Private ruling: Goods and services tax apportionment method
Published: November 2012

Ruling: Q1: Is Entity A's revenue method apportionment (as set out in the facts) to determine the extent of creditable purpose (ECP) for general acquisitions considered fair and reasonable? | A1: Yes. Entity A's revenue method apportionment to determine the ECP for general acquisitions is considered fair and reasonable in accordance with the Commissioner's view 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).


Relevant legislative provisions: Section 11-5 of the GST Act | Section 11-15 of the GST Act | Section 11-20 of the GST Act

Reasons for decision: Summary: Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) deals with entitlement to input tax credits. Section 11-20 provides that an entitlement to an input tax credit arises for any creditable acquisition made by an entity. The term creditable acquisition is defined by section 11-5 which states: You make a creditable acquisition if: a) you acquire anything solely or partly for a *creditable purpose; and b) the supply to it is a *taxable supply; and c) you provide, or is liable to provide, *consideration for the supply; and d) you are *registered or *required to be registered. * denotes a term defined in section 195-1. Relevantly, a creditable acquisition is one which is acquired solely or partly for a creditable purpose. Section 11-15 of the GST Act states: 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. Accordingly, Entity A acquires a thing for a creditable purpose to the extent that it acquires the thing in carrying on its enterprise. In this case Entity A has exceeded the financial acquisitions threshold provided for in subsection 11-15(4) of the GST Act and therefore it does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. Based on the facts, Entity A's enterprise involves it making a combination of: · financial supplies that are input taxed; · GST-free supplies; and · taxable supplies. Where acquisitions made by Entity A are used or intended to be used only for a creditable purpose, such acquisitions are fully creditable and do not require apportionment. Based on the facts Entity A has adopted such an approach in the apportionment methodology. Similarly, where acquisitions made by Entity A are used or intended to be used only for a non-creditable purpose, these acquisitions are not fully creditable and Entity A does not claim input tax credits in relation to these acquisitions, except to the extent that a reduced input tax credit is available, or to the extent the that the 'borrowing exception' under 11-15(5) of the GST Act applies. However, there are acquisitions made by Entity A that are both for a creditable purpose (that is, for making GST-free or taxable supplies) and an input taxed purpose (that is, making financial supplies). Accordingly, these acquisitions are partly creditable . In respect of such acquisitions, the amount of input tax credits to which Entity A is entitled depends upon the extent of creditable purpose as provided for in section 11-30 of the GST Act. The phrase extent of creditable purpose is defined in subsection 11-30(3) to mean the extent to which the creditable acquisition is for a creditable purpose, expressed as a percentage of the total purpose of the acquisition. On this basis an apportionment of these acquisitions would need to be made by Entity A to determine their extent of creditable purpose. 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) outlines the Commissioner's views on apportionment and the methods of calculating the extent of creditable purpose of an entity's acquisitions or importations. Paragraphs 33 and 73 of GSTR 2006/3 make it clear that the method chosen to allocate or apportion acquisitions between creditable and non-creditable purpose needs to: · be fair and reasonable; · reflect the intended use of the acquisition (or in the case of an adjustment, the actual use); and · be appropriately documented in your individual circumstances. Accordingly, the apportionment method adopted must be fair and reasonable in the circumstances of Entity A's enterprise and must appropriately reflect the intended or actual use of its acquisitions or importations. Paragraphs 81 and 103 of GSTR 2006/3 explore the Commissioner's view on direct and indirect methods of estimation and circumstances where these methods may be considered appropriate: 81. The Commissioner considers that the use of direct methods, including direct estimation best accords with the basic principles explained above. If it is not possible or practicable to use a direct method, you may use some other fair and reasonable basis, including an indirect estimation method. 103. Indirect estimation methods may be appropriate in circumstances where there are overhead expenses that are not directly referable to particular supplies or activities. They may also be appropriate if the direct methods do not apportion acquisitions or importations to the level of supplies, or groups of supplies, that require different treatment for GST purposes. It may also be the case that the direct attribution of a large number of small acquisitions or importations is not cost effective. In all cases where indirect methods are used, the method chosen should be fair and reasonable in the context of your enterprise. Further paragraph 105 to 107 of GSTR 2006/3 considers the use by an entity of an entity based general formula. These paragraphs state: 105. The entity-based general formula provides an estimate of the use (or intended use) of acquisitions or importations based on the proportion of revenues from non-input taxed activities of the enterprise, expressed as a percentage of total revenues of the enterprise. A decision taken to use this method should be based on a fair and reasonable expectation that the use of acquisitions or importations will be accurately reflected in the revenue flows (input taxed and non-input taxed) of the overall enterprise (or GST group). The formula to be used is that expressed in the revenue-based formulas section below, using entity-wide revenue figures. 106. A fundamental issue to be addressed prior to adopting this method is whether the use of the formula is fair and reasonable, based on the information available to you. 107. As the entity-based general formula uses the entity-wide (or GST group-wide) revenue flows as the basis for apportionment, it may be especially suitable for use by a smaller financial institution such as a credit union. Such an institution may have little or no access to methods of direct estimation as discussed above. The method might also be appropriately used by financial supply providers other than financial institutions, who may need to apportion overheads (sometimes referred to as enterprise costs) to the limited number of financial supplies (or classes of supplies) that they make. | Detailed Reasoning - Application of the GST Law to Entity A's circumstances: Consistent with the above paragraphs the Commissioner will accept any basis of apportionment of acquisitions which are applied indifferently to all supplies made, provided it is fair and reasonable in the individual circumstances. In this case, Entity A proposes to use a revenue based formula as its indirect estimation method. This formula identifies the revenue from supplies Entity A makes as part of its business activities as the basis for calculating the extent of creditable purpose. We consider that the theoretical aspect of Entity A's GST apportionment method is fair and reasonable, and reflects the intended use of the acquisitions in their circumstances. Therefore, provided the practical application does not result in a distortive outcome, we consider the method used by Entity A falls within the ambit of being fair and reasonable in accordance with GSTR 2006/3. Our acceptance of the apportionment methodology is based on the facts presented to us. However, if those circumstances change, Entity A may be required to review this methodology to determine if it remains fair and reasonable and accurately reflects the intended use of its acquisitions.

Relevant facts: Entity A makes supplies that are taxable supplies, GST-free supplies and input taxed supplies to its customers (members). | Whilst all products and services are provided for consideration, certain products supplied by Entity A do have features that are provided for no specified charge. | As part of a commercial decision making process the pricing model used by Entity A takes into consideration 'fee free' products. | The revenue received from taxable supplies provided by Entity A does not cross-subsidise 'fee free' features provided to members on input taxed products or services. | Entity A is registered for GST and at all times has exceeded the Financial Acquisition Threshold (FAT). | Entity A makes acquisitions that relate to both input taxed financial supplies and taxable (and GST-free) supplies and as such it is required to develop a suitable apportionment methodology to determine its ECP. | Entity A has historically used an entity based general revenue formula apportionment method (revenue method) to determine its ECP for general acquisitions. | Where Entity A makes an acquisition that relates solely to making input taxed supplies, the acquisition is not made for a creditable purpose and Entity A will apply an ECP of 0%, except to the extent that a reduced input tax credit of 75% is available or to the extent that the 'borrowing exception' applies from 1 July 2012. | Where Entity A makes an acquisition that solely relates to making taxable (and GST-free) supplies, the acquisition is made for a creditable purpose and Entity A will apply an ECP of 100%. | For all general acquisition that relate to supplies that are both input taxed and taxable (GST-free) supplies, Entity A is proposing to use the following revenue based formula: | . $ Value of taxable and GST-free supplies X 100 | $ Value of total Supplies (including input taxed) | The revenue based formula used by Entity A: | · does not include dividends from subsidiaries and asset sales; | · uses a $ value of input taxed supplies which is on an entity wide 'net interest' basis. | This private ruling does not address Entity A's entitlement to any reduced input tax credits, or the application of paragraph 11-15(5)(a) of the GST Act to Entity's circumstances. In addition it has not sought to determine whether Entity A has correctly classified the revenue category of the supplies made as input taxed, GST-free and taxable. | This ruling is limited to determining whether the proposed revenue method set out above is fair and reasonable according to the principles outlined in GSTR 2006/3.