Private ruling: Entitlement to input tax credits
Published: March 2014

Ruling: Q1: Are you entitled to claim input tax credits (ITCs) on costs for the construction of your units? | A1: Yes.

Relevant facts and circumstances: • You are registered for goods and services tax (GST) and are endorsed as a charity for GST purposes. • You provide accommodation and support to individuals who require assistance. • You obtained a grant from a Government department to construct a residential complex consisting of multiple units. GST was charged on these building costs • You have advised that you were liable to provide, consideration for the goods and services provided by the builder • You have received a market valuation of the properties from a local real estate showing the weekly rental of the properties assessed as being $X per week based on similar properties within the locality. • You advise you will charge less than 75% of the GST inclusive market value of the supply

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 9-5, | A New Tax System (Goods and Services Tax) Act 1999 11-5, | A New Tax System (Goods and Services Tax) Act 1999 11-15 and | A New Tax System (Goods and Services Tax) Act 1999 38-250.

Reasons for decision: Summary: Section 11-5 of the A New Tax System (Goods and services Tax) Act 1999 (GST Act) 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. Note: the * denotes a defined term within the GST Act. 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 the acquisition relates to making input taxed supplies or is of a private or domestic nature. Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make. Subsections 11-15 (1) and (2) 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: (a) the acquisition relates to making supplies that would be input taxed; or (b) the acquisition is of a private or domestic nature. | Detailed Reasoning - Creditable acquisition: In your case, you advise that you have contracted with a builder to construct a residential complex. For GST purposes, we consider that you acquire those units from the builder in the course of your enterprise which includes leasing of them to a specific group of individuals. That is, you use those units predominantly to make supplies of residential accommodation. Further, we consider that the acquisition is not of a private or domestic nature. However, Division 11 of the GST Act denies an ITC where you use the acquisition to make a supply that would be input taxed. (a) In your case a supply of residential accommodation is normally input taxed. However if section 38-250 or section 9-30 of the GST Act applies to the supply, it is GST-free (these are discussed further below). If the supply of accommodation in a unit to the prospective tenant is GST-free, you acquire the unit and all things relating to it solely for a creditable purpose. (b) You have advised that the building costs you pay to the builder include GST. (c) You have advised that you are liable to provide, consideration for the goods and services provided by the builder; and (d) You are registered for GST. Accordingly you meet all the criteria for a creditable acquisition with the exception of "(a) you acquire anything solely or partly for a *creditable purpose" which is considered below. | Detailed Reasoning - GST-free or Input Taxed: As mentioned above, an acquisition will be a creditable acquisition if the supply you make with the acquisition is GST-free. A supply of residential accommodation is ordinarily input taxed, however if the supply is also GST-free, subsection 9-30(3) of the GST Act operates to treat the supply as GST-free. | Detailed Reasoning - Nominal consideration: Subsection 38-250(1) states that the supply will be GST-free if: (1) A supply is GST-free if (a) the supplier is an endorsed charity, a gift-deductible entity or a government school; and (b) the supply is for consideration that: (I) if the supply is a supply of accommodation - is less than 75% of the GST inclusive market value of the supply; or (ii) if the supply is not a supply of accommodation - is less than 50% of the GST inclusive market value of the supply. Our records show that you are an endorsed charity for GST purposes. | Detailed Reasoning - Benchmark Market Value: In applying subsection 38-250(1) of the GST Act to your case, we need to determine the market value of a supply of residential accommodation in a bedroom unit. Schedule C of Part 3 of the Charities Consultative Committee Resolved Issues Document (published on the ATO website) provides that certain charities making supplies of supported accommodation and community housing can use the benchmark market values published to work out the market value of the supplies. As you supply residential accommodation to particular individuals we consider that you can use the benchmark market values for the purposes of subsection 38-250(1) of the GST Act. You have advised that you will be charging rental per week which is less than 75% of the benchmark figure. Therefore the accommodation that you provide will be a GST-free supply. | Detailed Reasoning - Market Value Guidelines: It should be noted that where the rent you charge equals or is more than 75% of the benchmark market value, then you can determine the GST-inclusive market value of a supply of accommodation by following the market value guidelines. These guidelines are located in Part B of the 'Goods and Services Tax Industry Issue: Non-commercial activities of charities, cost of supply and market value tests' which is published on the ATO website. You have advised that you will charge rent less than 75% of the GST inclusive market value of the supply on the basis of a valuation provided by a local real estate agent. Therefore, your supply of the residential accommodation s will be GST-free under section 38-250 of the GST Act. For record keeping purposes you will need to maintain and retain records that adequately document the process and information collected in establishing the relevant market values. Please note : You will also need to monitor the use of the property and your pricing structure to ensure that your rents are less than 75% of the GST inclusive market value. | Detailed Reasoning - Change in Creditable Purpose: At the time of construction of the unit(s), you would generally determine whether the supply of accommodation is either GST-free or input taxed. However, at a later date, there may be a change in the extent to which you have applied the unit for a creditable purpose. i.e. it may no longer be GST-free or input taxed. Therefore, in any subsequent year, you need to consider whether or not there is a change in creditable purpose. Division 129 of the GST Act provides that, amongst other things, you may have an adjustment for an acquisition where there is a change in the extent of a creditable purpose. The adjustment is made in a tax period called an adjustment period. It only applies where there is a later event that causes the actual use of a thing acquired to be different from the intended use of it. Adjustments include increasing and decreasing adjustments. An increasing adjustment arises if the original input tax credit claimed was too much, whereas a decreasing adjustment occurs if the original input tax credit claimed was not enough. An adjustment period is a tax period in which an entity makes an adjustment under Division 129 of the GST Act. Adjustment periods generally occur once a year. The number of adjustment periods for a thing depends on its value and whether or not it relates to business finance. An adjustment period for an acquisition (or importation) is a tax period applying to an entity that: • starts at least 12 months after the end of the tax period to which an input tax credit for the acquisition is attributable and • ends on 30 June, or, if none of an entity's tax periods end on 30 June, the tax period which ends closer to the 30 June than any other tax period. The following example clarifies how an entity determines its first adjustment period: Farmco Ltd is registered and has quarterly tax periods. It acquires some machinery on 15 March 2001 for its agricultural business. The GST exclusive value of the machinery was $ 100,000. An input tax credit of $10,000 was attributable to the tax period ending 31 March 2001. Farmco's first adjustment period is the tax period 1 April to 30 June 2002. This is the first tax period that ends on the 30 June and starts at least 12 months after the end of the tax period to which the input tax credit for the acquisition is attributable. The adjustment periods for acquisitions that are a non-business acquisition are as follows: GST-exclusive value of the thing acquired or imported Adjustment periods $1,000 or less None $1,001 to $5,000 Two $5,001 to $499,999 Five $500,000 or more Ten Goods and Services Tax Rulings GSTR 2000/24 and GSTR 2006/4 explain, amongst other things, what the adjustment periods for an acquisition are and how to work out the amount of an adjustment for an acquisition in an adjustment period. These documents may be located on the Australian Taxation Office website. | Detailed Reasoning - In conclusion: On the basis of the facts, your supply of residential accommodation is GST-free under section 38-250 of the GST Act. Section 38-1 of the GST Act provides that: If a supply is GST-free, then: • no GST is payable on the supply; • an entitlement to an ITC for anything acquired or imported to make the supply is not affected. Therefore, you are entitled to ITCs for things acquired to make the GST-free supply of residential accommodation. In your case you are entitled to ITC on the costs for the construction of residential development.

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