Private ruling: GST and entitlement to input tax credit in regard to purchase of a water craft.
Date of advice: 23 February 2016
Published: April 2016

Ruling: Q1: In the event that you acquire a water craft, will you be eligible to claim input tax credits (ITC) for this acquisition? | A1: Yes, in the event that you are the entity that acquires a water craft, you will be entitled to claim an ITC for the acquisition of the water craft where you have satisfied all the requirements in section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). | Q2: If the answer to 1 is yes, to what extent will you be able to claim an ITC on the acquisition? | A2: You will be entitled to claim an ITC to the extent that the water craft is used for a creditable purpose. The GST law does not prescribe any particular apportionment method for your use of the water craft. You may choose your own apportionment method, but the method you choose needs to be fair and reasonable, in the circumstances of your enterprise.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. • You are an Australian company and registered for goods and services tax (GST). • You conduct the following business activities: 1. You currently own a commercial property in Australia and derive rental income from the lease of this commercial property. 2. You have entered into a sub-dealer's Agreement with a GST registered company, Company X, where you are appointed non-exclusively to promote for sale certain water crafts manufactured by Company X in the Area. This is a new business activity that you have started recently. Pursuant to the agreement, you are responsible for promoting the water crafts' brand and for facilitating the introduction of customers to Company X. You receive a commission under the agreement. • You are considering acquiring a water craft. The purchased water craft will be used by you as a demonstrator for the marketing business. It is intended that the water craft will be used in sea trials for customers post water craft shows. While the water craft is being used at water craft shows, it will be unavailable for private use. • It is anticipated that the acquired water craft will be used partly as a demonstrator and partly for private purposes. • Your purchase of the water craft may be done under certain arrangements involving a third party.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 11-5 | A New Tax System (Goods and Services Tax) Act 1999 section 11-15 | A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision: Detailed Reasoning - Question 1: Under section 11-20 of the GST Act, you are entitled to an input tax credit (ITC) for any creditable acquisition that you make. In the event that you are the entity that acquires the water craft, the term 'you' refers to you. Under section 11-5 of the GST Act 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. | Detailed Reasoning - Paragraph 11-5 (a) of the GST Act: To make a creditable acquisition, you need to make the acquisition solely or partly for a creditable purpose. Recipient of the supply You must be the recipient of the supply in order to claim the ITC on the acquisition. Under a tripartite arrangement (involving three or more parties) it is possible that a supply is made to one entity under the terms of an agreement, but the supply is provided to another entity. Goods and Services Tax Ruling GSTR 2006/9 considers multi-party transactions, (commonly known as tripartite arrangements), and states at paragraphs 131 and 132: 131. 'Made' in the context of 'a supply made' takes its meaning from the definition of 'recipient' in section 195-1: recipient , in relation to a supply, means the entity to which the supply was made. 132. 'Provide' is used to contrast with 'made' - it distinguishes between the contractual flow of the supply to the recipient (the entity to which the supply is made) and the actual flow of the supply to another entity (the entity to which the supply is provided). In a tripartite arrangement, a situation may exist whereby a third party may pay for a supply, but is not the recipient of that supply (proposition 14 in GSTR 2006/9). When identifying to whom, a supply is made, it is necessary to look at the whole arrangement, including the contractual and other agreements made between the parties. The whole arrangement must be that you are the entity that is the recipient of the supply that makes the acquisition of the water craft. If it is determined that you are not the recipient of the supply, you will not be entitled to claim the ITC on the acquisition of the water craft. Creditable purpose You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise under subsection 11-15(1) of the GST Act. Subsection 11-15(1) of the GST Act requires that you acquire a thing in carrying on your enterprise. It is therefore necessary firstly to identify the enterprise that is being carried on and secondly to determine whether there is a connection between the acquisition and the enterprise being carried on. Goods and Services Tax Ruling GSTR 2008/1 explains some factors that provide guidance in determining whether an acquisition is for a creditable purpose. It also addresses whether the acquisition is made in carrying on an enterprise or whether it is of a private or domestic nature. Paragraphs 59, 64, 69 and 70 of GSTR 2008/1 state: 59. Section 9-20 sets out the meaning of enterprise. Subsection 9-20(1) commences by stating that 'an enterprise is an activity, or series of activities'. Consequently, it is necessary to identify the activity or series or activities that constitute the enterprise to determine whether the acquisition is acquired in carrying on that enterprise. 64. Whether something is acquired in carrying on an enterprise requires a connection or link between the thing acquired and the enterprise. 69. The Commissioner considers that in the GST context it is necessary to make an objective assessment as to whether there is a connection between the thing acquired and the enterprise, based on all the facts and circumstances. Although the subjective purpose of the entity making the acquisition is relevant, it is not determinative. 70. Whether an acquisition is acquired in carrying on an enterprise is a question of fact and degree, making it impractical to provide an exhaustive list of all the factors that may be relevant to determining whether an acquisition is made in carrying on an enterprise. However some factors that would suggest that an acquisition is made in carrying on an enterprise include that: n The acquisition is incidental or relevant to the commencement, continuance or termination of the enterprise; n The thing acquired is used by the enterprise in making supplies; n The acquisition secures a real benefit or advantage for the commencement , continuance or termination of the enterprise; n The acquisition is one which an ordinary business person in the position of the recipient would be likely to make for the enterprise; n The acquisition does not meet the personal needs of individuals such as partners or directors; n The acquisition helps to protect or preserve the enterprise entity, structure or organisation; and n The acquisition is made by the entity in accordance with, or to satisfy, a statutory requirement imposed on the enterprise. In this case: • You carry on a leasing enterprise, and a marketing business pursuant to the sub-dealer's Agreement you have entered into with Company X. Under this agreement. You are to promote the water crafts manufactured by Company x and to source potential customers for Company X. • There is an expected sales target. You will receive a commission from the sales. • You are considering purchasing a water craft to use for demonstration purposes at water craft shows and for sea trials as part of your marketing activities. You anticipate that the water craft will be used for demonstration purposes and for private purposes. From the above, it is considered that there will be a connection between the acquisition of the water craft and the marketing business carried on by you as the water craft relates to the marketing activities. Limit to Subsection 11-15(1) of the GST Act However, under subsection 11-15(2) of the GST Act 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. The supply of marketing services is not an input taxed supply under the GST Act. Paragraph 11-15(2)(b) of the GST Act is applicable as the water craft will be partly used for private use. In this instance, the acquisition will not be for a creditable purpose to the extent that the water craft is used for private use. Accordingly, in the event that you purchase the water craft, the extent to which you acquire it in carrying on your marketing business, the acquisition is for a creditable purpose. | Summary: You will satisfy the requirements in subsection 11-15(1) of the GST Act to the extent that the water craft is used in the course or furtherance of carrying on your marketing business. You will therefore be required to determine the extent to which the acquisition of the water craft will be for a creditable purpose. Paragraph 11-5(a) of the GST Act will be satisfied in this instance. | Detailed Reasoning - Paragraph 11-5(b) of the GST Act: A supply is a taxable under section 9-5 of the GST Act if: a) the supplier makes the supply for consideration; b) the supply is made in the course or furtherance of an enterprise that the supplier carries on; and c) the supply is connected with the indirect tax zone (Australia); and d) the supplier is required for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. Where you satisfy all the above requirements, the supply of the water craft to you will be a taxable supply. For a taxable supply, you are required to pay GST on the acquisition of the water craft from the supplier, and the supplier is required to remit the GST to the ATO. In this instance, paragraph 11-5(b) of the GST Act will be satisfied by you. | Detailed Reasoning - Paragraph 11-5 (c) of the GST Act: This paragraph requires that the recipient of the supply provides, or is liable to provide, consideration for the supply. For you to claim an ITC, you must provide, or be liable to provide, consideration for the supply. There must be a presently existing obligation to make a payment for the acquisition. As discussed above, you make an acquisition if you are the recipient of the supply. That is the supply is made to you. It will not be sufficient if you are merely provided with the supply. Also, you will not make an acquisition merely by paying for a supply. Paragraph 183 of GSTR 2006/9 provides that if you provide or are liable to provide consideration for a supply, but you are not the recipient of the supply, you are referred to as a 'third party payer'. As a third party payer you do not make a creditable acquisition in relation to your payment because the supply is not made to you as required by section 11-5 of the GST Act. Making a payment for a supply that is made to another entity is not sufficient to make you the recipient of that supply. Accordingly, in the event that you are the entity that acquires the water craft and are the recipient of the supply, and you provide or are liable to provide consideration for the acquisition of the water craft, paragraph 11-5(c) of the GST Act will be satisfied. However, if you are only a third party payer, this paragraph will not be satisfied. | Detailed Reasoning - Paragraph 11-5(d) of the GST Act: You are registered for GST. This paragraph will be satisfied. | Detailed Reasoning - Summary - question 1: In the event that you purchase the water craft and satisfy all the requirements in section 11-5 of the GST Act, you will be entitled to claim an ITC to the extent that the water craft is used for a creditable purpose. | Detailed Reasoning - Question 2: Section 11-30 of the GST Act explains how to calculate the amount of an input tax credit on an acquisition that is partly creditable. As discussed above you will be entitled to claim ITCs on the acquisition of the water craft to the extent that the acquisition is for a creditable purpose. You will therefore need to determine the extent of the creditable purpose of the acquisition and can refer to Goods and Services Tax Ruling GSTR 2006/4 for guidance. The GST law does not prescribe any particular apportionment method for your use of the water craft for business purposes. You may choose your own apportionment method, but the method you choose needs to be fair and reasonable in the circumstances of your enterprise. This will normally mean that you need to design and apply a methodology to accurately identify, capture, and report on its acquisitions (and supplies). There may be more than one method that is fair and reasonable and which is suitable for your business activities. We encourage you to adequately document the reasons for making choices that meet the principle of being fair and reasonable and keep sufficient information to support its decisions. Creating and maintaining these documents will contribute to your own internal risk management and governance processes and also assist you by reducing the risk of a protracted enquiry and possible dispute with the ATO.