Private ruling: GST and entitlement to input tax credits
Date of advice: 28 February 2020
Published: April 2020

Ruling: Q1: Are you making a creditable acquisition pursuant to section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to goods acquired by another entity? | A1: No

Relevant facts and circumstances: You are registered for GST and carry on an enterprise as a residential builder. You were approached by Individual A (Friend) to enlist your service in building the Friend a new home. The Friend had intentions of constructing the house as an owner/builder however this was not possible as they did not have the necessary licences and insurance. You entered into a written contract with the Friend to construct the house for an amount of $xxx,000. The amount of $xxx,000 was based on an estimate of the cost of materials required to build the house. The Friend presented the contract to a financial institution (Bank) to obtain pre-approved funds. Separate to the written contract, you and the Friend verbally agreed that you provided authority to the Friend to source materials as your agent for the construction of the home and you would reimburse the Friend for all expenses at a later date. The verbal agreement was that you would claim all GST input tax credits (ITCs) on the reimbursed expenses for the duration of the build. The Friend is not registered for GST. The Friend purchased materials from mm/yyyy to mm/yyyy and forwarded all invoices to you for the purpose of reimbursement. The following process was adopted where you sourced and acquired materials directly (for a GST-inclusive price if $1,100): · you hold a tax invoice issued by the supplier in your name · claim an ITC of $100 · submit the tax invoice to the Friend's Bank · receive $1,100 payment from the Bank · report GST payable of $100 · The following process was adopted where the Friend sourced the materials directly: · Friend would pay a supplier $1,100 · supplier issues tax invoice to the Friend in the name of the Friend · Friend forwards the tax invoice to you · you submit the tax invoice to the Friend's Bank · you receive $1,100 payment from the Bank · you report GST payable of $100 · you forward $1,000 to the Friend as reimbursement of the expense incurred You did not claim any ITCs on the reimbursed costs as all invoices were made out in the name of the Friend. In the case the Friend sourced materials directly from a supplier, the Friend did not advise the supplier of any agreement whereby the Friend was acting as your agent in purchasing the materials. The Friend acted in their own name when sourcing materials. You did not bear any risk in the case the Friend purchased faulty or subpar materials. Any such risk was maintained by the Friend. You did not remunerate (by way of commission or other payment) the Friend in relation to purchasing materials. The Friend was not your employee.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Division 11 | Section 11-5 | Paragraph 11-5(b) | Section 11-20 | Division 111 | Subsection 111-5(1) | Subsection 111-5(2)

Reasons for decision: Summary: Note: In this reasoning, unless otherwise stated, · all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) · reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au Section 11-20 provides that you are entitled to an input tax credit (ITC) for any creditable acquisition that you make. Section 11-5 states that you 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. The primary issue in this case is determining, in the scenario the Friend source and pay for the materials directly, the entity that has made the acquisition/creditable acquisition. That is, does the Friend acquire the materials in his own right or in his capacity as your 'agent'. The issue of principals and agents is discussed in Goods and Services Tax Ruling GSTR 2000/37; Goods and services tax: agency relationships and the application of the law . Paragraph 11 of GSTR 2000/37 provides that for commercial law purposes, an agent is a person who is authorised, either expressly or impliedly, by a principal to act for that principal so as to create or affect legal relations between the principal and third parties. Paragraph 12 of GSTR 2000/37 continues stating that the 'principal is bound by the acts of an agent as a result of the authority given to the agent'. Whist in this case there was a verbal agreement between the parties that the Friend would source materials for the construction of the home, we do not consider that this agreement was intended to extend to your authorisation for the Friend to create a legal relationship between you and a third party supplier of the materials. Paragraph 28 of GSTR 2000/37 contains a number of factors that indicate an entity is acting in the capacity as an agent and there being a principal/agency relationship. Whilst no single factor (by itself) is determinative, the following factors should be considered: · any description of you as an agent, having authority to act for another party, in an agreement (expressed or implied) between you and the other party; · any exercise of the authority that you are given to enter into legal relations with a third party; · whether you bear any significant commercial risk; · whether you act in your own name; · whether you are remunerated for your services by way of commissions and whether you are entitled to keep any part of your remuneration secret from another party; and · whether you decide the price of things that you might sell to third parties. In applying the above factors to the facts in this case: · Suppliers of the materials were not notified or provided advice that the Friend was acting in their capacity as your agent when sourcing materials directly. · The Friend maintained any risk from sourcing faulty or subpar materials. In a true principal/agency relationship, the principal is bound by the acts of the agent and would bear any commercial risk. · The Friend acted in their own name when dealing with suppliers and again, did not advise suppliers they were acquiring the materials as your agent. · You did not pay the Friend a commission in relation to sourcing the materials (although the Friend did receive a benefit by way of having a house built at cost of materials only). · The Friend is not your employee Furthermore it is highly conceivable/probable that in sourcing the materials directly, the Friend did not create a legal relationship between you and the supplier. That is, it is more likely than not that in the event a dispute eventuated in relation to payment of the materials, a supplier would, given the facts provided, seek recourse from the Friend as opposed to yourself. Given the above, we do not consider the Friend was acting in the capacity as you agent when he sourced materials directly from suppliers. We consider that the Friend acquired the materials in his own right for the purpose of the construction of his own home. Consequently, you have not made the acquisition of the materials in question and therefore not made a creditable acquisition pursuant to section 11-5 in respect to such materials. | Detailed Reasoning - Division 111: Division 111 provides that a GST registered principal may be entitled to an ITC for reimbursements made to an agent for expenses the agent has incurred that are directly related to activities in acting in the capacity as an agent of the principal. Subsection 111-5 (1) effectively deems the reimbursement as consideration for an acquisition the principal makes from the agent. In some cases, the agent/employee may not be registered for GST with subsection 111-5(2) providing that the supply from the non-registered agent/employee may satisfy paragraph 11-5(b) (that the supply to the principal was a taxable supply) and be a creditable acquisition made by the principal. As under principal/agent concepts, any act done by an agent on behalf of the principal, is an act of the principal (paragraph 15 of GSTR 2000/37). Applying this to the current scenario, where the Friend was acquiring materials on behalf of a principal, the acquisition is considered to have been made by the principal. Any entitlement to an ITC by the principal would be determined under the basic rules in Division 11. Division 111 is not applicable in these circumstances. Division 111 would be applicable where, for example, the Friend rented a truck/ute to transfer the materials to the property site. The Friend does not rent the truck/ute in his capacity as agent (the agent's authority being restricted to the sourcing of building materials only). Where the principal reimburses the agent for the expense of renting the truck/ute, subsection 111-5(1) treats the reimbursement to the agent as consideration for the supply (of the truck/ute) to the principal. Subsection 111-5(2) deems the supply from the non-registered agent as a taxable supply for the purpose of satisfying the requirement in paragraph 11-5(b) of the definition of a 'creditable acquisition'. In summary the principal would make a creditable acquisition (via an agent) of the building materials in applying Division 11. The principal may also make a creditable acquisition of the truck/ute due to the application of the special rules relating to reimbursements contained in Division 111.