GST and entitlement to input tax credits where second-hand goods are acquired GST-free

Is the entity, a business operator that is registered for goods and services tax (GST), entitled to input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it acquires second-hand goods through a GST-free supply?

No, the entity is not entitled to input tax credits under section 11-20 of the GST Act when it acquires second-hand goods through a GST-free supply.

The entity is a business operator registered for GST. The entity acquires second-hand goods through a GST-free supply.

The acquisition was made solely for a creditable purpose.

Under section 11-20 of the GST Act, an entity is entitled to an input tax credit for any creditable acquisition that it makes. Under section 11-5 of the GST Act, an entity makes a creditable acquisition if: (a) it acquires anything solely or partly for a creditable purpose; (b) the supply of the thing to it is a taxable supply; (c) it provides, or is liable to provide, consideration for the supply; and (d) it is registered, or required to be registered for GST.

As the acquisition was made solely for a creditable purpose, the acquisition satisfies paragraph 11-5(a) of the GST Act.

Paragraph 11-5(b) of the GST Act requires that the supply of the thing to the entity is a taxable supply. The supply to the entity was not a taxable supply. It was a GST-free supply. Therefore, the entity is not making a creditable acquisition under section 11-5 of the GST Act.

Nevertheless, under subsection 66-5(1) of the GST Act, if an entity acquires second-hand goods for the purposes of sale or exchange in the ordinary course of business, the fact that the supply of the goods to it is not a taxable supply does not stop the acquisition being a creditable acquisition.

However, paragraph 66-5(2)(a) of the GST Act provides that section 66-5 of the GST Act does not apply, and is taken never to have applied to the acquisition, if the supply of the goods to the entity was a taxable or GST-free supply.

The supply of second-hand goods to the entity was a GST-free supply.

Accordingly, the entity is not making a creditable acquisition of second-hand goods under section 66-5 of the GST Act.

The entity is not making a creditable acquisition under either section 66-5 of the GST Act or section 11-5 of the GST Act. Therefore, the entity is not entitled to input tax credits under section 11-20 of the GST Act when it acquires second-hand goods through a GST-free supply.