Claiming GST credits can be very costly without a ‘creditable purpose'

Under the GST law, a person or a business can claim input tax credits (ITCs) for acquiring things for a creditable purpose. A taxpayer acquires a thing for a “creditable purpose” to the extent he or she acquires it in carrying on his or her enterprise.

However, the GST law provides that a taxpayer does not acquire a thing for creditable purpose to the extent the acquisition is of a private or domestic nature.

Seems relatively straightforward – if that can ever be said about taxation matters! But, spending money on acquiring things of a private or domestic nature can be an area that confuses many.

In a recent AAT case, the Tribunal upheld GST and penalty assessments against a taxpayer concerning incorrect claims for ITCs.

The taxpayer carried on a computer repair business. Following an audit of the taxpayer's BASs for the period March 31, 2007 to February 28, 2011, the ATO issued GST net amount assessments, penalty assessments and cancelled the taxpayer's GST registration.

The Tax Commissioner disallowed many (although not all) of the taxpayer's ITC claims on the basis that he did not consider the taxpayer was carrying on an enterprise during the relevant tax periods, that the expenses on which the ITC claims were based appeared to be private in nature (e.g. certain legal and health expenses) and were considered not to have any obvious links to commercial activity, and that the taxpayer did not provide tax invoices for the expenses as claimed creditable acquisitions.

In an along-the-way win for the taxpayer, the Tribunal noted that the Commissioner reconsidered the matter in light of additional information since provided by the taxpayer, and now accepted that the taxpayer was carrying on an enterprise during the relevant tax periods and that the decision to cancel his GST registration should be set aside. For this reason, the Commissioner also accepted that some (but not all) of the input tax credits claimed were properly allowable.

In the taxpayer's case, the Tribunal said the reasons for the relevant supplies (ie made to him) not being taxable included that either it had not been established that the person making the supplies was registered or required to be registered and/or that the supplies by that person were GST-free or input taxed.

The Tribunal said the taxpayer claimed an ITC in respect of his purchase of a second-hand motor vehicle pursuant to a "private sale". No invoice was produced for this transaction. As no GST liability would have been incurred by the seller, the taxpayer was not entitled to any input tax credit.

The taxpayer also claimed a number of items for "occupancy expenses". The AAT said the Commissioner understood those expenses related to the taxpayer's personal accommodation, particularly in a private home in Perth. He did not accept the expenses were "creditable acquisitions". The Tribunal said no invoices were provided by the taxpayer in respect of the claims, so it had not been established that any GST was paid or incurred by the person that supplied the accommodation to the taxpayer.

The Tribunal worked through a number of other ITC claims that had been made by the taxpayer, finding that most were not allowable. It worked through the taxpayer's exercise book ledgers in the process. These included:

• Running expenses – the AAT said there was no evidence that any GST was incurred by the relevant supplier of those expenses.

• Legal expenses – understood to relate to expenses connected to an assault the taxpayer suffered at a hotel. The AAT saw no connection with the taxpayer's business activity.

• Health expenses, including gym expenses – the AAT considered that the items claimed are clearly private or domestic in nature and were insufficiently connected to the taxpayer's business.

• Finance expenses – the Tax Commissioner said he was unable to match most of those items to invoices so that he could not be sure exactly what they relate to. In addition, some items related to cash advances made to the taxpayer but the AAT said the documents relating to these made no reference to any GST payable by anyone.

• Electronic goods – again, the Tax Commissioner said he was unable to match most of those items to documentary evidence.

• Reference magazines – the Commissioner accepted that the taxpayer's purchases of relevant information technology magazines were sufficiently related to his enterprise to be properly regarded as creditable acquisitions for GST purposes. But the same could not be said of other magazines the taxpayer purchased.

• Event "hosting" - The items claimed under this characterisation related to functions held by the taxpayer in his room at the house for friends and/or clients. The Tax Commissioner's understanding was that attendance at these functions was by invitation only and was not open to the public generally. If that is the case, then these expenses cannot be creditable acquisitions because they are excluded by a specific provision in the GST Act.

• Imported items - The taxpayer made a number of claims for imported items described as "reference-magazine" or "reference-book" and so on. The relevant invoices in each case showed that the relevant item was imported and do not record any GST component. The AAT said that, as stated, each acquisition was “A non-taxable importation” pursuant to the GST Act and the Customs Tariff Act 1995 – essentially because the value of the goods imported did not exceed $1000. Any such importation will not be a “creditable importation” pursuant to the GST Act. As such, there is no entitlement to an input tax credit for that importation.

The Tax Commissioner allowed part of the taxpayer's claims concerning travel and telephone expenses.

After reviewing the case, the Tribunal considered that the GST net amount assessments in relation to each of the 48 individual monthly tax periods ended March 31, 2007 to February 28, 2011 inclusive were not open to review.

The AAT said it accepted that the inference from the evidence and the taxpayer's conduct throughout was that it showed a disregard of or indifference to a risk foreseeable by a reasonable person. The Tribunal saw no basis to counter the Commissioner's submission that the taxpayer's behaviour was reckless in that he claimed input tax credits for items clearly private or personal in nature and/or not acquired in the carrying on of the enterprise.

Taxpayers in business can validly claim input tax credits for many expenses they incur that relate to the business. However, it must be proved that GST was incurred or paid by the supplier of the goods/services and that they relate to carrying on an enterprise. The taxpayer in the above AAT case was not able to prove this to the satisfaction of the Tribunal in regard to many of the expenses he claimed. SMEs should take note.

For those interested in knowing more about how the GST system operates, the Thomson Reuters Australian GST Handbook 2013-14 contains an excellent explanation of the GST system, covering all aspects of the GST legislation – simply visit our website for details.

This article first appeared on SmartCompany.