Private ruling: GST and change in creditable purpose
Published: December 2013

Ruling: Q1: How much of the previously claimed input tax credits (ITCs) claimed on building costs are you required to repay? | A1: Apportioned (for the house currently being leased only). Refer to Reasons for decision below. | Q2: How is the repayment made? | A2: Repayment is made through an increasing adjustment under Div 129 in your Business Activity Statement (BAS). Refer to Reasons for decision below. | Q3: Are all ongoing costs charged to us by the agent e.g. repairs, phone connection, agent fees, etc. also input-taxed? | A3: Yes. The costs are now associated with making an input taxed supply of leased residential premises and are not for a creditable purpose.

Relevant facts and circumstances: · You are a not-for-profit entity and an endorsed charitable institution entitled to goods and services tax (GST) concessions. · You are registered for GST and account for GST on a quarterly basis. · During 2012/13 you demolished an old building and constructed X courtyard homes, one of which you retained as accommodation as part of an employment package. · The second house was to be sold to raise capital for some redevelopment of your property. However on completion of the house, it was decided not to sell immediately, so that further consideration could be given to how to best manage any proposed new development. Subsequently you have contracted a short term rental agreement at market value, managed by an agent. · You have received a previous Private Binding Ruling (PBR) from the Australian Taxation Office (ATO) in which, amongst other things, you were advised that if you made a change in usage of the house you would be required to make an adjustment to the amount of GST credits claimed during the building process. · Your intention is that the house will be sold at after the 12 month rental lease expires, as capital will be required for whatever future development is decided upon. · You have provided a table showing building costs and GST claims.

Relevant legislative provisions: All references are to the A New Tax System (Goods and Services Tax) Act 1999 : Section 9-5 | Section 9-15 | Section 9-20 | Section 11-5 | Section 11-15(1) | Section 11-15(2) | Section 38-250. | Section 129-5 | Section 195-1

Reasons for decision: Summary: The leasing of the house is input taxed under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 GST Act. As you have changed the intended use of the house (from sale to lease, taxable to input taxed) the ITCs previously claimed (for this house only) will be adjusted (reduced) to reflect the intended use of the premises changed. An increasing adjustment needs to be remitted to the Australian Taxation Office (ATO)... | Detailed Reasoning - Detailed reasoning: After an acquisition or importation is made, the extent to which it is actually applied or used for a creditable purpose may be different from the planned use. This means that the original input tax credit claimed may have been too much or not enough. Adjustments for such changes in the extent of creditable purpose are subject to the provisions of Division 129 of the GST Act. Subsection 129-50(1) of the GST Act provides that an entity applies a thing for a creditable purpose to the extent that the entity applies it in carrying on its enterprise. However, subsection 129-50(2) provides that an entity does not apply a thing for a creditable purpose to the extent that the application relates to making supplies that are input taxed or the application is of a private or domestic nature. In this case you made acquisitions relating to the construction of the house where it was your planned intention to make a taxable supply of new residential premises (sell). The actual use or application of those acquisitions has changed whereby those acquisitions are now being used to make an input taxed supply of residential premises (lease). | Detailed Reasoning - Dual planned use: The creditable purpose test in determining the input tax claim focuses on an entity's intended use of the acquisition. In other words, it is an entity's planned use for the acquisition that is relevant for claiming input tax credits under Division 11. Your planned use of the house was to make a taxable supply of new residential premises. In accordance with this planned use, you claimed input tax credits on the acquisitions associated with its construction. However, the purpose for which the house was held changed from that of making a taxable supply, to a dual application of making a taxable supply of new residential premises and of making an input taxed supply of leased residential premises. This change occurred some time in 2013. You made acquisitions for a dual application for the construction of the two residential premises and are entitled under Division 11 of the GST Act to claim a proportion of the ITCs. By now supplying one of the houses by way of lease with the intention of sale you have a change in planned use of the acquisitions and intention to sell. As the extent of creditable purpose has now changed, you may have an adjustment pursuant to Division 129 of the GST Act. GSTR 2009/4 provides guidance on how to determine the extent to which an acquisition made in constructing new residential premises is applied for a creditable purpose where the new residential premises are being held for sale as part of an entity's enterprise, but prior to their sale the new residential premises are leased for a period of time. (a copy is enclosed) | Detailed Reasoning - Apportionment: As only one of the residential premises has changed its application, we need to work out the ITC adjustment for the leased premises. Where the ITC claimed was made for acquisitions that applied to both premises, the Commissioner requires that any apportionment method be fair and reasonable. The general principles of apportionment are provided in a number of Tax Office publications, particularly GSTR 2006/4 and 2009/4. Paragraph 25 of GSTR 2006/4 states that to correctly calculate the amount of your input tax credit entitlement on creditable acquisitions or creditable importations that you make, you need to determine the extent of your creditable purpose for those acquisitions and importations. 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. An entity may choose its own apportionment method, but the method it chooses needs to be fair and reasonable in the circumstances of the entity. It needs to appropriately reflect the intended or actual use of the acquisitions or importations (Paragraph 34 GSTR 2006/4). Paragraph 35 of GSTR 2006/4 explains: Apportionment methods explained in the Ruling can be broadly categorised as direct or indirect methods. Where a direct method is available to you, the Commissioner's view is that such a method would best reflect the intended or actual use of your acquisitions. However, you are not required to use direct and indirect methods in the manner set out in this Ruling, provided that whatever alternative method you use is fair and reasonable having regard to the principles in paragraph 34 of this Ruling (see paragraphs 101 to 107 of this Ruling). Where items of acquisitions are not referable to a particular object, then apportionment is required using a method which results in a fair and reasonable allocation. The apportionment method you choose needs to be: · 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. If it is not possible or practicable to use a direct method, you could use some other fair and reasonable basis. In some cases, a combination of different methods might be required for the various acquisitions. In your case you have advised that you have claimed ITCs for the leased residential premises and for the Minister's premises. We accept that where the apportionment follows the guidelines above, it is a fair and reasonable apportionment. What needs to be considered now is how to adjust the ITCs claimed for the leased premises considering the change in creditable purpose. GSTR 2009/4 provides that where a house remains unsold at the end of the relevant adjustment period, an estimated consideration amount for the taxable supply of the premises is to be used in the formula above with paragraph 90 containing examples of references which may be used in such estimations. 82. In circumstances where an entity constructs new residential premises for sale but they are subsequently leased, it is necessary to consider the different applications of the premises up to the end of the relevant adjustment period. 83. If the premises have been applied in relation to the creditable purpose of sale and the non-creditable purpose of making input taxed supplies during the relevant period and the premises have been sold prior to the end of the relevant adjustment period, one reasonable method of apportionment is an output based indirect method. This method is based on the consideration received or liable to be received in respect of any taxable supply as compared to any input taxed supply. Thus, the extent to which new residential premises were applied for a creditable purpose under Division 129 can be determined by the following formula: | Detailed Reasoning - Consideration for the taxable supply of the premises: Consideration for the taxable supply of the premises plus consideration for the input taxed supplies of residential premises by way of lease Example 10 - output based indirect method after the premises have been sold 84. Jane is registered for GST and constructed new residential premises for sale and was entitled to full input tax credits on her acquisitions. However, because the market for new premises was slow Jane leased the premises for six months before the premises were finally sold. Jane received $15,000 in rent over the six months. The premises were sold for $500,000. There had been no private or domestic use of the premises. 85. At the end of the next adjustment period following the sale, Jane calculates the extent of creditable purpose using the formula above as follows: $500,000 $500,000 + $15,000= 97.09% 89. The output based indirect method using estimated sales consideration will also be an appropriate basis of apportionment when there has been a dual concurrent application of the premises to the creditable purpose of sale as well as the non-creditable purpose of making input taxed supplies for the entirety of the relevant period. 90. An entity should determine the estimated sales consideration for the purposes of the formula by reference to objective evidence. In particular, the sales consideration could be estimated by using evidence such as: · comparative sales price analyses prepared by real estate agents when listing the premises for sale; · market valuations prepared for finance or other purposes; and · in the case of stratum unit developments, recent sales of other units in the development. 91. The estimated sales consideration should be assessed for each relevant adjustment period. For instance, at the first adjustment period an entity may determine that the estimated sales consideration for a property is $600,000. If the premises remain unsold at the end of the second adjustment period, but are still being held for the purpose of sale, the entity will need to reassess the estimated sales consideration. The available objective evidence may suggest that the estimated sales consideration is now only $580,000. In such a case, the entity should use $580,000 in the formula to determine the apportionment between creditable and non-creditable purposes for the second adjustment period In summary, you need to follow the steps below: · work out the ITC claimed for the leased property (this will involve some apportionment where an acquisition(s) may be applied to both premises). · Work out the extent of creditable purpose using the formula above., and the adjustment amount · Revise you BAS at the adjustment period (explain below). | Summary: Under Division 129 of the GST Act, you are required to monitor the extent to which your acquisition continues to be applied to a creditable purpose. Where there is a change in the extent to which you have applied a thing to a creditable purpose, you may be required to make an adjustment in your BAS. | Detailed Reasoning - Detailed reasoning: Division 129 provides for adjustments, for changes in extent in creditable purpose, in tax periods that are adjustment periods. An adjustment period is generally defined as the last tax period ending on 30 June of each year following acquisition, with the first being at least 12 months after acquisition. [subsection 129-20(1).] The number of adjustment periods that relate to the thing are determined by the GST-exclusive value of the acquisition. The number of adjustment periods for acquisitions (that do not relate to business finance) are set out in the table below: GST-exclusive value of the acquisition Adjustment periods $5,000 or less two $5,000 to $499.999 five $500,000 or more ten In your case the value of the acquisitions for the leased premises is between $5,000 to $499.999 and based on the table above this would mean that you have 5 adjustment periods. Your first acquisition for these premises occurred in December 20YY which would mean that your first adjustment period would occur in the June 2013 BAS. You may amend the June 2013 BAS to account for the over claimed ITCs. | Summary: You are making not making a creditable acquisition of goods and services associated with the input taxed supply of residential premises and are therefore not entitled to the ITCs. | Detailed Reasoning - Detailed reasoning: Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make. You make a creditable acquisition · if you acquire anything solely or partly for a creditable purpose · the supply of the thing to you is a taxable supply · you provide, or are liable to provide, consideration for the supply and · you are registered, or required to be registered, for GST. In your case you provide consideration for the goods and services and you are registered for GST. Therefore you will be making a creditable acquisition if the supply of the goods and services to you is a taxable supply and you are acquiring the goods and services for a creditable purpose. Relevantly, a creditable acquisition is one which is acquired solely or partly for a creditable purpose. Subsections 11-15(1) and (2) provides: (1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. (2) 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. In your case the ongoing costs charged to you by the real estate agent e.g. repairs, phone connection, agent fees, etc are provided for the input taxed supply of residential premises and therefore are not for a creditable purpose. Accordingly you cannot claim ITCs for these costs.