Section 69-5 of the A New Tax System (Goods and Services Tax) Act 1999 is a crucial provision that clarifies the eligibility for Goods and Services Tax (GST) input tax credits. Specifically, it stipulates that non-deductible expenses do not give rise to creditable acquisitions or creditable importations. This means if an expense cannot be claimed as a deduction for income tax purposes, you generally cannot claim the GST paid on that expense as an input tax credit.
Understanding the Core Principle
At its heart, Section 69-5 creates a linkage between the income tax treatment and the GST treatment of certain expenses. It is designed to prevent businesses from claiming GST credits on expenditures that are specifically disallowed as deductions under income tax law. This ensures consistency and prevents a "double benefit" where a business might otherwise gain both an income tax deduction (if it were allowed) and a GST credit on the same non-deductible expenditure.
Key Terminology Explained
To fully grasp Section 69-5, it's helpful to understand its key components:
- Non-Deductible Expenses: These are costs incurred by a business that, for various reasons, cannot be claimed as a deduction when calculating taxable income under income tax laws. Common examples often include certain entertainment expenses, specific capital expenses, or costs related to earning non-assessable non-exempt income.
- Creditable Acquisition: This refers to an acquisition (like buying goods or services) for which a business is entitled to claim an input tax credit. An input tax credit allows a GST-registered business to recover the GST included in the price of its purchases that are used in its enterprise.
- Creditable Importation: Similar to a creditable acquisition, this refers to an importation of goods for which a business is entitled to claim an input tax credit on the GST paid at the Australian border.
Practical Implications and Examples
This section has significant practical implications for businesses when managing their GST obligations and claiming input tax credits. It requires businesses to consider the income tax deductibility of an expense before claiming GST credits.
- Entertainment Expenses: This is one of the most common areas impacted by Section 69-5.
- If you take a client out for a meal and the expense is not deductible for income tax purposes (e.g., because it's considered non-deductible entertainment and FBT doesn't apply), then you cannot claim the GST on that meal.
- Conversely, if entertainment expenses are deductible (e.g., under specific Fringe Benefits Tax (FBT) rules where an FBT liability arises, or for certain staff amenities), then the GST credit may be claimable, provided all other input tax credit rules are met.
- Non-Assessable Non-Exempt (NANE) Income: Expenses directly related to earning NANE income are generally not deductible for income tax purposes. Consequently, any GST paid on such expenses would also be non-creditable under Section 69-5.
- Private or Domestic Expenses: While generally not an enterprise expense, if any portion of an expense is deemed private and therefore non-deductible for income tax, the associated GST credit is also denied for that portion.
Businesses should maintain clear records that distinguish between deductible and non-deductible expenses to ensure accurate GST reporting and avoid errors in claiming input tax credits.
Why This Section Matters
Section 69-5 plays a vital role in:
- Maintaining Tax System Integrity: It prevents businesses from exploiting loopholes by claiming GST credits on expenditures that are intentionally non-deductible for broader tax policy reasons.
- Harmonizing Tax Laws: It helps align the treatment of certain expenditures between the income tax and GST regimes, reducing complexity and potential for misuse.
- Ensuring Fairness: It ensures that businesses don't gain an unfair tax advantage from expenses that are not considered legitimate business deductions.
Understanding this section is critical for any business that is registered for GST to correctly manage its input tax credits and comply with Australian tax law. For further details, you can refer to the full text of the Act on the AustLII website: A New Tax System (Goods and Services Tax) Act 1999 - SECT 69.5.
