GST and entitlement to input tax credits for entertainment expenses incurred by an entity that cannot make income tax deductions

Is the entity, an overseas company that cannot make income tax deductions under the Income Tax Assessment Act 1997 (ITAA 1997), denied by section 69-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), from claiming input tax credits for acquisitions made in Australia for entertainment purposes?

Yes, the entity is denied from claiming input tax credits for acquisitions made for entertainment purposes.

The entity is a company incorporated and managed and controlled overseas. Its principal place of business is outside Australia. The entity cannot make any deductions from assessable income under Division 8 of the ITAA 1997 or any specific provision of the ITAA 1997.

The entity made acquisitions in Australia for entertainment purposes. These entertainment expenses are of the type that Division 32 of the ITAA 1997 prohibits from being deductible under Division 8 of the ITAA 1997.

Under section 11-20 of the GST Act, an entity is entitled to an input tax credit for any creditable acquisition that it makes. However, Division 69 of the GST Act provides that some acquisitions that are not deductible under the ITAA 1997 are not creditable acquisitions.

Subsection 69-5(1) of the GST Act provides that an acquisition is not a creditable acquisition to the extent that it is a 'non-deductible expense'. Subsection 69-5(3) of the GST Act provides that an acquisition will be a non-deductible expense if it is not deductible under Division 8 of the ITAA 1997 because of one of the specified statutory provisions in the ITAA 1997. Paragraph 69-5(3)(f) of the GST Act specifies Division 32 of the ITAA 1997 (which deals with entertainment expenses).

The entity has made acquisitions that are of a type that Division 32 of the ITAA 1997 prohibits from being deductible under Division 8 of the ITAA 1997. [ History : This ATO ID was amended on 20 December 2005. The last sentence in the third paragraph in the reasons for decision was removed as it was not relevant]

When section 69-5 of the GST Act refers to an expense being not deductible under Division 8 of the ITAA 1997 because of one of the specified statutory provisions, it is referring to the requirements specified in the statutory provision and not to whether the claimant for an input tax credit would have been entitled to a deduction for income tax but for the statutory provision. That is, the words 'under Division 8 of the ITAA 1997' is a reference to the general deductibility provisions of the ITAA 1997 rather than the particular circumstances of an entity's case. Section 69-5 of the GST Act incorporates the income tax provisions into the GST Act only for the purpose of identifying non-deductible expenses which will not form part of a creditable acquisition or importation.

Therefore, as a result of the operation of section 69-5 of the GST Act, the entity cannot claim an input tax credit for its acquisitions made for entertainment purposes.