GST and entitlement to an input tax credit for acquisitions that are used to make supplies to customers who provide entertainment

Is the entity, a local council, 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 it makes which it then supplies to a customer who uses the goods and services to provide entertainment?

Yes, the entity is entitled to an input tax credit under section 11-20 of the GST Act, for acquisitions it makes which it then supplies to a customer who uses the goods and services to provide entertainment.

The entity is a local council. The entity makes acquisitions solely for a creditable purpose. The entity provides consideration for the acquisitions. The supply of the goods and services to the entity is a taxable supply.

The entity supplies these goods and services to a customer. The customer uses the goods and services to provide entertainment to its clients, guests and employees. The expenses incurred by the customer in providing the entertainment are non-deductible expenses as a result of the operation of Division 32 of the Income Tax Assessment Act 1997 (ITAA 1997).

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

Section 11-20 of the GST Act provides that 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: • the entity acquires anything solely or partly for a creditable purpose • the supply of the thing to the entity is a taxable supply • the entity provides, or is liable to provide, consideration for the supply, and • the entity is registered, or required to be registered for GST.

The entity provides consideration for the acquisitions which are solely for a creditable purpose. The supply of the goods and services to the entity is a taxable supply. In addition, the entity is registered for GST. Accordingly, all of the requirements of section 11-5 of the GST Act are met.

However, section 69-5 of the GST Act provides that an acquisition is not a creditable acquisition to the extent the acquisition is a non-deductible expense. An acquisition is a non-deductible expense if it is not deductible under Division 8 of the ITAA 1997 because of, amongst other things, Division 32 of the ITAA 1997 (paragraph 69-5(3)(f) of the GST Act).

Division 32 of the ITAA 1997 prohibits, with certain exceptions, expenses an entity incurs in respect of providing entertainment from being deductible under Division 8 of the ITAA 1997. Therefore, an acquisition an entity makes in providing entertainment is not a creditable acquisition where the expenditure is not deductible because of Division 32 of the ITAA 1997.

The entity makes acquisitions for the purpose of supplying goods and services to a customer who uses the goods and services to provide entertainment. That is, it is the customer who uses the goods to provide entertainment, not the entity. As the entity has not used the goods and services to provide entertainment, their deductible expenditure incurred to make the acquisitions is not affected by the operation of Division 32 of the ITAA 1997. Therefore, section 69-5 of the GST Act does not stop the entity's acquisitions from being creditable acquisitions.

As all the elements of section 11-5 of the GST Act are met, and section 69-5 of the GST Act does not apply, the entity is entitled to an input tax credit under section 11-20 of the GST Act for acquisitions that it makes which it then supplies to a customer who uses the goods and services to provide entertainment.