Private ruling: GST and claiming input tax credits for set up costs
Date of advice: 22 March 2016
Published: May 2016

Ruling: Q1: Are you entitled to claim input tax credits on your set up costs in relation to your wedding and school ball vehicle hire business? | A1: You may be entitled to claim input tax credits on your set up costs in relation to your wedding and school ball vehicle hire business provided the expenses are creditable acquisition to you. However, you are not entitled to claim input tax credits in relation to the extension of your house.

Relevant facts and circumstances: • You are registered for goods and services tax (GST) on 1 July 20XX. • You are currently building a vehicle for weddings and school ball hire. • You have registered your wedding and school ball hire business as partnership. • You purchased the original vehicle as unregistered and partly restored. • The vehicle was originally imported for restoration and not parts. You have the customs documents in relation to the import of this vehicle. • You have obtained a modification permit from the licencing authority to complete the vehicle to a roadworthy standard. • You do not have any other vehicles currently operating and this is the only vehicle that you are restoring and modifying for your business. • You have been able to cover the majority of the costs from your own savings and last year you were approved for a small business loan to assist you in the completion of the vehicle. • You do not have past experience in this industry and you have a business plan that was required for the purpose of obtaining the loan. • There is no local government requirement to have a permit to run the business from your home. • The vehicle will be required to be registered as a small charter vehicle and you have to obtain the necessary licences to be able to drive the vehicle. • You expect to cover all the set up expenses in the first 2-3 years and then start to see an increase in profit. • You have all the receipt and invoices to support the GST claims on your set up costs.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 - section 9-5, 9-20 | A New Tax System (Goods and Services Tax) Act 1999 - section 11-5,11-25 | A New Tax System (Goods and Services Tax) Act 1999 - Division 129

Reasons for decision: Summary: The rules relating to the entitlement to input tax credits for creditable acquisitions for GST purposes are outlined in Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The GST Act says that if you are registered for GST and you acquire goods or services in order to carry on your business, you can claim a credit for the GST that was included in the price. You cannot claim the credit if the acquisition is to make input taxed supplies or for a private purpose. | Detailed Reasoning - Creditable acquisition: 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; 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. You are entitled to claim input tax credits if you are making creditable acquisitions. You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, 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 or domestic nature. | Detailed Reasoning - Commencement of Enterprise: Enterprise is defined in section 9-20 of the GST Act to include an activity or series of activities done in the form of business. The term 'carrying on' in respect of an enterprise is defined in section 195-1 of the GST Act to include doing anything in the course of the commencement or termination of the enterprise. Paragraph 70 of the Goods and Services Tax Ruling GSTR 2008/1 provides a list of some factors that would suggest that an acquisition is made in carrying on an enterprise and this includes (amongst other things) that the acquisition is incidental or relevant to the commencement, continuance or termination of the enterprise. Therefore, any pre-establishment costs relevant to the commencement of the enterprise are considered to have been incurred in the course of the enterprise. In your case, you have incurred expenses in relation to restoring and modifying the vehicle to be used in wedding and school ball hiring business. Based on the facts provided by you, we consider that the set up costs in relation to the business are relevant to the commencement of your business. | Detailed Reasoning - Taxable supply: As explained above, to enable you to claim an input tax credit the acquisition should satisfy all of the requirements of creditable acquisition. One of the requirements is that the supply made by the supplier to you is a taxable supply. Section 9-5 of the GST Act provides that a supply to you would be a taxable supply if the supply made by the supplier to you is for consideration; and the supply is made in the course or furtherance of an enterprise that the supplier carries on; and the supply is connected with the indirect tax zone and the supplier is registered or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. In your case, if the supplies made by your suppliers in relation to the restoration and modification of your vehicle satisfied all of the requirements of section 9-5 of the GST Act, the supplies would be taxable supplies to you. Section 11-25 of the GST Act provides that you will be entitled to full input tax credits equal to the amount of the GST paid for the creditable acquisitions used 100% for business use. Please note that if any acquisitions made by you are not used 100% for your business use, you will be entitled to partial input tax credits for the creditable acquisition. | Detailed Reasoning - Extension to the residential premises: Under subsection 40-35(2) of the GST Act the supply of residential premises is input taxed to the extent that the premises are used predominantly for residential accommodation regardless of the term of occupation. Paragraph 10 of the GSTR 2012/5 provides that the requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office). In your case, you advised us that you have incurred expenses in relation to the extension of your house to accommodate the vehicle size as part of your set up costs. You will be making a supply of your house as the owners, to the business to accommodate the vehicle. The expenses in relation to the extension of your house will not satisfy the requirements of section 11-5 of the GST Act as the expenses will be input taxed as explained above. Therefore, you are not entitled to claim input tax credits in relation to the extension of your house to accommodate the long vehicle. | Detailed Reasoning - Additional information: As stated above, you will only be entitled to the input tax credits to the extent of the creditable purposes. The intended use of the acquisitions at the time of your purchases would determine the extent of the creditable purposes. Where the acquisitions are used partly for a creditable purpose, the acquisitions will be partly creditable. If there is a change in the extent of creditable purpose, then you will have to make adjustments under Division 129 of the GST Act. For guidance on this matter, refer to Fact Sheet Making an Adjustment on Your Activity Statement (NAT 11035), in particular pages 4 to 6. | Detailed Reasoning - Conclusion: You have been registered for GST since 1 July 20XX. You are entitled to claim input tax credits for acquisitions made after the date of the GST registration and the acquisitions are for creditable purposes as explained above. You are not entitled to claim input tax credits for the acquisitions made in relation to the extension of your house to accommodate the vehicle. If you make any acquisitions partly for private use, then you are only entitled to claim input tax credits for the partly creditable of your acquisitions. If there is a change in the extent of your creditable acquisitions, you are required to make an adjustment under Division 129 of the GST Act.