GST issues registers

Primary production industry partnership

14 Non business use

14.1 Apportionment

14.1.1 - Correct basis for apportionment of expenses

Question

What is the correct basis for apportionment of expenses such as electricity and insurance?

Non-interpretative - other references (see - Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose).

Answer

It may be the case that the apportionment method used to establish the 'private or domestic ' component of expenditure for income tax purposes will also be a fair and reasonable basis for apportioning input tax credits. For example, there are a range of methods commonly used to establish the 'business usage' of premises for income tax purposes that would usually satisfy the requirement to apportion input tax credits on a fair and reasonable basis.

Explanation

General principles of apportionment

The phrase 'to the extent' which appears in sections 11-15 and 15-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is also found in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and section 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Under the income tax law, that phrase has been found to require an apportionment to be made in order to determine what part of a loss or outgoing is deductible. The Commissioner views the phrase 'to the extent' in the GST Act as incorporating the same apportionment concepts relevant to income tax (see GSTR 2006/4 paragraphs 36 and 50).

In addition, the Commissioner views the words 'private and domestic' as having essentially the same meaning as in the ITAA 1936 and ITAA 1997 (see GSTR 2006/4 paragraph 79).

The principle established by the High Court in Ronpibon Tin NL v FCT (1949) 78 CLR 47 is to apportion on the basis of information regarding the actual application of the expenditure where it is possible to do so. If there are various expenses devoted to different purposes, an apportionment must be made on the basis of those purposes. On the other hand, if an expenditure is dedicated to different purposes an apportionment needs to be made on a 'fair and reasonable basis' - it is the latter that would seem to be appropriate for premises that are used for both business and private purposes (see GSTR 2006/4 paragraphs 99-100).

Methods of apportioning input tax credits

The most appropriate method will depend on the circumstances of each case.

GSTR 2006/4 provides the following guidance:

Methods can either be direct or indirect (paragraphs 104 - 120 GSTR 2006/4).

Direct methods

Direct methods are preferred because they give the most accurate measure of creditable purpose.

These methods use variables that are directly connected with the acquisition, for example, floor area used by the business. The relevant use is expressed as a percentage of the total use.

Example

Toby owns a small store selling posters, etc. The premises from which he runs the business also includes a flat where Toby lives. The total area of the premises is 60 square metres, with 40 square metres relating to the flat and 20 square metres relating to the shop. Toby incurs the following expenditure in relation to the premises (prices include GST):

Electricity	$450
Insurance (covering entire premises)	$330

Toby must apportion the input tax credits on those expenses that relate to both the shop and the flat as he cannot claim input tax credits for acquisitions of a private or domestic nature.

Electricity - this is a variable expense and floor area would not be an appropriate means by which to apportion as it bears no relation to the amount of energy actually used. Toby could use the number of hours worked in the shop to estimate the amount of electricity related to business usage. Based on business hours and the nature of appliances used, if Toby reasonably estimates that 40% of the electricity costs are attributable to his business activities, the calculation would be as follows:

$450 × 1/11 × 40% = $16.36


Insurance - this is a fixed occupation expense. A floor area basis would be appropriate to apportion this expense as it reasonably reflects the portion of the insurance cost relating to the shop area. The calculation would be as follows:

$330 ×1/11 × 20/60 = $10.00.


Indirect methods

An attempt is made to estimate the usage of acquisitions for creditable purposes. Variables that are not directly identifiable with the use of the particular acquisition are used. Although an accurate measure of the creditable use may not be known, these methods may provide a reasonable basis for the purpose of apportioning input tax credits.

There are two types of indirect methods, both of which work on the assumption that measures of input and output are an adequate estimate of the use of mixed use inputs for the making of various supplies:

•

Input based methods

•

Output based methods

For further details about methods of apportioning input tax credits, please refer to GSTR 2006/4 - Goods and Services Tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose.

Record keeping requirements

Records that relate to the calculation and apportionment of input tax credits must be kept. These must explain all relevant transactions and must be retained for at least 5 years after the completion of the transactions to which they relate (section 382-5 of Schedule 1 to the Taxation Administration Act 1953).

The Legislation

Relevant GST provisions: Division 11 of the GST Act.

Section 11-20 of the GST Act provides:

You are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act provides:

You make a creditable acquisition if:

(a)

you acquire anything solely or partly for a creditable purpose; and

(b)

......

(c)

......

(d)

......

Section 11-15 of the GST Act 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.

Section 11-30 of the GST Act provides:

(1)

An acquisition that you make is partly creditable if it is a creditable acquisition to which one or both of the following apply:

(a)

you make the acquisition only partly for a creditable purpose;

(b)

you provide, or are liable to provide, only part of the consideration for the acquisition.

(2)

Repealed

(3)

The amount of the input tax credit on an acquisition that you make that is partly creditable is as follows:

Full input tax credit × Extent of creditable purpose × Extent of consideration


(4)

.......

(5)

The Commissioner may determine, in writing, one or more ways in which to work out, for the purpose of subsection (3), the extent to which a creditable acquisition is for a creditable purpose.

14.2 Reimbursement

14.2.1 - Employee reimbursement on an annual basis

Question

Is an entity registered for GST entitled to claim an input tax credit for motor vehicle expenses that are incurred by way of reimbursement to an employee, where the reimbursement is calculated on a cents per kilometre basis?

Non-interpretative - other references (see GSTB 2000/2 - How to claim input tax credits for car expenses).

Answer

No

Explanation

Division 111 of the A New Tax System (Goods and Services Tax) Act 1999 allows you to claim input tax credits when you reimburse your employees, agents, officers or partners for any expenses they incur in connection with you carrying on your enterprise.

However, a reimbursement must be for an actual expense. Thus, if you undertake to pay a proportion of your employee's vouched car insurance expenses and all of the petrol dockets he produces, you may be entitled to claim an input tax credit. If you pay a car allowance to an employee that is not based on actual expenditure, even if it is calculated on actual mileage, this is not a reimbursement and no input tax credit can be claimed.

For further details please refer to GST Bulletin.

14.2.2 - Non-profit organisations claiming input tax credits

Question

How can a non-profit organisation, that is not an endorsed charity, a gift deductible entity or a government school claim input tax credits for reimbursing volunteers?

For the source of the ATO view, refer to the Charities Consultative Committee Resolved Issues.

Answer

Reimbursements to an organisation's employees, agents, partners and officers are not creditable acquisitions under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (the 'Act'), unless the relevant person is acting as an agent in making the acquisition. The organisation would therefore not be entitled to an input tax credit for such reimbursements.

In some situations the organisation may reimburse the expenses of a person that were not incurred by the person whilst acting as an agent. For example, if the person acting as agent acquires something for the organisation, that acquisition is effectively made by the organisation, and could therefore be a creditable acquisition.

However, if the person, on his or her own behalf, incurs, for example, petrol expenses, in making that acquisition, and the organisation reimburses him or her for those expenses, the organisation has not made an acquisition. The organisation would therefore not be entitled to an input tax credit in relation to such a reimbursement.

Division 111 of the Act covers an organisation's entitlement to claim input tax credits where it reimburses an employee, agent, officer, partner or volunteer of a charity for expenses they incur in connection with carrying on the organisation's enterprise.

Charitable institutions

Where an endorsed charity, a gift-deductible entity or a government school reimburses an individual for an expense he or she incurs that is directly related to their activities as a volunteer of that organisation, the organisation will be entitled to claim the input tax credits on these acquisitions.

To enable the organisation to claim the input tax credit, the volunteer will need to provide the organisation with the tax invoice for the acquisition they have made.

Organisations that are not charitable institutions

Where volunteers of organisations that are not endorsed charities, gift-deductible entities or government schools are reimbursed for expenses they incur in carrying out their activities as volunteers, the organisation will have no entitlement to claim the input tax credits. This will affect organisations such as sporting clubs and other non-profit organisations.

A non-profit organisation is entitled to an input tax credit where it makes a creditable acquisition. For example, an organisation may make a creditable acquisition where it purchases uniforms and provides the uniforms to its volunteers. However, the non-profit organisation would not be entitled to an input tax credit where it reimbursed the volunteer for cost of the uniform.

Note that if the organisation acquires something through an agent who was acting on its behalf in making the acquisition, the organisation is making that acquisition. The consideration an organisation pays through the agent for that acquisition is covered by the general rules about creditable acquisitions, not by Division 111.

For further information on the reimbursement of employees and volunteers and other related matters of The New Tax System is available in Part 9 of the Charities consultative committee resolved issues document.

14.3 Personal use

14.3.1 - Apportionment of Bulk Fuel Costs

Question

How does a farmer account for GST paid on bulk fuel if the fuel is used by more than one vehicle for both business and personal use?

Non-interpretative - other references (see - Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose)

Answer

It may be the case that the apportionment method used to establish the 'private or domestic' component of expenditure for income tax purposes will also be a fair and reasonable basis for apportioning input tax credits. For example, there are a range of methods commonly used to establish the 'business usage' of a vehicle for income tax purposes that would usually satisfy the requirement to apportion input tax credits on a fair and reasonable basis.

Explanation

General principles of apportionment

The phrase 'to the extent' which appears in subsection 11-15(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is also found in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Under the income tax law, that phrase has been found to require an apportionment to be made in order to determine what part of a loss or outgoing is deductible. The Commissioner views the phrase 'to the extent' in the GST Act as incorporating the same apportionment concepts relevant to income tax law (see GSTR 2006/4 paragraph 50).

In addition, the Commissioner views the words 'private or domestic nature' as having essentially the same meaning as in the ITAA 1936 and ITAA 1997, unless some specific provision of the GST Act indicates a contrary outcome in a particular case (see GSTR 2006/4 paragraph 79-81).

The principle established by the High Court in Ronpibon Tin NL v FCT (1949) 78 CLR 47 is to apportion on the basis of information regarding the actual application of the expenditure where it is possible to do so. If there are various expenses devoted to different purposes, then an apportionment must be made on the basis of those purposes. On the other hand, if an expenditure is dedicated to different purposes then an apportionment needs to be made on a 'fair and reasonable basis' - it is the latter that would seem to be appropriate for bulk fuel that is used for both business and private purposes (see principles in GSTR 2006/4).

Methods of apportioning input tax credits

The most appropriate method will depend on the circumstances of each case.

GSTR2006/4 provides the following guidance:

Methods can be either direct or indirect (paragraphs 104-120 GSTR 2006/4).

Direct methods

Direct methods are preferred because they give the most accurate measure of creditable purpose.

These methods use variables that are directly connected with the acquisition, for example, kilometres travelled by a motor vehicle. The relevant use is expressed as a percentage of the total use.

Indirect methods

An attempt is made to estimate the usage of acquisitions for creditable purposes. Variables that are not directly identifiable with the use of the particular acquisition are used. Although an accurate measure of the creditable use may not be known, these methods may provide a reasonable basis for the purpose of apportioning input tax credits.

There are two types of indirect methods, both of which work on the assumption that measures of input and output are an adequate estimate of the use of mixed use inputs for the making of various supplies:

•

Input based methods

•

Output based methods

For further details about methods of apportioning input tax credits please refer to GSTR 2006/4.

Record keeping requirements

Records that relate to the calculation and apportionment of input tax credits must be kept. These must explain all relevant transactions and must be retained generally for five years after they are prepared, obtained or the transaction is completed, whichever occurs latest (section 382-5 of Schedule 1 to the Taxation Administration Act 1953).

The Legislation

Relevant GST provisions: Division 11 of the GST Act

Section 11-20 of the GST Act provides:

You are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 provides:

You make a creditable acquisition if:

(a)

you acquire anything solely or partly for a creditable purpose; and

(b)

.......

(c)

.......

(d)

.......

Section 11-15 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.

Section 11-30 provides:

(1)

An acquisition that you make is partly creditable if it is a creditable acquisition to which one or both of the following apply:

•

you make the acquisition only partly for a creditable purpose;

•

you provide, or are liable to provide, only part of the consideration for the acquisition.

(2)

Repealed

(3)

The amount of the input tax credit on an acquisition that you make that is partly creditable is as follows:

Full input Tax credit × Extent of creditable purpose × Extent of consideration


14.3.2 - Personal use or consumption by producer

This issue was withdrawn on the 30 August 2002

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