Private ruling: Apportionment
Date of advice: 20 October 2016
Published: February 2017

Ruling: Q1: Is Entity A's apportionment methodology 'fair and reasonable' for determining the extent of its entitlement to input tax credits under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ? Summary Yes, based on Entity A's overall circumstances the Commissioner considers that the proposed apportionment methodology is fair and reasonable.

Relevant facts and circumstances: Entity A is an Australian company registered for goods and services tax (GST) to account on an accruals (non-cash) basis and lodge quarterly activity statements. Entity A is listed on the Australian Stock Exchange (ASX). In the course of its enterprise, Entity A invests in securities listed on foreign stock exchanges. Entity A provides Australian residents an investment vehicle through which they can gain access to world equity markets. Entity A makes supplies that are input taxed, supplies that are GST-free and supplies that are outside of the scope of GST. Entity A does not make taxable supplies. Entity A's portfolio is in direct equity holdings in offshore entities. These holdings consist of securities in an entity listed on a foreign stock exchange. Entity A has developed an apportionment methodology that better reflects its entitlement to ITCs. Entity A considered a number of alternate bases in developing its apportionment methodology but determined that these alternate bases were unsuitable to its enterprise. Entity A considers the proposed methodology provides a fair and reasonable basis upon which to allocate the expenses it incurs to its activities and therefore the methodology should be acceptable to the Commissioner as being appropriate to Entity A's circumstances.

Relevant legislative provisions: Division 11 of the GST Act. | Section 11-15 of the GST Act. | Subsection 11-30(3) of the GST Act.

Reasons for decision: Summary: You acquire a thing for a creditable purpose to the extent that you acquire the thing 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 input taxed supplies. Entity A make financial supplies that are input taxed as well as GST-free supplies and supplies that are outside the scope of GST. Entity A does not make taxable supplies. Where you incur GST on acquisitions that directly relate to the making of input taxed financial supplies, you will not be entitled to full ITCs. However, where you incur GST on acquisitions directly relating to the making of GST-free supplies or supplies that are outside the scope of GST, full ITCs may be claimed. The use of the words 'to the extent' within the definition of 'creditable purpose', as outlined in section 11-15 requires an entity to apportion its acquisitions where those acquisitions relate to both input taxed supplies and supplies that are not input taxed. This is also reflected in the formula contained in subsection 11-30(3) which relates to acquisitions that are partly creditable. The Commissioner's views on apportionment and the methods for calculating the extent of creditable purpose (ECP) are outlined in Goods and Services Tax Ruling GSTR 2006/3: Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3). In developing the proposed apportionment methodology Entity A considered a number of alternate bases for calculating your ECP: However, Entity A identified issues with each of these bases which it concluded made them unsuitable given the nature of the activities Entity A undertakes in its business. In choosing a fair and reasonable method, we consider these questions and factors are important ● Is the information accurate and complete? ● Is the information likely to change in the near future? ● Can you fully explain your business activities and consumption of acquisitions and resources? Have you documented this? ● Have you accurately determined the classification of supplies? ● Are there any distorting elements in the methodology? ● Do you apply the method consistently? ● Did you use assumptions in the methodology and can they be supported? Do they continue to be relevant over time? ● Is the method overly complex and burdensome and does it cause unnecessary compliance costs? ● Is the method sufficiently sophisticated and appropriate to the nature, size, complexity and resourcing of your business? ● Is the outcome consistent with your documented understanding of the business activities and relationship or connection between acquisitions and supplies made? Without addressing each factor specifically, Entity A has demonstrated that it has completed an analysis and comparison between each of the methodologies considered. While Entity A has not provided ECP outcomes for the unsuitable methodologies we accept Entity A's explanation that they may not be suitable in respect of the activities Entity A carries out in its enterprise. The methodology Entity A has developed will save on compliance costs because it derives the information from its financial statements for each year and therefore will not involve Entity A carrying out additional work to identify the necessary expenses to be included in the formula. The methodology Entity A proposes does not require the adoption of any major assumptions and there appears to be no distortive factors impacting the outcome. The decision that Entity A's methodology is considered to be fair and reasonable is based on the information provided and the circumstances applicable at the time of issuing this private ruling. If these circumstances change, Entity A may be required to review the methodology to determine if it remains fair and reasonable.