ATO ID 2002/438: GST and entitlement to input tax credits for acquisitions made prior to registration
Date of decision: 28 March 2002
Business line: Indirect Tax

Issue
Is the entity, a business operator, entitled to an input tax credit under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), for acquisitions made to establish its business before it registered, or became required to be registered, for goods and services tax (GST)?

Decision
No, the entity is not entitled to an input tax credit under section 11-20 of the GST Act for acquisitions made to establish its business before it registered, or became required to be registered, for GST. However, the entity is entitled to a decreasing adjustment under section 137-5 of the GST Act for stock on hand at the time it registers where the stock is for the purposes of sale or exchange, or for use as raw materials.

Facts
The entity is a business operator. The entity makes acquisitions to establish its business. These acquisitions are made before it registers, or becomes required to be registered, for GST. On the day that the entity registers for GST, it holds some of these acquisitions as stock items for the purpose of sale. The entity has not had an increasing adjustment under Division 138 of the GST Act for the stock it has on hand. The entity is not a company.

Reasons for decision
Summary: Under section 11-20 of the GST Act, an entity is entitled to the input tax credit for any creditable acquisition that it makes. Section 11-5 of the GST Act provides that an entity makes a creditable acquisition if: The entity was not registered or required to be registered for GST when it made the acquisitions to establish its business. Therefore, the requirement in paragraph 11-5(d) of the GST Act is not met and the entity is not entitled to input tax credits for the acquisitions. However, section 137-5 of the GST Act provides that an entity has a decreasing adjustment for stock on hand if: The entity has registered for GST and holds stock for the purpose of sale. This stock was purchased for use in the entity's enterprise and is therefore acquired for a creditable purpose (section 11-15 of the GST Act). The entity is not entitled to an input tax credit for the acquisitions and has not had an increasing adjustment under Division 138 of the GST Act. Therefore, although the entity is not entitled to an input tax credit under section 11-20 of the GST Act for establishment acquisitions, it does have a decreasing adjustment under section 137-5 of the GST Act for the stock it has on hand for the purpose of sale when it registers for GST.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 11-5 paragraph 11-5(d) section 11-15 section 11-20 Division 60 section 137-5 subsection 137-5(3) Division 138
Subject references: Goods & services tax GST registration GST supplies & acquisitions