GST and entitlement to input tax credits for acquisitions made prior to registration

Is the entity, a business operator, entitled to an input tax credit under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), for acquisitions made to establish its business before it registered, or became required to be registered, for goods and services tax (GST)?

No, the entity is not entitled to an input tax credit under section 11-20 of the GST Act for acquisitions made to establish its business before it registered, or became required to be registered, for GST.

However, the entity is entitled to a decreasing adjustment under section 137-5 of the GST Act for stock on hand at the time it registers where the stock is for the purposes of sale or exchange, or for use as raw materials.

The entity is a business operator. The entity makes acquisitions to establish its business. These acquisitions are made before it registers, or becomes required to be registered, for GST.

On the day that the entity registers for GST, it holds some of these acquisitions as stock items for the purpose of sale. The entity has not had an increasing adjustment under Division 138 of the GST Act for the stock it has on hand. The entity is not a company.

Under section 11-20 of the GST Act, an entity is entitled to the 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 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.

The entity was not registered or required to be registered for GST when it made the acquisitions to establish its business. Therefore, the requirement in paragraph 11-5(d) of the GST Act is not met and the entity is not entitled to input tax credits for the acquisitions.

However, section 137-5 of the GST Act provides that an entity has a decreasing adjustment for stock on hand if: • the entity becomes registered or required to be registered; • at that time, the entity holds stock for the purpose of sale or exchange, or for use as raw materials, in carrying on its enterprise; • the entity acquired the stock solely or partly for a creditable purpose; • the entity is not entitled to an input tax credit for the acquisition; and • the entity has not had an increasing adjustment relating solely or partly to the stock under Division 138 of the GST Act (cessation of registration).

The entity has registered for GST and holds stock for the purpose of sale. This stock was purchased for use in the entity's enterprise and is therefore acquired for a creditable purpose (section 11-15 of the GST Act). The entity is not entitled to an input tax credit for the acquisitions and has not had an increasing adjustment under Division 138 of the GST Act.

Therefore, although the entity is not entitled to an input tax credit under section 11-20 of the GST Act for establishment acquisitions, it does have a decreasing adjustment under section 137-5 of the GST Act for the stock it has on hand for the purpose of sale when it registers for GST. [Note 1: A decreasing adjustment reduces an entity's GST liability. The amount of the decreasing adjustment under section 137-5 of the GST Act is an amount equal to what would have been the previously attributed input tax credit amount for the acquisition if the entity had been registered at the time it made the acquisition (subsection 137-5(3) of the GST Act). Note 2: Companies may be entitled to input tax credits for pre-establishment costs under Division 60 of the GST Act.]