GST and input tax credits for second-hand goods received prior to 1 July 2000

Is the entity, a supplier of goods, entitled to an input tax credit under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it acquires second-hand goods from a customer prior to 1 July 2000 under a trade-in arrangement, and the second-hand goods are supplied to a third party after 1 July 2000 as a taxable supply?

Yes, the entity is entitled to an input tax credit under section 11-20 of the GST Act when it acquires second-hand goods from a customer prior to 1 July 2000 under a trade-in arrangement, and the second-hand goods are supplied to a third party after 1 July 2000 as a taxable supply.

The entity is a supplier of goods. The entity is registered for goods and services tax (GST).

Prior to 1 July 2000, the entity entered into a trade-in agreement with a customer. At that time, the entity acquired second-hand goods (with a value of more than $300) and received a monetary deposit from the customer as part consideration for a supply of new goods to that customer. The entity held the second-hand goods for the purposes of sale at 1 July 2000.

The entity supplied the new goods to the customer after 1 July 2000 at which point the entity also collected the balance owing from the customer. The entity then sold the second-hand goods as a taxable supply to a third party.

The supply of the second-hand goods to the entity was neither a taxable supply nor a GST-free supply. The second-hand goods were not imported and they were not supplied to the entity by way of hire. The second-hand goods are not divided for re-supply.

The customer is not registered or required to be registered for GST.

Reasons for Decision

Under section 11-20 of the GST Act, an entity is entitled to an input tax credit for any creditable acquisition that it makes. Section 11-5 of the GST Act provides that an entity makes a creditable acquisition if: (a) it acquires anything solely or partly for a creditable purpose; (b) the supply to the entity 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.

The entity acquires the second-hand goods for a creditable purpose as the second-hand goods are acquired in the course or furtherance of its enterprise. The entity provides consideration for the supply of the second-hand goods by supplying the customer with new goods and the entity is registered for GST.

However, the supply of the second-hand goods to the entity was not a taxable supply because the customer was neither registered nor required to be registered for GST. Therefore, the requirement in paragraph 11-5(b) of the GST Act is not satisfied.

However, the special rules contained in Subdivision 66-A of the GST Act provide that, in certain circumstances, an entity can make a creditable acquisition of second-hand goods, even though the supply of the goods to the entity is not a taxable supply.

Subsection 66-5(1) of the GST Act provides that if an entity acquires second-hand goods for the purpose of sale or exchange (but not manufacture) during the ordinary course of its business, the fact that the supply of the goods to the entity is not a taxable supply does not stop the acquisition being a creditable acquisition under section 11-5 of the GST Act.

Subsection 66-5(2) of the GST Act provides that section 66-5 of the GST Act does not apply to the acquisition if: • the supply of the goods to the entity was a taxable supply, or was GST-free; or • the entity imported the goods; or • the supply of the goods to the entity was a supply by way of hire; or • the goods acquired are divided for re-supply; or • the entity makes a supply of the goods that is not a taxable supply.

None of these exclusions applies in this case. Therefore, the application of subsection 66-5(1) of the GST Act to the second-hand goods is not precluded by subsection 66-5(2) of the GST Act.

The second-hand goods were acquired before 1 July 2000. Subsection 7(2) of the A New Tax System (Goods and Services Tax Transition) Act 1999 (Transition Act) provides that an entitlement to an input tax credit only arises on an acquisition or importation to the extent that it is made on or after 1 July 2000.

However, section 18 of the Transition Act extends the application of Subdivision 66-A of the GST Act to second-hand goods acquired before 1 July 2000 but only in circumstances where: • the entity held the goods at the start of that day for the purpose of sale or exchange in the ordinary course of business; and • the entity had not previously held them for any other purpose.

The second-hand goods were acquired before 1 July 2000 and were held for the purpose of sale or exchange as at 1 July 2000. The goods were not held for any other purpose. Accordingly, section 18 of the Transition Act operates to extend the application of Subdivision 66-A of the GST Act and the entity is making a creditable acquisition of the second-hand goods.

Therefore, the entity is entitled to an input tax credit under section 11-20 of the GST Act when it acquires second-hand goods from a customer prior to 1 July 2000 under a trade-in arrangement, and the second-hand goods are supplied to a third party after 1 July 2000 as a taxable supply. [Note 1: In this case, the entity is entitled to an input tax credit under section 11-20 of the GST Act in respect of second-hand goods it receives prior to 1 July 2000 for the purposes of sale or exchange after 1 July 2000 in the ordinary course of the entity's business. It does not matter that the second-hand goods are received as a trade-in for new goods that are supplied to the customer after 1 July 2000. Note 2: In this case, the second-hand goods were acquired for more than $300. Subsection 66-10(1) of the GST Act provides that the amount of the input tax credit for a creditable acquisition of second-hand goods for which the consideration is more than $300 is: • an amount equal to 1/11 of the consideration that the entity provides, or is liable to provide, for the acquisition; or • if that amount is more than the amount of the GST payable on a taxable supply of the goods that the entity makes - the amount of GST on that taxable supply.]