Edited version of private advice

Authorisation Number: 1052344260373

Date of advice: 18 December 2024

Ruling

Subject: GST and financial Supplies - apportionment

Question 1

Is a floor space based formula a fair and reasonable method for establishing the extent of creditable purpose (ECP) for acquisitions made by the taxpayer for the purposes of subsection 11-30(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?"

Answer 1

Yes.

Relevant facts and circumstances

The taxpayer operates a foreign exchange currency business at an international airport. The taxpayer buys and sells foreign and Australian currencies to customers departing from and arriving to Australia.

The taxpayer has kiosks located in the Departure and Arrival areas of the airport. The Departure and Arrival areas are located on different floor levels of the airport.

The taxpayer makes acquisitions that relate to both the supply of currency that is input taxed and GST-free.

In determining its entitlement to input tax credits on the taxpayer's acquisition that relates to both input taxed and GST-free supplies, the taxpayer's ECP will be calculated using the formula below:

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However, there will be no GST apportionment applied to acquisitions where it can be directly attributed to the Departures or Arrivals area. In such cases, the acquisition will be either solely creditable or solely not creditable purposes.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 sections 11-5, 11-15, 11-25, 11-30, 40-5

A New Tax System (Goods and Services Tax) Regulations 2019 section 40-5.09

Reasons for decision

Section 11-20 of the GST Act provides that an entity is entitled to the input tax credit for any creditable acquisition it makes.

Under section 11-5 of the GST Act, an entity makes a creditable acquisition if:

(a) the entity acquires the thing solely or partly for a creditable purpose; and

(b) the supply of the thing to the entity is a taxable supply; and

(c) the entity provides, or is liable to provide, consideration for the supply; and

(d) the entity is registered or required to be registered.

Section 11-15 of the GST Act provides when something is acquired for a creditable purpose. The section states (in part):

(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.

* denotes a term defined in section 195-1 of the GST Act.

Section 11-25 of the GST Act provides that the amount of input tax credit for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired. However, the amount is reduced if the acquisition is only partly creditable.

Section 11-30 of the GST Act provides that an acquisition is partly creditable if one or both of the following applies:

a) the entity acquires the thing only partly for a creditable purpose,

b) the entity provides, or is liable to provide, only part of the consideration for the acquisition.

Section 40-5 of the GST Act provides that a financial supply is input taxed. Financial supply has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations).

Item 9 in the table under subsection 40-5.09(3) of the GST Regulations provides that the supply of Australian currency and the currency of a foreign country is input taxed if all of the requirements in subsection 40-5.09(1) of the GST Regulations are satisfied.

Section 38-190 of the GST Act provides that supplies of things other than goods or real property for consumption outside the indirect tax zone are GST-free. Item 4(a) in the table in subsection 38-190(1) of the GST Act provides that a supply that is made in relation to rights is GST-free if the rights are for use outside the indirect tax zone.

The taxpayer supplies currency to Inbound and Outbound customers. The supply of currency is input taxed under section 40-5 of the GST Act as it falls within item 9 in the table under subsection 40-5.09(3) of the GST Regulations. However, to the extent it is evident that a supply of foreign currency is for use outside the indirect tax zone, it would be a GST-free supply under item 4(a) in the table in subsection 38-190(1) of the GST Act.

It follows that where an acquisition relates to the taxpayer's input taxed supplies, the acquisition is not made for a creditable purpose. Alternatively, where an acquisition relates to making GST-free supplies the acquisition will be made for a creditable purpose under section 11-15 of the GST Act. However, in the case where an acquisition is used to make an input taxed supply and a GST-free supply, the taxpayer will be required the use an appropriate method to determine the extent of creditable purpose.

In Goods and Services Tax Ruling GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3), the Commissioner provides guidance on methods that can be used for calculating input tax credits by providers of financial supplies.

Paragraph 42 in GSTR 2006/3 states that if an acquisition made in carrying on an enterprise relates partly to the making of an input taxed supply, an apportionment is required.

Paragraph 26 in GSTR 2006/3 provides that the fundamental requirement in whatever apportionment method that is used to calculate the input tax credits, is that the method must be fair and reasonable, and appropriately reflect the intended use of the acquisitions.

Paragraph 35 in the GSTR 2006/3 states that the use of a direct method of allocating or apportioning the intended use of acquisitions, such as direct estimation, will best reflect the intended use of the acquisition. To the extent that it is not possible or practicable to use a direct method, some other fair and reasonable basis such as an indirect estimation method may be used.

Therefore, as the Departure and Arrival kiosks are located on different levels in the International Airport, the Commissioner accepts it is sufficiently evident that all currency exchanges in the Departures area are to customers who are set to depart Australia and would therefore use the currency outside the Indirect Tax Zone.

On this basis, the taxpayer's floor space based apportionment formula is a fair and reasonable method of determining their extent of creditable purpose for the purpose of section 11-30 of the GST Act.

Where a particular Acquisition solely relates to Outbound customers (Departure area), then the extent of the taxpayer's creditable purpose would be 100%. However, where a particular Acquisition solely relates to Inbound customers (Arrival area), the taxpayer's extent of creditable purpose will be 0%.