Edited version of your written advice

Authorisation Number: 1051226583509

Date of advice: 15 May 2017

Ruling

Subject: GST and supply of second hand car parts

Question 1

Are you able to use your indirect method of calculation to determine the value of input tax credits (ITC) on the acquisition of second hand goods from non-registered private sellers where only a part of the dismantled cars constitutes a taxable supply?

Answer 1

No.

Question 2

If so, can you make the input tax credits claim for second hand goods for the entire previous financial year (e.g. 2016) retrospectively in the following BAS (i.e. September 2016 BAS)?

Answer 2

Not applicable.

Relevant facts and circumstances

You are registered for Goods and Services Tax (GST).

You purchase second hand cars and divide them into parts which are sold to customers.

Where purchases are from auctions and business suppliers which include GST in the price, you claim the ITCs on these acquisitions on a quarterly basis. You also purchase vehicles from private sellers who are not registered for GST for which no ITCs have been claimed.

Your sales include GST-free exports and taxable domestic sales.

You are not able to use the direct method or the global accounting method to create the ITC entitlement on second hand goods that are subsequently divided for re-supply on the basis that:

● you have purchases from private sellers that are below $300 as well as above $300

● once a car is divided up, there is no tracking of the individual parts of a single vehicle (engine goes to the engine section of the car yard, tyres are piled up in the tyre section, etc.).

You would like to use a percentage of taxable supplies on total annual income as a reasonable basis for calculating the second hand goods ITCs claim. This way you would ensure that only GST relating to taxable (domestic) supplies is claimed on the second hand goods purchases.

You propose that the calculation formula be as follows:

Purchases from GST non-registered sellers X Annual taxable supplies

11 Total annual sales

You have selected a year as a relevant period for two reasons:

1. The period is long enough to absorb a minor seasonal volatility in proportion of domestic (taxable) supplies on total sales; and

2. You sell 3-4 full sea containers of goods every month, the period is long enough to ensure the compliance turnover of stock, i.e., all parts of the second hand cars purchased from non-registered sellers would be resold.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 66

Reasons for decision

Division 66 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) allows a taxpayer to claim ITCs for acquisitions of second-hand goods, even though GST was not payable on the original supply of the goods.

Section 66-5 of the GST Act establishes the rules for second-hand goods which are acquired from unregistered suppliers.

66-5 Creditable acquisitions of second-hand goods

(1) If you acquire second hand goods for the purpose of sale or exchange (but not for manufacture) in the ordinary course of business, the fact that the supply of the goods to you is not a taxable supply does not stop the acquisition being a creditable acquisition.

(2) However, this section does not apply, and is taken never to have applied, to the acquisition if:

(a) the supply of the goods to you was a taxable supply, or was GST-free; or

(b) you imported the goods; or

(c) the supply of the goods to you was a supply by way of hire; or

(d) subdivision 66-B applies to the acquisition; or

(e) you make a supply of the goods that is not a taxable supply.

(1) This section has effect despite section 11-5 (which is about what is a creditable acquisition).

You purchase second hand cars, mostly unlicensed vehicles, divide them into parts and sold to customers. You do not acquire the second-hand goods for manufacture. One of the limitations provided in paragraph 66-5(2)(d) of the GST Act provides that section 66-5 cannot apply if subdivision 66-B applies to the acquisition. Subdivision 66-B of the GST Act deals with acquisitions of second-hand goods that are divided for re-supply.

Section 66-40 of the GST Act provides:

66-40 Acquisitions of second-hand goods that can be used to offset GST on future re-supplies

(1)_ This Subdivision applies to an acquisition of second-hand goods if:

(a) you acquire the goods for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business; and

(b) either the consideration for the acquisition was more than $300 or you choose to have this section apply to the acquisition; and

(c) the goods are of such a kind, or they are supplied to you in such a way, that it would be reasonable to expect you to divide them before supplying them in 2 or more separate supplies; and

(d) you do not subsequently make a single supply of the entirety of the goods acquired.

(2)__However, this Subdivision does not apply, and is taken never to have applied, to the acquisition if:

(a) the consideration for the acquisition separately itemises the consideration for the different goods acquired, and your division of the goods before supplying them:

(i) corresponds to that itemisation; or

(ii) does not involve dividing the goods any further than the division indicated by that itemisation; or

(b) the supply of the goods to you was a taxable supply, or was GST-free; or

(c) you imported the goods; or

(d) the supply of the goods to you was a supply by way of hire; or

(e) you make a supply of the goods, or part of the goods, that is not a taxable supply (other than because of section 66-45).

Paragraph 66-40(2)(e) of the GST Act applies to your circumstances. You export part of your products to overseas clients and that these sales are GST-free supplies under section 38-185 of the GST Act. Therefore, paragraph 66-40(2)(e) of the GST Act excludes the application of Subdivision 66-B of the GST Act to the acquisition you make, which later become part of the product which are exported.

You acknowledge that you are not able to use the direct method or global accounting method to establish the ITC entitlement on second hand goods that are subsequently divided for re-supply on the basis that:

● you have purchases from private sellers that are below $300 as well as above $300 (both categories are kept in separate accounts from 1 July 2008).

● once a car is divided up, there is no tracking of the individual parts of a single vehicle (engine goes to the engine section of the car yard, tyres are piled up in the tyre section, etc.).

Second-hand goods acquired by you from unregistered persons are sold both to overseas entities as well as Australian entities. As you have advised that it is difficult to track a particular acquisition to the ultimate sale of those parts you are unable to determine the ITCs you are entitled to if any at all. Further you are not able to apply the A New Tax System (Goods and Services Tax) Rules for Applying Subdivision 66-B Determination (No.1) 2000 to allow pooling of ITCs since the sales made by you are not all taxable supplies.

There is no specific authority for the Commissioner to allow you to use an indirect method to calculate the amount of ITC. Therefore, you are not able to use your proposed indirect method.