Private ruling: creditable acquisition
Published: February 2014

Ruling: Q1: Is ABC Pty Ltd (ABC) entitled to claim the input tax credit on the payout of the lease on the destroyed equipment? | A1: Yes, ABC is entitled to claim the input tax credits on the payout of the lease of the destroyed equipment. | Q2: Is ABC able to claim an input tax credit for the payment of the remaining leases? | A2: Yes, ABC is able to claim an input tax credit for the remaining leases.

Relevant facts and circumstances: Entities · ABC Pty Ltd (ABC) acquired DEF Ltd (DEF) from MNO Pty Ltd (MNO) in 2011. · The shareholders of DEF were Mr and Mrs X. · ABC also owns a subsidiary company called GHI Pty Ltd (GHI), which was also controlled by Mr and Mrs X. · GHI carries on an enterprise of leasing equipment. · DEF carries on a business. It paid GHI hiring fees for the use of the equipment which was leased by GHI from MNO. · ABC, GHI and DEF are grouped for GST purposes. · Mr X died in the relevant year while operating one of the equipment pieces that was leased by GHI from MNO. The equipment was completely destroyed in the accident. Leases · MNO owns equipment that it leases to GHI. · Each equipment is subject to its own lease agreement. Each lease agreement included the exact same terms and conditions as each other, with different figures for monthly payment and residual values. · A sample lease agreement was provided to us for the equipment destroyed. The terms of the abovementioned lease were X monthly payments of $XX per month, payable on the first of every month. This equates to $XXX. There is a residual value of $XXX at the end of the lease. · The lease agreements also included the following terms: · GHI must effect and maintain general insurance against, amongst others, damage or destruction of the leased goods; · GHI is required to pay for all insurance premiums; · in the event of a total loss of the insured goods, GHI must pay to MNO the balance due which is defined to mean: (a) all rent and other amounts due or accrued due under the lease; (b) interest on these amounts; (c) the present value of the balance of the total rent that would have been payable during the remainder of the lease term but which was not then due for payment; (d) the present value of the residual value. · The other leases are similar, although they do contain different payment amounts. · At the end of the lease term, it was the understanding of the parties that the equipment would be transferred to GHI at their residual values. However, the contracts did not actually stipulate this. · The leases were all treated as taxable supplies by MNO, and as creditable acquisitions by ABC. General Insurance Policy · GHI took out a general insurance policy for each of the items of equipment as per the terms of the lease agreement. Both MNO and DEF were named as "The Insured" with MNO being the 'first loss payee'. This term is used to describe a common practice which serves to protect the interest of a lessor when there is finance on the insured goods. · However, it was the understanding of the parties that DEF would be responsible for the insurance premiums and it would also be entitled to any insurance proceeds to pay out the leases. DEF has consequently claimed the payments as operating expenses. · As per the informal agreement and the subsequent instruction of MNO to the insurer, DEF has received the amount of $XXX as insurance on the destroyed equipment. The amount of $XXX (GST exclusive) has been applied to pay out the lease commitments of GHI. Life Insurance Policy · Mr X also arranged a life insurance policy for $X.XX million on his life at about the same time as the leases were entered into. · The policy shows the Policy Owner was MNO, and the life insured was Mr X's. The beneficiary of the life insurance policy was MNO. This was to ensure that if Mr X died, sufficient monies would be available to pay out the lease commitments of GHI. This is not a 'key man' policy as MNO did not pay the premiums. · DEF has provided the consideration for the life insurance policy. · MNO, as the sole owner and beneficiary of the life insurance policy, has now received the proceeds of $X.X million. · It has since been decided that the leases will be paid out, and equipment will be transferred to GHI at their residual values. This will also be funded out of the insurance proceeds. · The final payout on the total leases is $X (which also includes the residual values). · Therefore, after deducting the destroyed equipment, the amount to terminate the remaining leases on all equipment still held is $X. · MNO will then pay to the late Mr X's estate the surplus of the insurance monies received from the life policy.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 7-1 | Section 9-5 | Section 9-10 | Section 11-5

Reasons for decision: Detailed Reasoning - Question 1: Summary Yes, ABC is entitled to claim the input tax credits on the payout of the lease of the destroyed equipment. | Detailed Reasoning - Detailed reasoning: Section 7-1 of the GST Act provides that an entitlement to an input tax credit arises on creditable acquisitions that you make. Section 11-5 of the GST Act defines a creditable acquisition. It 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. (Items marked with an asterisk are defined in the Dictionary at section 195-1 of the GST Act). GHI is grouped with ABC for GST purposes. ABC is the representative member. Section 48-1 of the GST Act broadly provides that the representative member of the group then deals with all of the GST liabilities and entitlements of the group. Creditable Purpose The acquisition of the initial lease by ABC was for a creditable purpose. The remainder of the lease is paid out in full. Subsection 11-15(1) 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'. The payout of the lease for the destroyed equipment was acquired in the carrying on of your enterprise as it was a contractual arrangement that you entered into and kept. Paragraph 11-5(a) of the GST Act has therefore been met. Taxable supply to you The supply of the lease to you by MNO is a taxable supply. Paragraph 11-5(b) of the GST Act is therefore met. Consideration You have advised that DEF received the amount of $712,500 as insurance on the destroyed equipment. The amount of $XXXXXX will be provided by DEF to MNO to pay out the lease commitment on the destroyed equipment. You have therefore provided consideration for the supply. Paragraph 11-5(c) of the GST Act has therefore been met. Registration The representative member of your GST group (ABC), is registered for GST. Paragraph 11-5(d) of the GST Act has therefore been met. As all of the elements of section 11-5 of the GST Act have been met, you have made a creditable acquisition and can claim an input tax credit. | Detailed Reasoning - Question 2: Summary Yes, ABC is able to claim an input tax credit for the other remaining leases. | Detailed Reasoning - Detailed Reasoning: ABC will be able to claim an input tax credit for the remaining leases. | Summary: Yes, ABC is able to claim an input tax credit for the other remaining leases. | Detailed Reasoning - Detailed Reasoning: ABC will be able to claim an input tax credit for the remaining leases. In respect of the remaining leases we are satisfied that paragraphs 11-5(a), (b) and (d) of the GST Act have been met. That is, ABC acquired the leases for a creditable purpose, the supply of the leases to ABC by MNO was a taxable supply, and ABC is registered for GST. The question is whether ABC has provided consideration or whether it was liable to pay consideration for the acquisition. As it was liable to pay consideration for the remaining leases paragraph 11-5(c) of the GST Act is satisfied. In this particular case, though the funds from the insurance company were received by MNO it was nevertheless applied towards ABC liability for the remainder of the remaining leases. Therefore, all of the requirements of section 11-5 of the GST Act have been met, and ABC has made a creditable acquisition.