Senate

Further Supplementary Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 5 - Partial input tax credits

Introduction

5.1 This Chapter explains the amendments to the A New Tax System (Goods and Services Tax) Bill 1998 (the Bill) to allow a partial input tax credit for certain acquisitions made by financial suppliers. Acquisitions that are made for the purpose of making financial supplies are generally input taxed. This means that generally input tax credits are not available for such acquisitions. This could create a bias towards in-sourcing in financial institutions because the effective tax burden is higher on the outsourced services than insourced services.

5.2 Request 10 requests an amendment to the Bill to insert new Division 70 which will allow a partial input tax credit for certain acquisitions [new section 70-1] . This partial input tax credit effectively removes the bias towards in-sourcing of prescribed services.

Partial input tax credits

5.3 The acquisitions that will be eligible for the partial input tax credit are to be specified in regulations. The regulations will also specify the rate of input tax credit that will be allowed for each type of reduced credit acquisition. The acquisitions may be of things such as credit reference services and cheque clearing facilities etc. [New section 70-5]

5.4 A reduced credit acquisition will be acquired or applied for a creditable purpose even though it is acquired or applied for the purpose of making financial supplies [new section 70-10] . This means that in the application of the change in extent of creditable purpose provisions in Division 129 of the Bill, the acquisition is treated as being used for a creditable purpose even though it is used to make financial supplies.

Amount of the partial input tax credit

5.5 The amount of the partial input tax credit will depend on whether the acquisition is solely or only partly a reduced credit acquisition.

Solely a reduced credit acquisition

5.6 If the acquisition is solely a reduced credit acquisition, the amount of the partial input tax credit is the amount of GST on the supply to you (the full input tax credit) multiplied by the percentage specified in the regulations for that type of acquisition. [New subsection 70-15(1)]

Example

The Credit Union acquires a service specified in the regulations as a reduced credit acquisition. It intends to use the acquisition 100% for its enterprise. The percentage of input tax credit available for such acquisitions is specified in the regulations to be 50%. The price of the supply to The Credit Union was $11,000. The Credit Union paid all of that price. Therefore, the full input tax credit for the acquisition is $1,000. The amount of the partial input tax credit is 50% multiplied by $1,000, which equals $500.

Partly creditable

5.7 If you do not provide, or are not liable to provide, all of the consideration for an acquisition, the acquisition is only partly creditable. If you intend to use something only partly for a creditable purpose, such as some private use, or input taxed use, the acquisition is only partly creditable (see section 11-30 of the Bill).

5.8 If an acquisition is partly creditable because you do not provide all of the consideration, you are not entitled to the full input tax credit, only the proportion of it that is equivalent to the proportion of the consideration for which you are liable. That is, if you provide 60% of the consideration you are only entitled to 60% of the input tax credit you would otherwise be entitled to. Therefore, if you are not liable to provide all of the consideration for a reduced credit acquisition, the amount of the partial input tax credit is further reduced.

Example

If in the example at paragraph 5.8 above, The Credit Union only paid 80% of the price for the supply and someone else paid the other 20%, the acquisition would only be partly creditable. The amount of the partial input tax credit that The Credit Union would be entitled to would be 80% of the $550, which is $440.

5.9 If an acquisition is partly creditable because it is only partly for a creditable purpose, you are not entitled to the full input tax credit, only the proportion of it that is equivalent to the proportion that your creditable purpose is of your total purpose in making the acquisition. That is, if you only intend to use it 40% for a creditable purpose, you are only entitled to an input tax credit equal to 40% of the full input tax credit. Therefore, if you make a reduced credit acquisition only partly for a creditable purpose, the amount of the partial input tax credit is further reduced.

Example

If in the example at paragraph 5.9 above, The Credit Union made the reduced credit acquisition 80% for a creditable purpose, the acquisition would only be partly creditable. The amount of the partial input tax credit that The Credit Union would be entitled to would be 80% of the $500, which is $400.

Partly a reduced credit acquisition

5.10 If an acquisition is partly a reduced credit acquisition, only that part of the input tax credit relating to the reduced credit acquisition will be reduced. [New section 70-20]

Example

The Credit Union makes an acquisition which relates 40% to making taxable supplies and 60% to making financial supplies for which there is a reduced input tax credit. The regulations specify 50% of the full input tax credit for that type of reduced credit acquisition. The acquisition was for a price of $11,000, which is a full input tax credit of $1,000. The Credit Union is entitled to an input tax credit of: 40% * $1,000 plus 60% * 50% * $1,000, which is $400 plus 300, which equals $700.

Provide only part consideration

5.11 As discussed at paragraph 5.7, you are only entitled to an input tax credit to the extent that you provide or are liable to provide the consideration for the acquisition. Therefore, if in the example from paragraph 5.10 above, The Credit Union only paid 80% of the consideration, the amount of input tax credit it would be entitled to would be: 80% * (40% * $1,000 plus 60% * 50% * $1,000), which equals $560.

Change in use

5.12 Division 129 of the Bill applies to a reduced credit acquisition as if the acquisition is for a creditable purpose. That is, if the acquisition is solely a reduced credit acquisition it will be treated as made solely for a creditable purpose. If the acquisition is partly for making taxable supplies and partly a reduced credit acquisition, it will be treated as made solely for a creditable purpose. If the acquisition is partly a reduced credit acquisition and partly for making other input taxed supplies it will be treated as made for a creditable purpose to the extent that it is a reduced credit acquisition, and so on. This means that if the extent to which an acquisition is used for making financial supplies that give rise to reduced input tax credit changes, you may have adjustments under Division 129 of the Bill. [New subsection 70-10(2)]

Sale of reduced credit acquisition

5.13 Under Division 132 of the Bill you may be entitled to a decreasing adjustment when you sell something that you had acquired or applied for making financial supplies. This decreasing adjustment gives you an amount equivalent to the input tax credit, adjusted by the change in price between purchase and sale, you were denied due to your use in making financial supplies.

5.14 In calculating the amount of the adjustment you work out an amount of full input tax credit and an amount of adjusted input tax credit in reference to the extent of creditable purpose. Division70 of the Bill alters your extent of creditable purpose. To obtain the correct result under Division132 it is necessary to take account of this alteration to extent of creditable purpose. This is achieved by new section 70-25 .

5.15 The effect of new section 70-25 is that the amount of decreasing adjustment you receive under Division 132 of the Bill is equivalent to the amount of input tax credit you did not receive due to making financial supplies other than ones to which Division 70 of the Bill applies, plus the amount of input tax credit you did not receive because you only received a partial input tax credit adjusted for the difference between purchase and sale price.

Consequential amendments

5.16 Amendments 1, 5, 16, 27 and 30 make amendments to the Bill consequential on inserting new Division 70 .