At the start of any new tax year there is always a flurry of activity at Carrazzo Consulting in relation to the setting up of new businesses, whether it be in relation to the horse or any other industry.
As part of this process, there is always one piece of advice we really enjoy passing onto new business owners and it is to do with GST that they thought they could never claim.
These special GST concessions relate to: –
- all pre-establishment fees (including stock) for a company; and
- original stock on hand only for all other entities (e.g. sole traders, partnerships and trusts)
Many start-up horse entities already have stock on hand acquired when they start in business, therefore these often overlooked concessions can be claimed by many new players in the industry – in short, they’re well worth sharing, especially as often GST paid on start-up stock is a large cost!
Companies are a very common tax vehicle to conduct any business and they have an even wider category of GST to claim back as all pre-establishment GST (including GST import tax) can be claimed back, not just the GST relating to opening stock on hand.
Under the general GST system, a “black hole” could exist where expenditure is incurred in connection with an enterprise to be carried on by an entity, but the entity is not yet in existence.
GST relating to pre-establishment expenditure is capable of being claimed back because the definition of “carrying on an enterprise” includes things done while commencing an enterprise. However, claiming back GST is generally only available to existing registered entities for the purposes of their enterprises. This means that GST attaching to expenditure incurred by individuals for the purposes of a future entity could generally not be claimed by the individuals and cannot be claimed by the entity when brought into existence.
To get around this situation where pre-establishment GST can be “lost”, the GST Act provides an exception to the general operation of the GST rules for all the pre-establishment costs of a company. Upon its creation and registration for GST, the company can claim back GST for these pre-establishment costs if the necessary requirements are met.
1.1 Eligible pre-establishment costs
- To claim GST credits for these pre-establishment costs of a company the following seven criteria must apply:
- the purchase must be for the purpose of bringing the company into existence or carrying on a business after it comes into existence
- the company must come into existence and be registered for GST no more than six months after the purchase you must become a shareholder, officer or employee of the company
- the company must have fully reimbursed you for the cost of the purchase
- the purchase must not be used to make input-taxed sales or for private purposes
- to avoid “double dipping” the company must not be entitled to a GST credit for the purchase, if it subsequently acquires the thing from you
- you must not be entitled to claim a GST credit for the purchase.
The GST Act does this by treating an acquisition or importation made by a future shareholder, director/secretary or employee of the company as being an acquisition or importation of the company upon (not before) its creation.
Of the seven requirements listed above, the most difficult to meet are:
– the “six-months” rule; and
– the “fully reimbursed” requirement (see below) for the shareholder, director or employee who incurred the expense.
1.2 What does “fully reimbursed” mean?
In relation to acquisitions only, the acquisition does not qualify as a pre-establishment acquisition unless the member, officer or employee is “fully reimbursed” by the company for the consideration for the acquisition. In other words, before the relevant GST can be claimed back, the company must reimburse the individual not only for the GST-exclusive cost of the thing acquired, but also for any GST on the thing acquired.
1.3 What costs are eligible?
The costs eligible include:
– set-up fees (e.g. accounting fees, company cost, business plan);
– business registration;
– plant & trading stock (e.g. broodmares, stallions, pin-hook stock, service fees); – business premises; and
– GST on importation (see below).
Example 1 – claiming pre-GST establishment costs for a company
In May 2020, Andre engages Alex & Co, accountants, to prepare a horse industry business plan for his yet to be incorporated company. Andre receives the plan in October 2020.
The company is set-up in December 2020 and is registered for GST in January 2020. The company can claim back the GST referable to the services of Alex & Co. This is because Andre “made” the acquisition when the business plan was supplied, which was within 6 months of the company coming into existence and becoming GST-registered.
1.4 Reimbursement of GST importation costs for companies
For those who buy and import breeding stock from overseas, this is a very worthwhile cost to be included as “pre-establishment” cost. The GST import tax on mares and stallions is often in the tens of thousands.
The position in relation to importations is slightly different. Under the GST Act, the company must fully reimburse the shareholder, officer or employee for the GST paid on the importation and the cost of acquiring or producing the thing imported.
This simply ensures that the amount of the reimbursement is the amount of GST payable on the importation together with the actual price paid for the importation of the goods, not simply the customs value.
Example 2 – reimbursing GST on importations
EFG Pty Ltd (EFG) is set-up on 1 July 2020 to run a horse breeding and agistment business.
On 1 April 2020, which is within six months of EFG set-up, a UK broodmare is acquired and imported into Australia, a mare acquired to form the initial breeding stock of EFG. The mare cost AUS100,000, with import GST of $10,000 applying – total cost is $110,000. This is paid by Peta the shareholder.
To ensure EFG can claim the $10,000 import GST after set-up, the full $110,000 must be reimbursed to Peta, not just the $10,000 of GST import tax.
2. All other entities (e.g. sole traders, partnerships and trusts)
There is a special GST adjustment rule which states that an entity may claim GST relating to opening stock on hand if it becomes registered or required to be registered for GST. Simply put, the GST Act will deem the acquisition of the stock on hand by the entity prior to its registration as a creditable acquisition and thereby allowing the entity to claim the associated GST.
The special adjustment rule only applies to stock on hand. That is, any other items (including capital items) acquired by an entity will not be eligible (unlike companies, as noted above).
2.1 Eligibility requirements
This special GST rule applies if an existing entity becomes registered or required to be registered for GST. A GST claim on opening stock will arise at the time of the entity registering or meeting the requirements to be registered if:
- the entity that holds stock is carrying on its enterprise; and
- the entity had acquired the stock solely or partly for a business/creditable purpose
I reiterate that this special adjustment rule does not apply to any other items (e.g. plant and equipment) acquired by an entity prior to it became registered.
It is important to note that a GST claim will only arise if stock on hand was acquired from an entity that was registered for GST at the time of acquisition, i.e. the original seller must have been registered and actually charged GST on the stock.
Example 3 – a trust claiming GST for opening stock
Mary carries on a horse business via her family trust. She voluntarily registers with effect from 1 July 2020 and elects to report her GST liability on a quarterly basis. Mary will have a GST claim in her Business Activity Report for the quarter ending 30 September 2020 in relation to her trading stock on hand as at 1 July 2020.
DISCLAIMER Any reader intending to apply the information in this article to practical circumstances should independently verify their interpretation and the information’s applicability to their circumstances with an accountant or adviser specialising in this area.
PAUL CARRAZZO CA
CARRAZZO CONSULTING PTY LTD
801 Glenferrie Road, Hawthorn, VIC, 3122
TEL: (03) 9982 1000 FAX: (03) 9329 8355 MOB: 0417 549 347
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