise is outlined in Part A of Goods and Services Tax Ruling GSTR 2008/1. The first step is to determine the enterprise being carried on by X Ltd. 'Enterprise' is defined in section 9-20 of the GST Act as an activity, or series of activities, done, inter alia, in the form of a business. We understand that X Ltd carries on the business of a discretionary investment trust and it was confirmed that X Ltd owns two properties and derives income from renting out those properties to a related party and to third parties.

The next step required by Part A of GSTR 2008/1 is determining a connection between the thing acquired and the enterprise carried on by X Ltd. Paragraphs 61 and 62 of GSTR 2008/1 provide some simple examples in relation to acquisitions of trading stock and capital acquisitions:

61. In many cases it is clear that there is a connection between the thing acquired and the enterprise being carried on. For example, if an entity operating a shoe shop acquires shoes to on-sell through his or her shoe shop it is clear that the acquisition is made in carrying on the enterprise. However, if the entity acquires the shoes to give as a gift to his or her daughter, it is equally clear that the acquisition is not made in carrying on the enterprise.

62. There is also a connection between acquisitions of a capital nature and the enterprise being carried on if the acquisitions are, for example, used by the entity in making supplies. Although acquisitions of a capital nature are denied a deduction for income tax purposes, there is no similar denial of an input tax credit under section 11-15 and so acquisitions that are of a capital nature are treated in the same manner as other acquisitions. For example, if a car manufacturing company purchases new spray painting machinery for use on its production line, the acquisition is made in carrying on its enterprise and is for a creditable purpose.

Paragraph 69 of GSTR 2008/1 provides that it is necessary to make an objective assessment as to whether there is a connection between the thing acquired and the enterprise and paragraph 70 of GSTR 2008/1 states that the following factors suggest that an acquisition is made in carrying on an enterprise:

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.

Paragraph 76 of GSTR 2008/1 discusses a number of specific situations, including (subparagraph (iv)) acquisitions where the thing acquired is provided to another entity. Paragraphs 114 to 132 of Goods and Services Tax Ruling GSTR 2006/9 explain how a supply may be 'made' to one entity and 'provided' to another entity:

114. In a two party transaction, a thing supplied to an entity is typically also provided to that entity.

115. In more complex arrangements involving more than two entities, which the Commissioner refers to as tripartite arrangements, analysis may reveal:

  a supply made to one entity but provided to another entity…

118. The scenario of Grandma's flowers illustrates some of the tripartite propositions.

A enters into a contract with B for B to provide goods to C. A is an individual, B is a florist, the goods are flowers, and C is A's grandmother:

A ← Contract → B­­­ flowers ­→ C provided

130. In Grandma's flowers pursuant to the contract between A and B, B makes the supply to A but provides the flowers to C.

131. 'Made' in the context of 'a supply made' takes its meaning from the definition of 'recipient' in section 195-1:

recipient , in relation to a supply, means the entity to which the supply was made.

132. 'Provide' is used to contrast with 'made' - it distinguishes between the contractual flow of the supply to the recipient (the entity to which the supply is made) and the actual flow of the supply to another entity (the entity to which the supply is provided).

In the present case the Subcontract Agreement between the Trustee (as contractor) and B Ltd (as subcontractor) and the Quote issued by J Ltd to the Trustee indicate that the Trustee will acquire from B Ltd and J Ltd the services of carrying out the works on the land resumed by the Council and that X Ltd will acquire from the Trustee the services of arranging the carrying out of those works.

In our view the supply by the Trustee of arranging the carrying out of the works is:

'made' to X Ltd (in the sense that there is an agreement between the Trustee and X Ltd pursuant to which the Trustee arranges the carrying out of the works); and

'provided' to the Council (because the works improve land which has been resumed by the Council).

Paragraphs 98 to 100 of GSTR 2008/1 deal with the situation where a supply is 'made' to one entity and 'provided' to another entity. Paragraph 99 explains that it is the entity to which the supply is 'made' which must satisfy the creditable purpose requirements in section 11-15 of the GST Act:

98. A thing may be acquired by one entity (the recipient) but be provided to another entity. This concept is discussed at paragraphs 123 to 176 of GSTR 2006/9.

99. As explained in that Ruling, it is the recipient entity that acquires the thing. Consequently, it is the recipient entity that must satisfy the creditable purpose requirements in section 11-15.

Paragraph 100 of GSTR 2008/1 provides an example of where a thing acquired by one entity but provided to another entity is not a creditable acquisition in relation to the first entity:

100. If a thing is acquired by one entity but provided to another entity, the acquisition is not necessarily made in carrying on the first entity's enterprise. For example, if advice concerning share value is acquired by a private company and provided to its individual shareholders to enable those individuals to secure private finance, the advice provides no benefit to the company and is not acquired in carrying on its enterprise. The acquisition relates to each individual's shareholding rather than the enterprise that is being carried on. It satisfies the personal needs of the shareholders rather than the company.

In our view X Ltd's case can be distinguished from the example in paragraph 100 of GSTR 2008/1. In the example in paragraph 100 the relevant supply (i.e. the advice concerning share value) does not benefit the entity to which that supply was 'made' (the company) but does benefit to the entities to which that supply was 'provided' (the individual shareholders). In X Ltd's case the relevant supply (i.e. the supply by the Trustee of arranging for the works to be carried out on the land resumed by the Council) does benefit the entity to which that supply is 'made' (X Ltd) because it satisfies a Condition of the DA issued by the Council in respect of the Property owned by X Ltd. We therefore consider that the supply by the Trustee of arranging for the works to be carried out on the land resumed by the Council is 'made' to X Ltd and that the corresponding acquisition is 'acquired…in carrying on' X Ltd's enterprise as required by subsection 11-15(1) of the GST Act and therefore acquired for a creditable purpose.

Notwithstanding that an acquisition satisfies subsection 11-15(1) of the GST Act, that acquisition is not for a creditable purpose if it is caught by subsection 11-15(2). Paragraph 11-15(2)(a) provides that an entity does not acquire the thing for a creditable purpose to the extent that the acquisition relates to supplies that would be input taxed.

Paragraphs 102 and 103 of GSTR 2008/1 state:

102. Subject to paragraph 103 of this Ruling, if an entity does not make, has never made, and does not intend to make, supplies that would be input taxed, there is no need to consider whether paragraph 11-15(2)(a) applies. Instead, to establish whether an acquisition is for a creditable purpose, it is only necessary to ascertain whether the acquisition is made in carrying on the enterprise (see Part A at paragraph 54 of this Ruling).

103. If an entity makes, has made, or intends to make, input taxed supplies, it needs to consider whether paragraph 11-15(2)(a) applies to its acquisitions. Consideration of paragraph 11-15(2)(a) is also required if an entity acquires residential premises as defined in section 195-1 subject to an existing lease. Paragraph 11-15(2)(a) applies if acquisitions relate solely or partly to supplies that would be input taxed.

As noted above, the DA issued in respect of the Property provides for the Property to be used for a specific purpose, storage and for the existing dwelling on the Property to be used as a maintenance facility and so far all enquiries about renting the dwelling have been made by specific operators. Consequently we consider that, per paragraph 103 of GSTR 2008/1, X Ltd does not make, has never made, and does not intend to make input taxed supplies for the purposes of paragraph 11-15(2)(a) of the GST Act. Even if it is possible that the dwelling on the Property could be leased as residential premises, the acquisition made by X Ltd of arranging for the works to be carried out on the land resumed by the Council would not 'relate' to that supply in the manner suggested by paragraph 104 of GSTR 2008/1 which states (in part):

When viewed in the context of the adjustment provisions such as Division 129, it can be seen that that the purpose of subsection 11-15(2) is to focus on the intended usage of an acquisition in so far as the acquisition relates to supplies that are to be made in the future.

Applying paragraph 104, the intended use of the acquisition by X Ltd of arranging for the works to be carried out on the land resumed by the Council is to satisfy a Condition of the DA which approved the use of the dwelling as a maintenance facility rather than as a residence. Consequently that acquisition does not 'relate' to making input taxed supplies as required by paragraph 11-15(2)(a) of the GST Act.

Paragraph 11-15(2)(b) of the GST Act provides that an entity does not acquire a thing for a creditable purpose to the extent that the acquisition is of a private or domestic nature. We do not consider that acquisition made by X Ltd from the Trustee is of a private domestic nature.

As the acquisition made by X Ltd from the Trustee satisfies subsection 11-15(1) of the GST Act and is not caught by subsection 11-15(2) that acquisition is made for a creditable purpose and paragraph (a) of section 11-5 is satisfied. As the requirements in paragraphs (b) to (d) of section 11-5 are also satisfied that acquisition is a creditable acquisition.