Edited version of your written advice

Authorisation Number: 1051472118270

Date of advice: 14 May 2019

Ruling

Subject: GST and apportionment methodology to determine extent of creditable purpose

Question

Is the apportionment methodology you proposed to determine the extent of creditable purpose under section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for claiming input tax credits (ITCs) in relation to acquisitions made fair and reasonable?

Answer

Yes, on the facts and assumptions provided the proposed apportionment methodology to determine the extent of creditable purpose under section 11-15 of the GST Act for claiming ITCs in relation to acquisitions is fair and reasonable.

This ruling applies for the following period:

ending 31 December 202X

Relevant facts and circumstances

You are registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC) and are endorsed to access goods and services tax (GST) concessions and income tax exemptions.

You are registered for GST.

As part of your broader enterprise, you currently make supplies of, amongst other things, accommodation.

You currently supply the lease of residential accommodation (EA) for consideration that is less than 75% of the GST inclusive market value of the accommodation and as such you treat the supply of EA as GST-free supplies under section 38-250 of the GST Act.

Project

As part of a project (Project) you have engaged an entity (the Manager) to deliver the Project in the following two phases:

● Construction Phase – being the finance, design construction and commissioning of the new facilities, including:

● New residential accommodation (NA)

● Retail/Commercial space and car parking

● self-contained apartments

● Operation Phase – being the operation and maintenance of the new facilities and the EA by the Manager.

Upon completion of the Construction Phase, the Manager will operate and maintain the new facilities and EA during the Operation Phase.

You will retain ownership of the EA and new facilities.

Construction Phase

You have advised that the new facilities will be funded through a securitised license structure which will provide you the required funds to pay the construction payment.

Operation Phase

During the Operation Phase, the Manager will supply operating and non-operating services (Services) as set out in the Operating Agreement (OA) to you. These services will involve the management and operation of the EA and NA, self-contained apartments, asset management and maintenance of the facilities as well as non-operating services of entry into certain obligations.

Your acquisitions from the Manager will relate to all supplies you make using the facilities developed as part of the Project.

Service Payment:

During the Operation Phase you will pay the Manager the service payments (SP) in consideration for the Manager making the supplies of Services.

Your supplies

You have advised that you will make supplies during the Operation Phase of the Project that will be taxable supplies (retail and commercial rentals, operating licence and other supplies), GST-free supplies of accommodation pursuant to subsection 38-250(1) of the GST Act and input taxed supplies of accommodation in self-contained apartments under subsection 40-35(1) of the GST Act.

Proposed apportionment methodology

Given the difficulty in allocating your acquisition between those that relate to creditable and non-creditable purposes on a direct basis, it will be necessary for you to adopt an apportionment methodology to determine the creditable purpose of your acquisitions.

You have proposed a two-step apportionment methodology. The steps in the apportionment methodology are as follows.

Step 1 – Revenue based formula

● Calculate total revenue for each category of supplies you make as part of the Project for the period in question.

● Calculate the accommodation revenue (being the GST-free and input taxed accommodation and the self-contained apartments).

● Adjust the revenue amounts as follows:

● Increase all accommodation rental revenue to market value; and

● Increase the revenue for any other supplies made for nominal consideration (i.e. GST-free supplies pursuant to section 38-250 of the GST Act) to market value.

● Calculate accommodation revenue as a percentage of total revenue (as adjusted by the above step).

The percentage derived using the revenue formula is then used to allocate acquisition costs between your supply of accommodation and other non-accommodation.

As all other non-accommodation supplies are taxable or GST-free no further apportionment is required. The portion of acquisition costs allocated to non-accommodation supplies will be for a creditable purpose.

Step 2 – Bed count

● Calculate total number of beds

● Calculate total number of GST-free beds

● Divide number of GST-free beds by total beds

This gives the extent of creditable purpose for those acquisition costs that will relate to you making the supply of accommodation.

Relevant legislative provisions

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 Section 11-20

A New Tax System (Goods and Services Tax) Act 1999 Section 11-25

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-250(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 40-35

Reasons for decision

Entitlement to input taxed credit

You are entitled to ITCs for any creditable acquisition that you make (section 11-20 of the GST Act). Section 11-5 of the GST Act provides that you make a creditable acquisition if:

● you acquire anything solely or partly for a creditable purpose

● the supply of the thing to you is a taxable supply

● you provide, or are liable to provide, consideration, and

● you are registered or required to be registered for GST.

On the facts and assumption provided:

● you are registered for GST

● you will provide consideration (service payment) for the supply by Trustee

● the supply by Trustee Co will be a taxable supply of operating and non-operating services for which tax invoices will be held.

The issue that arises under section 11-5 of the GST Act in your circumstances is whether you acquired something from the Manager and if so whether those acquisitions were solely or partly for a creditable purpose.

An acquisition is defined under section 11-10 to the GST Act as any form of acquisition whatsoever and includes, amongst other things, an acquisition of services or an acquisition of a right to require another person to do anything.

Under the terms of the OA you will acquire the Services from the Manager.

Creditable purpose

Under subsection 11-15(1) of the GST Act you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

There is no issue in the present case that the services and entry into obligations you acquire from Trustee are acquired in carrying on your enterprise. That enterprise involves activities or series of activities done by you:

● in the form of a business

● on a regular and continuous basis in the form of a lease, licence or other grant of interest in property

● as a charity

However, subsection 11-15(2) of the GST Act provides that you do not acquire the thing for a creditable purpose to the extent that:

● the acquisition relates to making supplies that would be input taxed or

● the acquisition is of a private and domestic nature.

With regards to the second requirement of subsection 11-15(2) of the GST Act the acquisitions in question for which the service payments are consideration are not of a private or domestic nature.

With regards to the first requirements of subsection 11-15(2) of the GST Act you supply tenants with residential accommodation.

Accommodation supplies

Input Taxed supplies

You have advised that prima facie, those supplies of accommodation in EA and NA and accommodation in self-contained apartments are input taxed supplies of residential premises in accordance with subsection 40-35(1) of the GST Act.

This will be the case unless some of the accommodation or self-contained apartments satisfies the requirements of a GST-free supply.

GST-free supplies

Section 38-250 of the GST Act, provides that a supply of accommodation by an endorsed charity will be GST-free where:

● the consideration for the supply of the accommodation:

● is less than 75% of the GST inclusive market value of the supply (subparagraph 38-250(1)(b)(i) of the GST Act), or

● is less than 75% of the cost to the supplier of providing the accommodation (subparagraph 38-250(2)(b)(i) of the GST Act).

You are an ACNC registered charity and are endorsed to access GST concessions including those under section 38-250 of the GST Act.

Pursuant to the assumptions that the requirements of section 38-250 of the GST Act are satisfied in respect of the accommodation supplied in the EA and will be satisfied in respect of some but not all of the accommodation in the NA those supplies that satisfy the requirements of section 38-250 of the GST Act will be GST-free.

You propose to threat those supplies of accommodation and self-contained apartments that do not satisfy the GST-free requirements of section 38-250 of the GST Act as input taxed under subsection 40-35(1) of the GST Act.

Non accommodation supplies

You will be making various non-accommodation supplies as part of the Project. All the non-accommodation supplies will be taxable supplies.

Extent of creditable purpose:

A creditable acquisition is partly creditable where the extent of creditable purpose is greater than 0% but less than 100%. This will be the case if the acquisitions are made in carrying on your enterprise, but relate partly to making supplies that would be input taxed (input taxed supplies of accommodation and self-contained apartments).

As you will acquire services and other obligations from the Manager that will relate to your GST-free, taxable and input taxed supplies your planned extent of creditable purpose will be less than 100% (but greater than zero) and as such your acquisitions will be partly creditable. You will need to apportion the total purpose between that which, on your estimate, is creditable (GST-free and taxable supplies) and that which is not (input taxed supplies). It is your planned extent of creditable purpose that is relevant for your calculation of ITC’s.

Apportionment methodology

Goods and Service Tax Ruling GSTR 2006/4 (GSTR 2006/4) provides guidance on how to determine the extent of your creditable purpose in making acquisitions to enable you to claim the correct amount of ITC’s.

GSTR 2006/4 explains that you may choose your own apportionment method, but the method you choose needs to:

● be fair and reasonable;

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

● be appropriately documented in your individual circumstances.

You consider that a two-step apportionment methodology involving an initial revenue based formula applied in order to determine the proportion of acquisitions that will relate to accommodation and the proportion of acquisitions that will relate to non-accommodation supplies followed by a direct bed-count formula in order to determine the proportion of those acquisitions that relate to accommodation that relate to supplies of accommodation and self-contained apartments that are input taxed and the proportion of those that are GST-free, fair and reasonable in determining the extent the acquisitions are not for a creditable purpose.

Is a revenue based formula fair and reasonable for step one?

On the facts and assumption provided the use of a revenue based formula as a first step in apportioning the estimated use of acquisitions that will relate to supplies of non-accommodation supplies from the acquisitions that relate to supplies of accommodation is based on a fair and reasonable expectation of their use.

Is a bed-count method fair and reasonable for step two?

On the facts and assumption provided the bed-count formula applied as the second step in apportioning the estimated use of acquisitions that will relate to supplies of input taxed accommodation and self-contained apartments (non-creditable purpose) and those that will relate to supplies of GST-free accommodation (creditable purpose) is fair and reasonable to determine the extent of creditable purpose.

Conclusion

On the facts and assumptions provided your proposed apportionment methodology to determine the extent of creditable purpose under section 11-15 of the GST Act for claiming ITCs in relation to acquisitions for which the service payment is consideration is fair and reasonable.

Additional Information

You are required to keep record containing particulars of any election, choice, estimate, determination or calculation you make under the GST law. These records should also contain the particulars of the basis on which and the method by which, an estimate, determination or calculation is made. You should keep these records in a manner that would enable your entitlement to an ITC under the GST Act to be readily ascertained.