Private ruling: GST and methodology for determining creditable acquisitions
Published: December 2011

Ruling: Q1: Is the proposed GST apportionment methodology for determining the extent to which acquisitions are creditable acquisitions for the purposes of Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) considered fair and reasonable with respect to the acquisitions made under the program? | A1: The proposed GST apportionment methodology is considered fair and reasonable.

Relevant facts and circumstances: The Government (Govt) through its Department is administering the program. Under the program, various partners have been appointed as a result of a tender process to undertake various works. The Govt is aware that: § Not all acquisitions made under the program are creditable acquisitions. § Where the acquisitions have both a creditable and non-creditable purposes, the input tax credits will need to be apportioned using a method which is fair and reasonable. The Govt has not yet claimed any input tax credits with respect to acquisitions made under the program. As it stands: Acquisitions made under the program would be considered to be made for a creditable purpose to the extent that they relate to infrastructure works. Accordingly, these acquisitions will be fully creditable and there is no need for the Govt to apportion input tax credits. Acquisitions made under the program will not be creditable acquisitions to the extent that they relate to the other works. Accordingly, the Govt is not entitled to any input tax credits with respect to such acquisitions and there is no need to apportion input tax credits. Where the acquisitions relate in part to both the other works and infrastructure works, the Govt will need to apportion the input tax credits. You propose the following methodology for the apportionment required. The Govt will use direct attribution to the maximum extent that is possible in order to determine the extent to which those acquisitions would be considered to have been acquired for a creditable purpose. This determination process would involve a detailed analysis of the program's internal accounting systems, relevant tax invoices, and the underlying costing data supplied by the partners in order to ascertain the acquisitions which relate to infrastructure works, and are therefore considered creditable acquisitions, and the other works, which are not considered creditable acquisitions. It is considered that the creditable / non-creditable purpose for a majority of the acquisitions can be determined using direct attribution. As for the remaining inputs, there is some expenditure in relation to the program which cannot be directly attributed either to infrastructure works or the other works (Remaining Inputs). This includes: § Indirect program expenses: This expenditure consists of administrative costs and operational expenses incurred by the Govt with respect to the program. o The A Program indirect expenses: This expenditure consists of expenses paid by the partners in accordance with the Agreement which are then oncharged to the Govt by the partners. For the inputs that require apportionment, a direct measure of the use of the acquisition based on inherent characteristics of, or factors directly connected with the acquisition will not be possible or practicable. Therefore, the following is proposed: 1. Indirect program expenses The proportion of allocated inputs would be calculated as the proportion of total inputs to inputs used in making supplies. This would then be used to establish the extent of creditable purpose in respect of the remaining inputs (Overall GST Apportionment Percentage). That is: Extent of creditable purpose = (Total acquisitions used in making taxable supplies / Total acquisitions used in making taxable and input taxed supplies) That is: (Directly attributable infrastructure works costs / Total directly attributable infrastructure works and the other works costs) It is proposed that the Overall GST Apportionment Percentage would be calculated separately for each relevant tax period in order to provide a fair and reasonable reflection of the planned use of these Remaining Inputs for each tax period. 2. The A Program indirect expenses As this expenditure relates to specific activities carried out by the partners, the nature of which may vary across the work done, a separate calculation to determine the extent of creditable purpose will be performed for each strand of work for each relevant tax period. This would more accurately reflect the planned use of these Remaining Inputs for each tax period. This calculation is: (Directly attributable Infrastructure Works costs for package / Directly attributable infrastructure works and the other works costs for package) You propose that where the package does not have any infrastructure works costs or other works costs for any of the relevant tax periods, then the Overall GST Apportionment Percentage is used to calculate the extent of creditable purpose in such instances.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 11-20 | A New Tax System (Goods and Services Tax) Act 1999 section 11-25

Reasons for decision: Summary: The proposed GST apportionment methodology for determining the extent to which acquisitions are creditable acquisitions for the purposes of Division 11 of the GST Act is considered fair and reasonable with respect to the acquisitions made under the program. | 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 you make. Section 11-25 of the GST Act provides that the amount of the input tax credit is reduced if the acquisition is only partly creditable. You have established that some of the indirect program expenses and the A Program indirect expenses are incurred for only partly creditable acquisitions. Where a direct measure of determining the extent of creditable purpose of an acquisition is impractical, the Commissioner allows indirect measures to be used. Of relevance to your proposal is the Commissioner's approach to the use of input based indirect measures. Input based indirect methods employ a measure based on the already established use of some inputs (directly allocated inputs) to estimate the use of other inputs not able to be allocated in this way (remaining inputs). These methods are only useful where a direct method has already been used in respect of a majority of acquisitions or importations, so as to provide a reliable basis for their use in calculating the creditable use of the remaining inputs. The proportion of directly allocated inputs would be calculated as the proportion of total inputs to inputs used in making supplies other than input taxed supplies. This could then be used to establish the extent of creditable purpose in respect of the remaining inputs. This method will provide the most accurate results where the percentage of remaining inputs does not exceed the proportion of directly allocated inputs. Some examples of input based indirect methods are: (i) the cost of acquisitions directly allocated to supplies that are not input taxed relative to the total costs of all acquisitions directly allocated; or (ii) input tax credits directly allocated to acquisitions used to make supplies that are not input taxed relative to total directly allocated input tax. The methodology that you propose for apportionment is an input based indirect method by which you seek to apportion the indeterminate component of creditable purpose in the same proportion as that already known through direct attribution. This method is considered fair and reasonable.

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