Private ruling: GST and input tax credits
Published: March 2014

Ruling: Q1: Are you entitled to an input tax credit (ITC) for acquisitions made in relation to capital expenditure incurred in operating a motel? | A1: Yes, however the amount of ITC is limited to the extent you made the acquisitions to make supplies that are not input taxed.

Relevant facts and circumstances: You are registered for GST. You carry on an enterprise of operating a motel providing motel accommodation. You consider the property to be 'commercial residential premises' for GST purposes. The clientele of your motel predominately stay for periods in excess of 30 days. You have chosen that Division 87 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is not to apply to your supplies of long-term accommodation. You treat such supplies as input taxed in accordance with paragraph 40-35(1)(b) of the GST Act. You engage a manager to run the day to day operations of the motel. The manager lives in an apartment on-site and pays rent. You also treat this supply as input taxed pursuant to 40-35(1)(b) of the GST Act. You have converted an existing function room into an apartment which also has an interconnecting motel room attached. You will incur costs of approximately $XXXX in renovating the function room. The supplies to you in regard to the renovations are taxable supplies. The apartment is used as the manager's residence. The renovated manager's apartment will have a 'duel key system' where access to certain areas (wardrobes, kitchen cupboards, other personal areas) can be restricted whilst the unit is occupied by another party. Your intention is that the manager's unit will be used to provide short term accommodation to guests when the manager is on annual leave with another employee/resident stepping into the manager's role. The apartment will also be used to make taxable supplies of short-term accommodation and input taxed supplies of long-term accommodation in commercial residential premises during the peak season whilst the manager is on annual leave (this will be determined by the length of stay of each individual occupant). The peak season is approximately X weeks per year and annual revenue generated during this period represents approximately Y% of the total annual income in relation to the apartment.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Division 11 | Division 129

Reasons for decision: Summary: Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to an input tax credit (ITC) for any creditable acquisition that you make. You make a creditable acquisition if: a) you acquire anything solely or partly for a creditable purpose; b) the supply to you was a taxable supply; c) you provide consideration for the supply; and d) you are registered for GST. You will acquire something for a creditable purpose to the extent that you acquire it in carrying on your enterprise and the acquisition does not relate to making input taxed supplies or is of a private or domestic nature. In this case, you have made acquisitions in the course of carrying on your enterprise of operating a motel. The supplies to you were taxable supplies, you provided consideration and you are registered for GST. Furthermore, the acquisitions are not of a private or domestic nature. The acquisitions in question were acquired for the purpose of making taxable supplies of short term accommodation in commercial residential premises and input taxed supplies of commercial accommodation and thus were acquired partly for a creditable purpose. Given the above, you have made a creditable acquisition and are entitled to an ITC in regard to the acquisitions. However, as the acquisitions were not made solely for a creditable purpose, the ITC is required to be apportioned to exclude the extent the acquisition was acquired for a non-creditable purpose (i.e. to make input taxed supplies). 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 the ATO view on this issue. Paragraph 25 of GSTR 2006/4 states in part: … It is your planned extent of creditable purpose that is relevant for calculating input tax credits. You need to determine your planned extent of creditable purpose on a basis that is fair and reasonable… Discussion on the general principles of apportionment is contained in paragraphs 96 to 99 of GSTR 2006/4 with paragraph 100 providing that the method you use must: • 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. Further discussion on choosing an appropriate method and the types of methods (including direct and indirect methods) is contained in paragraphs 101 to 120 of GSTR 2006/4. | Detailed Reasoning - Further issues for you to consider: If your actual extent of use for a creditable purpose is different from your planned use, you may need to make an adjustment under Division 129 of the GST Act. That is, it may be the case the actual taxable supplies of short term commercial accommodation you make differ from the taxable supplies you anticipated you would make when you claimed an ITC. Further guidance on this issue is contained in paragraphs 89 to 96 of GSTR 2006/4.