Private ruling: GST and entitlement to input tax credits
Published: February 2015

Ruling: Q1: Are you entitled to GST input tax credits on the cost of construction of employee accommodation under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 ? | A1: No. | Q2: Are you entitled to GST input tax credits on the cost of the solar electrical system under section 11-20 of the GST Act? | A2: Yes, to the extent the acquisition does not relate to making input taxed supplies.

Relevant facts and circumstances: You are registered for GST and carry on a farming enterprise. You employ workers on a casual or contract basis and supply them with accommodation. To this end, you are constructing a new residential dwelling on your property to house the employees. In addition to this, you will acquire a solar electricity system to supply power to a number of sheds and workshops on the property, an office and the new dwelling, as there is no mains electricity supply servicing the property. The system is mounted on the roof of one of the sheds. You estimate that the new residential dwelling will consume a maximum of 10% of the capacity of the new electrical system when occupied. Given the distance from alternative accommodation to properties like yours, it is industry norm that employees live 'on-property' and that the employer provides suitable accommodation for the employee. The employee, who is not related to you, will not be paying rent for their accommodation.

Relevant legislative provisions: 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 11-20 | A New Tax System (Goods and Services Tax) Act 1999 section 40-35 | A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision: Summary: Under section 11-20, an entity is entitled to claim input tax credits for creditable acquisitions that it makes. Section 11-5 provides that an acquisition is creditable where all of the following conditions are met: • the acquisition is made solely or partly for a creditable purpose • the supply of the thing to the recipient was a taxable supply • the recipient provides or is liable to provide consideration for the supply, and • the recipient is registered or required to be registered for GST. Section 11-15 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 a 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. You are constructing a house that will be used by your employee for residential accommodation. Subsection 40-35(1) states: A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if: (a) the supply is of *residential premises (other than *commercial residential premises); or (b) the supply is of *commercial accommodation and Division 87 (which is about long-term accommodation in commercial premises) would apply to the supply but for a choice made by the supplier under section 87-25. | Detailed Reasoning - Residential premises: The term 'residential premises' is defined in section 195-1 to mean land or a building that: • is occupied as a residence, or • is intended to be occupied, and is capable of being occupied as a residence. The house meets the definition of residential premises. Therefore, it is necessary to consider if your supply of the house meets the requirements of section 40-35 to be input taxed. The precondition of section 40-35 is that the supply of premises is by way of lease, hire or licence. 'Licence' is not defined in the GST Act. Therefore, it takes its ordinary meaning. The Macquarie Dictionary definition of licence includes 'formal permission or leave to do or not to do something'. Your granting of permission for your employee to use the premises meets this definition of licence. | Detailed Reasoning - Commercial residential premises: 'Commercial residential premises' is also defined in section 195-1 to include a hotel, motel, inn, hostel, boarding house or anything similar. In this case we do not consider your supply of employee accommodation satisfies the definition of 'commercial residential premises'. | Detailed Reasoning - Employee accommodation: Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6), at paragraph 69, provides an example of employee accommodation. Whilst the factual situation is slightly different to yours the principles are the same. The result is that a supply in your situation is considered to be an input taxed supply. Example 9 - house provided to an employee as a residence 69. XYZ Mining Co owns houses which it either leases or provides under licence to employees. The employees are responsible for the costs of utilities and grounds maintenance, while XYZ Mining Co is responsible for repairs and other maintenance. The houses do not have the features of a hotel, motel, inn, hostel or boarding house and are, therefore, not commercial residential premises. The supplies of the houses by way of lease or licence are input taxed supplies of residential premises to be used predominantly for residential accommodation under paragraph 40-35(1 )( a ). As discussed above, your supply of the premises is not a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises. Therefore, your supply of the residential premises will be input taxed in accordance with section 40-35. Accordingly, the acquisitions that you make in respect to these premises are not creditable acquisitions under section 11-5. Therefore, you will not be able to claim an input tax credit under section 11-20. Please note that the employment status (full-time/part-time/ casual/itinerant) of the occupant of the premises is not a factor when determining the GST treatment of those premises. Subsection 40-35(2) provides the supply of residential premises will be input taxed to the extent that the premises are to be used predominately for residential accommodation (regardless of the term of occupation). Therefore the period of occupation or intended occupation of land or a building is not relevant in determining whether premises are residential premises. The test of whether the premises are residential premises or not is interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. Where such premises have the physical characteristics to provide shelter and basic living conditions (such as bedroom, bathroom and kitchen facilities), the premises will meet the definition of 'residential premises'. Also of note is the fact the GST classification of your supply of the premises will not be affected regardless of whether or not you receive rent from the employee. This concept is illustrated in paragraph 59 of Goods and Services Tax Ruling GSTR 2001/3 Goods and Services Tax: GST and how it applies to supplies of fringe benefits . | Detailed Reasoning - Question 2: As discussed above, 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 a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. In this case, the solar electrical system was acquired to supply power to five sheds and workshops on the property, an office and the new residential dwelling. As such, the acquisition of the solar electrical system relates in part to your input taxed supply of residential premises to your employee. Section 11-30 provides that an acquisition is 'partly creditable' where you make the acquisition only partly for a creditable purpose. The amount of the input tax credit on an acquisition that is partly creditable is the full input tax credit (i.e. the amount the input tax credit would have been had the acquisition been made solely for a creditable purpose) multiplied by the 'extent of creditable purpose'. 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) provides guidance on how to determine the extent of your creditable purpose in making acquisitions and importations to enable you to claim the correct amount of ITCs. Paragraphs 51 to 53 of GSTR 2006/4 discuss the requirement to apportion ITCs where the acquisition was not made for a fully creditable purpose with paragraphs 67 and 68 discussing acquisitions used partly to make input taxed supplies. Paragraphs 101 to 123 of GSTR 2006/4 discuss choosing a reasonable method including both direct and indirect methods of apportionment and situations where a method may be inappropriate to use. The method you choose to 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. You are not required to use direct and indirect methods in the manner set out GSTR 2006/4, provided that whatever alternative method you do use is fair and reasonable having regard to the above principles. In summary, in regard to your acquisition of the solar electrical system, you are entitled to an input tax credit pursuant to section 11-20 to the extent the acquisition is a creditable acquisition.

Reasons for decision: Note: In this ruling, unless otherwise stated, | • all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | • all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au | • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act