Private ruling: entitlement to input tax credits
Published: January 2014

Ruling: Q1: Are you entitled to claim an input tax credit for renovations to your home's kitchen to include additional cupboards and new equipment and for additional running costs? | A1: No, you are not entitled to claim an input tax credit for renovations to your home's kitchen to include additional cupboards and new equipment and for additional running costs. You may be entitled to claim a portion of your running costs. Please refer to the reasons for decision section for further details.

Relevant facts and circumstances: You are registered for the goods and services tax (GST). You operate an enterprise. As part of your enterprise, you provide food and beverages for paying customers. You prepare the food in your own home, which you own. Due to the space and power limitations at the premises from where you carry on your enterprise you have completely renovated your home's kitchen to allow you to prepare food for the enterprise, at your private place of residence. You have spent a certain sum for new appliances, being a new dishwasher, oven and hotplates. These upgrades will allow you to prepare food in greater quantities for catering purposes for the enterprise. You state that no change to your private kitchen would be needed if not for the business requirements. The original kitchen was a few years old and built to accommodate the current equipment. The acquisitions that you have made in regards to the kitchen modifications were taxable supplies to you.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 7-1 | Section 11-5 | Section 11-15

Reasons for decision: Summary: Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) allows you to claim an input tax credit for any creditable acquisition you make. Creditable acquisitions are defined in section 11-5 of the GST Act, which states: 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. (terms marked with asterisks (*) are defined in section 195-1 of the GST Act) The supply of the kitchen modifications to you is a taxable supply, you will provide consideration for the supply, and you are registered. Therefore, paragraphs 11-5(b), (c) and (d) have been met. We need to determine if the kitchen modifications are for a creditable purpose. Section 11-15 of the GST Act provides that 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 it relates to making supplies that would be input taxed, or are of a private and domestic nature. The issue here is determining if the kitchen modifications are of a private and domestic nature. The Commissioners' view on this is elaborated in Goods and Services Tax Ruling GSTR 2006/4 Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose (GSTR 2006/4) at paragraphs 74 to 81, which state: | Detailed Reasoning - Acquisition or importation of a private or domestic nature: 74. An acquisition or importation is partly creditable to the extent that it is for a creditable purpose. To the extent that the acquisition is of a 'private or domestic nature', it is not a creditable acquisition. The question of whether an acquisition or importation is of a 'private or domestic nature' depends on the circumstances of each case. 75. The words 'private or domestic nature' are used in the ITAA 1936 and the ITAA 1997. In these sections, the words are part of what is referred to as the negative limb of the test for deductibility for income tax. The positive limbs of section 8-1 of the ITAA 1997 and subsection 51(1) of the ITAA 1936 require the expenditure to be incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. 76. There has been debate under current income tax law about whether the positive and negative limbs of section 8-1 of the ITAA 1997 and subsection 51(1) of the ITAA 1936 are mutually exclusive. One view is that the positive limb and the 'private or domestic' part of the negative limb are simply stating the same test in different words. That is, if something has been incurred in gaining assessable income or necessarily incurred in carrying on a business, it cannot be of a private or domestic nature and vice versa. 77. This view finds support in the fact that some cases on the business/private borderline in income tax concentrate on the positive limb while others concentrate on the negative limb, without suggesting that they are dealing with different principles. Even cases that suggest some potential overlap consider that it is rare for an item of expenditure to satisfy the positive limb, and yet be considered to be of a 'private or domestic nature'. 78. In income tax law, the Courts have considered the deductibility of various expenses that generally have a private or domestic nature. These include: (i) travel expenses to and from work; (ii) expenses for the necessities of life (such as food, clothing and shelter); (iii) self education; (iv) child care fees; and (v) home office expenses such as rent, interest and electricity. The Courts usually decided these cases on their particular facts with no general principle stating that expenditure of a particular type is always private or domestic. 79. The Commissioner views the words 'private or domestic nature' in the GST Act as having essentially the same meaning as in the ITAA 1936 and ITAA 1997. The meaning of 'creditable purpose' in sections 11-15 and 15-10 can be seen as having positive and negative limbs, similar to section 8-1 of the ITAA 1997 and subsection 51(1) of the ITAA 1936. The positive limb refers to the requirement that the acquisition or importation be made in 'carrying on your enterprise', while the negative limb excludes items of a private or domestic nature. 80. The Commissioner considers that the preferable view is that there is little or no difference between the two tests in the enterprise/private borderline. Under the GST law it would also be rare for an acquisition or importation to satisfy the positive limb and at the same time also be of a private or domestic nature. One consequence of this is that an entity, which is not an individual or a partnership, will rarely, if ever, make an acquisition in the course of its enterprise, which is of a private or domestic nature, where the acquisition is made for the purposes of the enterprise. 81. The Commissioner treats the body of income tax case law in the area of 'private or domestic' as establishing the principles applicable to the GST, unless some specific provision of the GST Act indicates a contrary outcome in a particular case. The modifications to the kitchen are being made to your private home. They are permanent additions to your private home, and cannot be separated from your private home. If you were to sell the private home, the modifications would be part of the sale. The characteristics of the renovation, as opposed to its supposed usage is what determines whether it is for a business use and is therefore a creditable acquisition. Although the kitchen may be used for business purposes, the nature of the kitchen has not changed. The kitchen is still private and domestic in nature. It is not, in any way, separate from the home. It still forms part of the residential premises. Also, if at any stage your enterprise ceases, then the house including the renovated kitchen would be a part of your residential home. Accordingly, as per GSTR 2006/4, we consider that the costs for the kitchen renovation are incurred for private purposes and as such are not for a creditable purpose. Therefore, you are not entitled to any input tax credits in respect of the construction of the kitchen renovations. | Detailed Reasoning - Input tax credits on running costs: It is recognised that some enterprises do run from a private home. Accordingly, the GST legislation recognises that certain acquisitions can be for a partly creditable purpose. Taxation Ruling TR 93/30 Income tax: deductions for home office expenses (TR 93/3) provides the Tax Office view on expenses incurred in a private home that relate to income producing purposes. It states: | Detailed Reasoning - Occupancy Expenses:: 16. If part of a taxpayer's home qualifies as a place of business, the taxpayer may be able to claim a portion of the occupancy expenses incurred under section 8-1. 17. The actual amount which can be claimed is dependent on the taxpayer's individual circumstances. In most cases, the apportionment of the total expense incurred on a floor area basis is the most appropriate method. 18. However, where an area of the home is a place of business for part of the year only, it may be necessary for expenses to be apportioned on a floor area and a time basis. The time apportionment under this method should reflect the period of the year in which the room is used for income producing purposes. | Detailed Reasoning - Running Expenses:: 19. Running expenses may take on a different character where taxpayers, who have a home office, establish that they have incurred additional expenditure on the running expenses as a result of their income producing activities (refer Faichney's Case). In appropriate circumstances, taxpayers are entitled to a deduction for the expenditure actually incurred through their income producing activities which is additional to their private expenditure. 20. While it is not practicable to provide a list of the running expenses which may be allowable as income tax deductions, the following paragraphs illustrate the type of expenses which may be claimed. Although TR 93/30 emphasises income tax, we consider the principles contained therein to apply in a GST context. This means that you can claim a portion of your home's running expenses, such as gas and electricity to the extent that they have been used for a creditable purpose and those supplies to you were taxable supples. You must employ an apportionment method that is fair and reasonable to determine the extent of the creditable purpose and hold valid tax invoices for the relevant acquisitions. GSTR 2006/4 provides guidance on what is a fair and reasonable method of apportionment. Your attention is drawn to paragraph 100, which states: 100. Following the principles set out by the High Court, the method you choose to allocate or apportion acquisitions between creditable and non-creditable purposes needs to: · be fair and reasonable; · reflect the planned use of that acquisition (or in the case of an adjustment, the actual use); and · be appropriately documented in your individual circumstances. Where possible, you should use a direct method for working out the extent to which the item is used for a creditable purpose. If a direct method is not available, then you may use an indirect method. You have stated that no change in the private kitchen would be needed if not for the new business. This does not affect the apportionment calculation. The new facilities are still part of a kitchen in a private residence and will be used predominantly for private and domestic purposes. Your apportionment methodology for running expenses will need to reflect this. I have included a copy of GSTR 2006/4 for your perusal.