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GST: Have you reached your threshold? – February 2002

In brief: Special Counsel Errol la Grange explains why many businesses that currently consider themselves to be well under the financial acquisitions threshold find themselves foul of the GST legislation.

First published in ATP's Australian GST Journal (2002) 2 AGSTJ 13.
Reproduced with permission.

Assume that of all the acquisitions made by a registered entity over a period of a year, the vast majority are wholly for a creditable purpose. Also assume that to a minor extent, some of the acquisitions relate to the making of financial supplies and that the amount of related input tax credits is, say, $3000.

Is it possible that the entity could be over the financial acquisitions threshold in these circumstances (assuming that it does not anticipate the overall purpose of its acquisitions to change in the year ahead)?

That surely would not have been the intention of the legislature when it amended the de minimis provisions and inserted the 'financial acquisitions threshold' provision in Div 189 of the GST Act. The purpose of the amendment was, after all, to increase the de minimis threshold from that originally contained in the legislation. However, it is apparent on a proper reading of Div 189, that the entity mentioned above may quite easily have exceeded the threshold in that year. If that is indeed the case, then this may be one of those situations that requires a swift reaction from the legislature, lest the provision be rendered meaningless and many businesses that currently consider themselves to be well under the financial acquisitions threshold find themselves foul of the legislation.

Initially the de minimis provisions for acquisitions relating to financial supplies focused on the annual value of financial supplies made by an entity. Essentially, in terms of s 11-15(4) of the GST Act (as it was prior to amendment), an acquisition was not to be treated as relating to making input taxed financial supplies if the annual turnover of financial supplies did not exceed the lesser of $50,000 or 5 percent of total annual turnover.

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That provision was amended prior to the implementation of GST. In a press release by the Treasurer (No 013) on 15 March 2000, he stated the following in explanation of the amendment:

The new financial services de minimis test is based on a determination of the amount of input tax credits which relate to the financial supplies made by a registered entity. The level of input tax credits under which a registered entity will not be denied any input tax credits is $50,000 or 10 percent of the entity's total input tax credits. For example, by applying the $50,000 level, a registered business will not be denied any input tax credits until $550,000 of its taxable inputs are acquired for the purpose of making financial supplies.

The new financial services de minimis test is being introduced to ensure administrative simplicity for Australian businesses as well as to ensure that most Australian businesses are not denied any input tax credits for making financial supplies which are not part of their principal commercial activities. [Emphasis added]

From a reading of the above statement by the Treasurer, it would seem that the intention behind the new de minimis provision is that an entity will be entitled to claim all input tax credits on acquisitions to the extent that they relate to making financial supplies until such time (looking either a year ahead or over the preceding year) as the input tax credits that would have been denied, but for the de minimis rules, exceed $50,000 (in respect of the first limb of the test). Such an approach would achieve the objective of ensuring that most Australian businesses are not denied any input tax credits for making financial supplies which are not part of their principal commercial activities.

The wording of Div 189 does not reflect the Treasurer's intent. Section 189-5(1) provides that:

You exceed the financial acquisitions threshold at any time during a particular month if, assuming that all the financial acquisitions you have made... were made solely for a creditable purpose, either or both of the following would apply:

  1. the amount of all the input tax credits to which you would be entitled for those acquisitions would exceed $50,000...
  2. the amount of the input tax credits referred to in paragraph (a) would be more than 10 percent of the total amount of the input tax credits to which you would be entitled for all your acquisitions...

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Most importantly, s 189-15 provides that:

A financial acquisition is an acquisition that relates to the making of a financial supply (other than a financial supply that relates to a borrowing).

To illustrate the meaning of this provision by way of example, assume that Red Ball Co, a registered manufacturer of cricket balls, acquires a new computer system in January 2002 at a cost of $660,000 including GST of $60,000. At the time of acquisition, it intends that it will use the computer system 5 percent of the time in relation to its treasury functions (which involves the making of financial supplies – refer to GSTR 2000/15 para 102 in respect of apportionment of the acquisition of a computer that relates partially to a creditable purpose). Assume that Red Ball Co does not make any other financial supplies and it makes no other acquisitions that relate to the treasury function. If the de minimis provisions do apply, Red Ball Co is entitled to a full input tax credit on acquisition of the computer system of $60,000 ($660,000 x 1/11). If the de minimis provisions do not apply, Red Ball Co is entitled to an input tax credit of $57,000. It would be denied an input tax credit of $3000 ($660,000 x 1/11 x 5 percent) as the acquisition would not be for a creditable purpose to the extent that the acquisition relates to making input taxed financial supplies: s 11-15(2)(a) of the GST Act.

Does Red Ball Co exceed the financial acquisitions threshold?

The acquisition of the computer system is a 'financial acquisition' as defined on the basis that it 'relates to the making of a financial supply': s 189-15. Even though the acquisition of the computer relates only 5 percent to the making of financial supplies, the entire acquisition must be taken to relate to the making of a financial supply. The definition of financial acquisition does not state that a financial acquisition is an acquisition to the extent that it relates to the making of a financial supply.

The GST legislation does not contain (and the Commissioner in his rulings does not apply) a de minimis test in respect of when something 'relates' to a financial or other input taxed supply. Section 11-15(2)(a) of the GST Act provides that something is acquired for a creditable purpose 'to the extent that the acquisition relates to making supplies that would be input taxed' [Emphasis added]. The Commissioner states at para 16 of GSTR 2000/22 that 'where you estimate that the extent of creditable purpose is less than 100 percent (but greater than zero), you need to apportion the total purpose between that which on your estimate is creditable and that which is not'.

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As such, if an acquisition relates only 1 percent to making supplies that would be input taxed, the acquisition is not for a creditable purpose to the extent of 1 percent and the ATO expects an entity to apportion the input tax credit if it exceeds the financial acquisitions threshold. The necessary implication is that even if an acquisition relates only 1 percent to the making of a financial supply, the entire acquisition nonetheless relates to the making of a financial supply. If that were not the case there would be no need to use the words, 'to the extent that' in s 11-15 of the GST Act for purposes of determining the proportion of creditable purpose for which something is acquired.

The necessary implication is that even if an acquisition relates only 1 percent to the making of a financial supply, the entire acquisition nonetheless relates to the making of a financial supply.

That being the case, if the acquisition of the computer system (being a financial acquisition as defined) was made by Red Ball Co solely for a creditable purpose, the amount of the input tax credit to which the Red Ball Co would be entitled exceeds $50,000 (ie it would be entitled to $60,000). As such it exceeds the financial acquisitions threshold.

It is interesting that neither the Explanatory Memorandum to the amending legislation, nor any of the explanatory information provided by the ATO (including the new draft ruling on the treatment of financial supplies and related supplies and acquisitions – GSTR 2001/D9) provide an example or explanation of how the de minimis provisions apply to an acquisition that relates only in part to a financial supply. This is curious, especially given that most businesses that would take advantage of the de minimis provisions would generally only acquire things partly for purposes of making financial supplies. This issue is simply not raised and in all the examples there is merely a statement of the amount of input tax credit that relates to the making of financial supplies, without any explanation as to how that figure was determined. As such, there does not appear to be anything published by the ATO to indicate that it will not apply the legislation on the basis that it is written as illustrated above.

Even if it does intend to apply the legislation as it may have been intended by the Treasurer in his press release, is it able to do so given the apparently clear meaning of the words in Div 189 to the contrary?

There would be many businesses in a similar position to the Red Ball Co that make different acquisitions which relate to making financial supplies (albeit only a small percentage of these acquisitions actually relates to the making of financial supplies), where the total GST-inclusive value of the acquisitions exceeds $550,000.

As such they would exceed the financial acquisitions threshold, even though the amount of the input tax credits to which they would not be entitled (as they relate to making financial supplies) would be well under $50,000. This denies a lot of non-financial supply businesses the administrative simplicity (and input tax credits) intended by the Treasurer. 

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