Edited version of private advice

Authorisation Number: 1051656940407

Date of advice: 07 April 2020

Ruling

Subject: GST and claiming input tax credits

Question

Are you entitled to claim input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for payments made?

Answer

No, you are not entitled to claim input tax credits under section 11-20 of the GST Act.

This ruling applies:

On and from its date of issue

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You have been contracted to construct xxxx.

You contracted with an entity (Contractor) to manage the construction of the xxxx.

The Contractor contracted directly with subcontractors and was responsible for making payments for invoices related to the construction cost of the project. All the invoices from subcontractors were addressed to the Contractor. Contractor would then invoice you.

In early yyyy, Contractor went into administration and halted all operations. As Contractor was not in the position to meet their payment obligations to subcontractors and the project was being severely delayed, you came to an agreement that you would pay subcontractors directly once they were satisfied that specific milestones in relation to the invoices were achieved.

The major subcontractor, issued tax invoices to the Contractor in yyyy which were paid by you.

Due to the tax invoices being addressed to Contractor, you understand that you would not be able to claim the input tax credit worth of $$$ in relation to the GST paid as per the table above.

Normal practice regarding tax invoicing is that Contractor would be invoiced by the subcontractors for the work performed. Contractor pays all invoices as Contractor is the entity that engaged the subcontractors to perform the work and have the liability to make those payments under the contract. Contractor would invoice you for those amounts plus their profit margin as per the terms and conditions of the contract that you and the Contractor have entered into.

For the paid amounts above, Contractor did not provide tax invoices to you that included those amounts, they were unable to do so as they went into administration.

The agreement between you and the Contractor was amended to allow you to engage subcontractors directly (on your own behalf).

Relevant legislative provisions

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

Section 11-5

Section 11-20

Reasons for decision

Section 11-20 of the GST Act provides that you are entitled to claim input tax credits for any creditable acquisition you make.

Requirements for a creditable acquisition are outlined in section 11-5 of the GST Act. Under section 11-5 you make a creditable acquisition if:

·   you acquire anything solely or partly for a creditable purpose; and

·   the supply of the thing to you is a taxable supply; and

·   you provide, or are liable to provide, consideration for the supply; and

·   you are registered or required to be registered.

The key issue to address is whether or not 'you' have made the creditable acquisitions for which you are entitled to claim input tax credits. The assumption, based on your business and the facts provided, is that anything you acquire as part of your enterprise would be a creditable acquisition provided the supplies to you are taxable supplies, you are registered for GST and you provide or are liable to provide consideration for supply.

From the facts provided, Contractor is the entity that contracts directly with subcontractors for subcontractors to perform work under that contract. The subcontractors issue tax invoices to the Contractor for the work performed, Contractor makes payment of those invoices accordingly.

Contractor would then invoice you for the taxable supplies they make to you, as per the terms and conditions of the contract between you and the Contractor.

Goods and Services Tax Ruling GSTR 2006/9: Goods and services tax: supplies (GSTR 2006/9) at paragraphs 177 to 216 explains at proposition 14 that a third party may pay for a supply but not be the recipient of the supply (para 177 to 216). An entity that provides or is liable to provide consideration for a supply, but is not the recipient of the supply is referred to as a third party payer. A third party payer does not make a creditable acquisition in relation to its payment because the supply is not made to it as required by section 11-5 of the GST Act (GSTR 2006/9, para 183). Making a payment for a supply that is made to another entity is not sufficient to make you the recipient of that supply.

Following the contractual flow and the arrangements in place, the creditable acquisitions in relation to the work performed by the subcontractors are made by the Contractor. As a result, under section 11-20 of the GST Act only the Contractor is able to claim input tax credits in relation to those acquisitions (provided they meet all of the other requirements). You are not the entity that made the creditable acquisitions from the subcontractors, as you did not have any contractual arrangement in place with subcontractors.

While you did make payments to subcontractors, you did this on behalf of the Contractor as per the agreement between you and the Contractor given their financial difficulties. Under the contract with subcontractors, the Contractor had the liability to make the payments (provide consideration) to subcontractors.

Your contractual arrangements are with the Contractor, and when you receive tax invoices from Contractor in relation to taxable supplies made to you by the Contractor you are entitled to claim input tax credits in relation to those supplies as those are creditable acquisitions made by you.