Easing the Pain with Input Credits
Input Tax Credits - How they offset the amount of GST payable
Can an entity always claim the full amount of input tax credit?
Partial input tax credit for acquisitions relating to financial supplies
Easing the Pain with Input Credits
Input Tax Credits - How they offset the amount of GST payable
Can an entity always claim the full amount of input tax credit?
Partial input tax credit for acquisitions relating to financial supplies
Can an entity claim an input tax credit for capital expenditure?
Restrictions on claiming input tax credits
Creditable acquisitions (Division 11)
GST is not a cost to business!
A business can claim some or all of the GST paid on the price of supplies acquired for business use.
An input tax credit is an amount allowed to offset the GST included in the price of an acquisition if it was acquired for use in an enterprise.
Registered suppliers are entitled to input tax credits which arise on creditable acquisitions.
The amount of the input tax credit is equal to the amount of the GST included in the price paid for the acquisition. However, the amount of input tax credit is reduced if the acquisition is only partly for a creditable purpose. This scenario is discussed below.
What is a creditable acquisition?
An entity makes a creditable acquisition if all the following conditions are met:
the acquisition is solely or partly for a creditable purpose (ie. not for a private or domestic purpose, or relating to making input taxed supplies);
the supply of the thing to be acquired was a taxable supply to the entity;
the entity provides or is liable to provide the consideration; and
the entity is registered or required to be registered.
Paul acquires a computer for $5,500 to use solely in his business.
The price of the computer includes $500 GST.
Paul is entitled to an input tax credit of $500 as he acquired the computer for use in his business and the GST paid was $500.
An acquisition has been defined very broadly in Section 11-10. The definition is intended to cover a very broad range of transactions. It will cover the usual
purchase of goods and services, but also extends to the
receipt of advice or information;
accepting the grant, assignment or surrender of any right;
receiving financial supplies;
acquiring the right to
require someone to do anything,
refrain from doing something or
tolerate something.
However, money that an entity receives as payment for a supply made by the entity is not an acquisition.
Can an entity always claim the full amount of input tax credit?
No!
If the acquisition is only partly for a creditable purpose, or
an entity provided only part of the consideration,
the input tax credits are apportioned (see below).
When is an acquisition only partly for a creditable purpose?
An acquisition will be for a creditable purpose
to the extent that it is acquired in carrying on the entity's enterprise.A thing is not acquired for a creditable purpose
to the extent that: the acquisition of the thing relates to making input taxed supplies; or
the thing acquired is acquired for a private or domestic purpose.
Under these circumstances the acquisition is only partly for a creditable purpose.
EXAMPLE - PARTLY CREDITABLE PURPOSE
Kramer buys a fax machine for $2200 (including $200 GST). He plans to use the machine 20% for private purposes relating to his volunteer activities in the local football club and 80% in his enterprise.
Kramer can claim an input tax credit of 80% of the GST paid in the price of the machine, that is, 80% of $200, which is $160.
Where an acquisition is only partly creditable because it relates to making financial supplies, the acquisition may still be taken to be fully creditable in certain circumstances.
Subsection 11-30(2) provides for an acquisition to be fully creditable if the value of the financial supplies that an entity makes in a year concluding at the end of the current month, or that an entity is likely to make in the year beginning at the start of the current month, is less than or equal to the lessor of:
$50,000; or
5% of what the entity's turnover would be if it included input taxed supplies.
Therefore, if an entity's supply of financial supplies is small in value it will not be denied a full input tax credit for acquisitions made in carrying on its enterprise.
If an entity only pays for part of the acquisition how does it work out the amount it can claim as an input tax credit?
If an entity provides or is liable to provide only part of the consideration for an acquisition then it will need to
apportion the amount of input tax credit it can claim. The entity is only entitled to the part of the input tax credit that relates to the consideration paid or liable to be paid by it.For example, Cheryl runs a cosmetic consulting business. She often travels to make presentations and it is common for the travel costs to be split equally between her and the client. As Cheryl only pays for half of the travel costs, she is only entitled to claim half of the input tax credit for the cost of her travel. The client may be able to claim half of the input tax credit for the half of the costs they pay for.
What happens if an entity changes its planned use for an acquisition?
The entity will be required to
make an adjustment to its previously claimed input tax credit where its actual use differs from that originally planned (Division 129).
Partial input tax credit for acquisitions relating to financial supplies
(Division 70)
Generally,
input tax credits are not available for acquisitions that relate to making financial supplies.However,
certain acquisitions will entitle the entity to a partial input tax credit. The amount of the credit and the special situations that give rise to a partial credit have yet to be provided for in regulations.Can an entity claim an input tax credit for capital expenditure?
Yes.
An
entity may be eligible to claim an input tax credit for the GST included in the price of capital items acquired for use in the enterprise.The
test for determining whether an acquisition has been made for the purpose of an enterprise is wider than the test for income tax deductibility.
Are there any other special credits that can be claimed?
An entity may be able to claim additional credits relating to:
pre-establishment costs (Section 60-5): a company may be able to claim an input tax credit for the GST on acquisitions made by another entity, before the company comes into existence, for example, in setting up the company;
special credit for the Wholesale Sales Tax (`WST') paid on trading stock on hand at 1 July 2000
Restrictions on claiming input tax credits
There will be some
situations where an entity will have paid GST in the price of a supply for use in carrying on its enterprise, but for which an input tax credit will be denied. These are: acquisitions of freehold interest subject to the margin scheme (Division 75);
certain non-deductible expenditure for income tax purposes (Division 69 - see below);
the portion of the credit on a motor vehicle which exceeds the car deprecation limit (Section 69-10); and
the input tax credit for new motor vehicles purchased after 1 July 2000 is being phased in over two years
Non-deductible expenses
(Division 69)Some expenses are not deductible
under the Income Tax Assessment Act 1997 - this is usually because there is a private element. Input tax credits are not allowed for acquisitions or importations that are included in the categories listed in section 69-5.Some examples of where an acquisition will not qualify as a creditable acquisition include:
entertainment;
relative's travel;
recreational clubs and leisure facilities or boats; and
non-compulsory uniform expenses.
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