Edited version of your written advice

Authorisation Number: 1051456007623

Date of advice: 27 November 2018

Ruling

Subject: Goods and services, insolvency, expenses

Question 1

Are you, in your capacity as Trustee in Bankruptcy (the Trustee) for the bankrupt’s estate, entitled to an input tax credit (ITC) pursuant to paragraph 58-10(1)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in respect to legal services acquired relating to Property A?

Answer

No

Question 2

Are you, in your capacity as Trustee for the bankrupt’s estate, entitled to an ITC pursuant to paragraph 58-10(1)(b) of the GST Act for acquisitions with respect to the administration of the bankrupt estate?

Answer

Yes, to the extent the acquisitions are made for a creditable purpose.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The bankrupt was registered for GST effective from 20XX operating several small businesses and was made bankrupt on 20XX.

You were appointed Trustee in 20XX and registered for the GST and ABN for the estate on that date.

You are registered for GST effective a number of years prior and carry on an enterprise of providing insolvency accounting services and in your capacity as Trustee for the estate of the bankrupt

In exercising your duties pursuant to the Bankruptcy Act 1966 (Bankruptcy Act), you sold several properties owned by the bankrupt.

Property A was the subject of a lengthy litigation process. You were successful in recovering the property for the benefit of the bankrupt estate and Property A was subsequently sold.

In your capacity as Trustee in Bankruptcy, you incurred legal fees with respect to the property totalling a specified amount (GST inclusive).

In your capacity as Trustee in Bankruptcy, you acquired goods and services in administering the estate of the bankrupt, including the acquisition of trustee services.

The goods and services acquired to facilitate the administration of the estate were taxable supplies.

You provided, or are liable to provide consideration for the goods and services acquired.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-15(2)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

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

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

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 11-15(2)(a)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 11-15(2)(b)

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

A New Tax System (Goods and Services Tax) Act 1999 Section 11-30

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

A New Tax System (Goods and Services Tax) Act 1999 Section 58-5

A New Tax System (Goods and Services Tax) Act 1999 Section 58-10

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 58-10(1)(b)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 58-10(5)(b)

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

Under section 58-5, any supply, acquisition or importation made by an entity in the capacity of a representative of another entity, that is an incapacitated entity (IE) is a supply, acquisition or importation by the other IE.

Paragraph 58-10(1)(b) provides that a representative of an IE is entitled to any input tax credit that the IE would be entitled to for a creditable acquisition to the extent that the making of the acquisition to which the ITC relates is within the scope of the representative’s responsibility or authority for managing the IE’s affairs.

The term ‘incapacitated entity’ is defined in section 195-1 to include:

(a) an individual who is a bankrupt

(b) …

(c) an entity that has a representative

A ‘representative’ is defined in section 195-1 to include:

(a) a trustee in bankruptcy

(b) …

You were appointed as Trustee in Bankruptcy for the estate of bankrupt. Accordingly, you meet the definition of representative and the bankrupt falls within the definition of an IE.

Question 1

In this case, you have made an acquisition of legal services (incurring legal fees) in relation to preserving an asset (Property A) of the IE. The acquisition of the legal services was made in exercising your duties pursuant to the Bankruptcy Act in your capacity as Trustee in Bankruptcy for the estate of the IE. As such, we consider that the acquisitions made were within the scope of your responsibility or authority for managing the IE’s affairs.

The issue in this case is whether the IE has made a creditable acquisition and would have been entitled to an ITC. If so, you are entitled to the ITC pursuant to paragraph 58-10(1)(b).

Section 11-20 provides that you are entitled to an ITC for any creditable acquisition that you make.

The term ‘creditable acquisition’ is defined in section 11-5 and provides that you will 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 for GST.

Section 11-15 provides that you acquire a thing for a ‘creditable purpose’ to the extent you acquire it in carrying on your enterprise. However, the thing will not be acquired for a ‘creditable purpose’ to the extent that the acquisition relates to making input taxed supplies or is of a private or domestic nature.

Section 9-20 contains the meaning of the term ‘enterprise’ and includes an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. The leasing of property falls within the definition of ‘enterprise’ for GST purposes.

The phrase ‘carrying on’ an enterprise includes doing anything in the course of the commencement or termination of the enterprise. We consider the legal services in question were acquired in carrying on a leasing enterprise by the IE.

Of further significance is whether the acquisition of the legal services was related to making an input taxed supply (being the supply of Property A).

Section 40-65 provides that the sale of real property is input taxed to the extent that the property is residential premises to be used predominately for residential accommodation. However, the sale will not be input taxed to the extent that the residential premises are either ‘commercial residential premises’ or ‘new residential premises’.

The definition of ‘residential premises’ in section 195-1 refers to land or a building that is occupied as a residence or for residential accommodation, or is intended to be occupied, and is capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation or intended occupation).

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) outlines the characteristics of residential premises.

Paragraph 9 of GSTR 2012/5 explains that the requirement in section 40-65 that premises be ‘residential premises to be used predominately for residential accommodation’ is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises’ suitability and capability for residential accommodation. Further, paragraph 15 of GSTR 2012/5 states that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities.

Paragraph 46 of GSTR 2012/5 acknowledges that the definition of ‘residential premises does not include any specific restriction on the area of land that can be included with a building with the extent to which land forms part of residential premises to be used predominantly for residential accommodation being a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

In this case we consider Property A will satisfy the definition of ‘residential premises’ as the dwellings on the property provide shelter and basic living facilities such as bedrooms, bathroom, kitchen and living areas with the land being enjoyed in conjunction with the residential dwellings.

Property A is neither commercial residential premises nor ‘new residential premises’.

The sale of Property A will be an input taxed supply pursuant to section 40-65.

The next question to address is whether the acquisition of the legal services relates to the input taxed supply of Property A. Goods and Services Tax Ruling; when do you acquire anything or import goods solely or partly for a creditable purpose? (GSTR 2008/1) discusses the Commissioner’s view as to whether an acquisition relates to making supplies that would be input taxed for the purposes of paragraph 11-15(2)(a).

Paragraph 109 of GSTR 2008/1 discusses the judgment of Hill J in HP Mercantile Pty Limited v. Commissioner of Taxation (HP Mercantile) provides some guidance on the operation of paragraph 11-15(2)(a). Paragraph 118 of GSTR 2008/1 contains principals established in HP Mercantile that should be applied in determining whether an acquisition relates to making supplies that would be input taxed including:

● There is no requirement for an acquisition to precede a supply before it can be said that the acquisition is connected to the making of that supply. Therefore an acquisition can relate to the entity making past, current or future supplies.

● The words 'relates to' are wide words signifying some connection between two subject matters. There must be a connection between an acquisition and the making of input taxed supplies. The connection or association signified by the words may be direct, or indirect, substantial or real. It must be relevant and usually a remote connection would not suffice.

Paragraph 119 of GSTR 2008/1 states that for the purposes of paragraph 11-15(2)(a) a sufficient connection is established if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or intended to be used, solely or to some extent for the making of supplies that would be input taxed.

Paragraph 120 of GSTR 2008/1 contains a number of situations that raise particular considerations in establishing a connection between the acquisition and the making of supplies that would be input taxed. The discussion in GSTR2008/1 that follows is a general indication of how the Commissioner would approach the analysis of the specified situations.

One such situation contemplated is in regard to acquisitions preparatory to the making of an input taxed supply. Paragraph 149 of GSTR 2008/1 states that if advice is sought on a range of specific options that an entity is exploring and all options involve the making of supplies that would be input taxed, the acquisition of advice relates to supplies that would be input taxed and is therefore not creditable.

This situation is illustrated in Example 6 at paragraphs 150 and 151 of GSTR 2008/1:

150. Jetstream Ltd is a company listed on the Australian Securities Exchange. Within Jetstream a designated team monitors other companies and industries to identify potential investment opportunities that are only of an equity nature. The team conducts research and works up proposals for presentation to the board. The team has a relatively free reign when considering options.

151. Jetstream acquires online market reports to assist the team in their analysis. This acquisition is made in carrying on Jetstream's enterprise. Due to the nature of the team's activity which can only lead to the making of supplies that would be input taxed, the acquisition of the market reports are not for a creditable purpose.

Whilst the facts of this case are not on par with the situation contemplated in GSTR 2008/1, the principle can be applied equally.

In this case, due to the nature of the property being residential, the acquisition of the legal services could only lead to the making of input taxed supplies. That is, an input taxed supply of residential premises by way of lease pursuant to section 40-35 or an input taxed supply by way of sale pursuant to section 40-65.

Given the above, we consider that the legal services were acquired in order to facilitate the sale of the Property A and thus the acquisition of the legal services relates to the input taxed supply of the property.

Therefore, as the acquisition of the legal services relates to the input taxed supply of Property A, the legal services have not been acquired for a creditable purpose; the IE has not made a ‘creditable acquisition’ and as such is not entitled to an ITC pursuant to section 11-20.

Consequently, you are not entitled to an ITC under paragraph 58-10(1)(b).

Question 2

Similar to the reasoning above, it is necessary to establish whether the IE has made (and to what extent the IE has made) a creditable acquisition and would be entitled to an ITC. The outcome will determine whether you are entitled to the ITC pursuant to paragraph 58-10(1)(b).

In your capacity as Trustee in Bankruptcy, you have acquired goods and services in administering the estate of the IE, including the acquisition of trustee services provided by you (as a sole trader providing insolvency services).

Again, similar to the above reasoning, the issue is whether the acquisitions are made for a ‘creditable purpose’ and if so, to what extent.

In this case, your duties include the sale of a number of properties. The properties sold include residential premises, commercial premises and residential premises used by the IE as their principal place of residence.

On the basis that the estate of the IE acquired taxable supplies and was required to provide consideration for those supplies, the IE will be entitled to an input tax credit to the extent that the acquisitions were for a creditable purpose.

In the case any acquisitions related solely to the sales of residential premises, those acquisitions will not be made for a creditable purpose pursuant to paragraph 11-15(2)(a) (as in the case of the legal services acquired in relation to Property A as discussed above). In such cases, you will not be entitled to an ITC under paragraph 58-10(1)(b).

Where you have acquired acquisitions of goods and services solely related to the sale of Property B (being the principal place of residence of the IE), those acquisitions are considered to not have been made for a creditable purpose as such expenses are not made in the carrying on of an enterprise of the IE. Furthermore, such expenses and acquisitions that are connected with the principal place of residence of the IE and pursuant to paragraph 11-15(2)(b), those acquisitions are considered to be private or domestic in nature.

In respect to acquisitions of goods and services solely related to the sales of the commercial properties and strata titled car parking space, those acquisitions are considered to have been acquired in carrying on the leasing enterprise by the IE, and not related to making input taxed supplies or being of a private or domestic nature. Such acquisitions are therefore made for a creditable purpose as defined in section 11-15.

The acquisitions were taxable supplies to the IE (in accordance with section 58-5), you provided or are liable to provide consideration for the acquisitions (note that subsection 9-15(2) provides that it does not matter whether consideration is provided by the recipient of the supply) and the IE is registered for GST. As such, the acquisitions satisfy the definition of a ‘creditable acquisition’ and therefore the IE would be entitled to an ITC pursuant to section 11-20. Consequently, you are entitled to an ITC under paragraph 58-10(1)(b) in respect to the acquisitions solely related to the sales of the commercial properties and strata titled car parking space.

Goods and services acquired that are related in part to making input taxed supplies, in part to making other supplies and in part not acquired in carrying on an enterprise.

Acquisitions that fall within this category include the acquisition of goods and services made by the IE (pursuant to section 58-5) of supplies made by you, in your capacity as a sole trader providing insolvency services. The acquisition of such goods and services (and the remuneration paid for these services) will relate in part to making input taxed supplies of residential premises, in part to making other supplies (including taxable supplies of commercial property) and in part being an acquisition not made in the course of an enterprise the IE carries on and being of a private or domestic nature.

As discussed above, section 11-15 provides that you acquire a thing for a ‘creditable purpose’ to the extent you acquire it in carrying on your enterprise. However, the thing will not be acquired for a ‘creditable purpose’ to the extent that the acquisition relates to making input taxed supplies or is of a private or domestic nature.

The use of the phrase ‘to the extent’ indicates that an acquisition may be acquired for different purposes and also relate to making supplies of different GST classifications. In such cases there is a need for apportionment in order to determine the amount of any ITC.

Section 11-30 contains the methodology to determine the amount of an ITC that is made for a partly creditable purpose. The methodology and further discussion on this issue is contained in Goods and Services Tax Ruling GSTR 2006/4; Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose (GSTR 2006/4).

Paragraph 44 of GSTR 2006/4 contains the formula included in section 11-30 to be used to calculate the ITC for an acquisition that is partly creditable:

Full input tax credit x Extent of creditable purpose x Extent of consideration

The ‘extent of creditable purpose’ in the formula is expressed as a percentage of the total purpose of the acquisition with the ‘extent of consideration’ being expressed as a percentage of the total consideration for the acquisition.

Paragraph 100 of GSTR 2006/4 provides that the method chosen to determine the ‘extent of creditable purpose’ must:

● be fair and reasonable;

● reflect the planned use of that acquisition; and

● be appropriately documented in your individual circumstances.

Discussion on choosing a method and types of methods that may be used is discussed in paragraphs 101 to 129 of GSTR 2006/4.

Where it is determined that an acquisition has been acquired for a creditable purpose to some extent, the IE would be entitled to an ITC in respect to that acquisition pursuant to section 11-20, with the amount of the ITC determined in accordance with section 11-30. In such cases you will be entitled to an ITC under paragraph 58-10(1)(b).

Please note that in all situations discussed above, paragraph 58-10(5)(b) provides that an IE is not entitled to the ITC for a creditable acquisition to the extent that you (in your capacity as representative of the IE) are entitled to the ITC under section 58-10.