Yesterday the Commissioner published GSTD 2012/6 ‘Goods and Services tax: when an entity makes a taxable supply of second hand goods by way of lease before making a taxable supply of the goods by way of sale (or exchange), are both taxable supplies taken into account to quantify and attribute input tax credits under Subdivision 66-A of the GST Act’.
The Commissioner’s view is yes, with the effect that both taxable supplies (i.e., the lease and the sale) are taken into account in quantifying and attributing input tax credits under s 66-10(1) and 66-15(1) of the GST Act. This is a view beneficial to taxpayer as it ensures that the entitlement to credits is not unduly limited to the GST payable on the sale of the asset where that asset is first subject to a lease.
Division 66 applies where second hand goods are acquired for the purposes of sale or exchange (but not manufacture) in the ordinary course of business: s 66-5. The Division was considered by the Federal Court in Leaseplan Australia Limited v Commissioner of Taxation  FCA 1309 and it is now settled that the provision can apply where the purpose of sale or exchange is one of a number of concurrent purposes – for example, where goods are purchased for the dual purpose of lease followed by sale at the expiration of the lease. See also the ATO Decision Impact Statement here.
The effect of the Determination is as follows:
- The amount of the input tax credit is limited to the lower of 1/11th of the consideration for the goods and the aggregate of the GST payable on the taxable supply of the goods through the lease and the subsequent sale of the goods: 66-10(1)
- An input tax credit will be attributable in respect of the taxable supply of the lease to the tax period in which consideration is received or an invoice is issued: s 66-15(1)
- Any remaining input tax credit will be attributable in respect of the taxable supply of the sale to the tax period in which consideration is received or an invoice is issued.
The Determination includes the following helpful example:
- Finance Co makes a creditable acquisition of second-hand vehicle from an unregistered vendor for the cost of $5,500.
- Finance Co then leases the vehicle for a total consideration of $4,400, including GST of $400
- After the lease expires, Finance Co sells the vehicle for $2,200, including GST of $200.
- Finance Co can claim input tax credits for the acquisition of the vehicle capped at $500 (being 1/11th of the acquisition cost) – as this is less than the total GST on taxable supplies of $600.
- Finance Co attributes $400 of the credits to the tax period in which any consideration is received for the lease. The balance of $100 is attributed in the tax period in which any consideration is received for the sale of the lease.
The Commissioner applies a construction of paragraph 66-10(1)(b) which would appear to benefit taxpayers. That paragraph refers to “the amount of the GST payable on a taxable supply of the goods that you make”. The Commissioner acknowledges that the word “taxable supply” is singular but takes the view that the context of the legislation supports the conclusion that the words should be read plurally so as to encompass situations where more than one taxable supply is made (e.g., a supply by lease and by sale).
The contrary construction would arguably be that the words “a taxable supply” refer to the “sale or exchange” of the goods envisaged in the threshold test in s 66-5 – i.e., the amount of the credit is limited to the GST payable on the taxable supply of the eventual sale of the goods and any other taxable supplies are disregarded. Using the example outlined above, that construction would mean that Finance Co would only be entitled to an input tax credit of $200 (being the GST payable on the sale of the vehicle) and also that the credit would not become attributable until the vehicle was sold.
While the matter is not free from doubt, I feel the the Commissioner’s construction is consistent with the context and purpose of Division 66, which is to recognise that there is GST embedded in the cost of acquiring the second hand goods. The Commissioner’s construction ensures that taxpayers can recover full credits on those acquisitions, albeit remaining subject to the limitation that the amount of the credits cannot exceed 1/11th of the cost of acquiring the goods in the first place.