Private ruling: Apportionment of input tax credits
Date of advice: 1 June 2018
Published: August 2018

Ruling: Q1: Is the proposed apportionment methodology a fair and reasonable method to determine the extent of creditable purpose of the entity’s acquisitions under section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 ? | A1: Yes. | Q2: Is the proposed apportionment methodology a fair and reasonable method to determine the extent of creditable purpose of the entity’s reduced credit acquisitions under subsection 70-20(2) of the A New Tax System (Goods and Services Tax) Act 1999 ? | A2: Yes.

Relevant facts and circumstances: The entity makes a range of taxable, GST-free and input taxed supplies. In the course of carrying on its enterprise, the entity makes various acquisitions. The entity has proposed a method to determine the extent of creditable purpose of its acquisitions.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 11-15. | A New Tax System (Goods and Services Tax) Act 1999 Division 70. | A New Tax System (Goods and Services Tax) Regulations 1999 regulation 70-5.02. | A New Tax System (Goods and Services Tax) Regulations 1999 regulation 70-5.02B.

Reasons for decision: Summary: Generally, section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an acquisition is not made for a creditable purpose to the extent that the acquisition ‘relates to making supplies that would be input taxed’. The phrase ‘extent of creditable purpose’ is defined in subsection 11-30(3) of the GST Act 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 its acquisitions would need to be made by the entity to determine the extent of creditable purpose. The Commissioner’s views on apportionment and the methods of calculating the extent of creditable purpose of an entity’s acquisitions or importations are outlined in Goods and Services Tax Ruling Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3). Paragraphs 33 and 73 of GSTR 2006/3 provide that the method chosen to allocate or apportion acquisitions between creditable and non-creditable purposes needs to satisfy the following requirements which are founded on the principles established in the High Court case of Ronpibon Tin NL v. FC of T. That is, the method: ● must be fair and reasonable; ● must reflect the intended use of the acquisition (or in the case of an adjustment, the actual use); and ● must be appropriately documented in your individual circumstances. Paragraph 89 of GSTR 2006/3 explains that a combination of different methods may be required to reasonably reflect the intended use of the acquisitions that an entity makes. The proposed apportionment method attempts to reflect the use of acquisitions and is therefore a fair and reasonable method to determine the extent of creditable purpose for all GST inclusive acquisitions to calculate the entitlement to input tax credits under Division 11 of the GST Act. As stated in paragraph 135 of GSTR 2006/3, ‘there is a degree of overlap in the apportionment method used for the purposes of Divisions 11 and 15, and the formula in section 70-20’ of the GST Act. Section 70-20 of the GST Act provides that the extent to which an acquisition which is only partly a reduced credit acquisition is made for a creditable purpose using the formula: extent of creditable purpose + [ extent of Division 70 creditable purpose x percentage credit reduction ] The same principles apply to a Division 70 extent of creditable purpose apportionment method which apply to a Division 11 apportionment method. The overriding principles are that the method: ● must be fair and reasonable; ● must reflect the intended use of the acquisition (or in the case of an adjustment, the actual use); and ● must be appropriately documented in your individual circumstances.