When a business makes both taxable supplies (subject to GST) and non-creditable supplies (input-taxed or GST-free), its costs must be apportioned. Only the proportion of input tax credits attributable to creditable (taxable) acquisitions can be claimed. Getting the apportionment right — and being able to document the methodology — is one of the more technically demanding aspects of GST compliance.
The Core Concept: Creditable Purpose
Under section 11-15 of the GST Act, you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise and you do not acquire it for a private or domestic purpose. The extent to which an acquisition is creditable determines the extent to which you can claim the ITC.
For a business making exclusively taxable supplies, the creditable purpose of most business acquisitions is 100% — full ITC claimed. For a business making exclusively input-taxed supplies (e.g., a residential property investor), the creditable purpose is 0% — no ITC at all. For a mixed-supply business, the creditable purpose must be calculated.
The businesses most commonly affected:
- Residential landlords who also conduct other business: the rental income is input-taxed; other income is taxable
- Aged care and health providers: health services are GST-free; accommodation and ancillary services are taxable
- Financial institutions: most financial supplies are input-taxed; advisory services are taxable
- Charities and NFPs: some supplies are taxable; others are GST-free or input-taxed
- Dental and medical practices: health services are GST-free; cosmetic services and retail sales are taxable
The Three Apportionment Methods
The ATO's GST Ruling GSTR 2006/4 sets out three main methods for calculating the extent of creditable purpose for acquisitions used for both creditable and non-creditable purposes.
Method 1: Turnover-Based Apportionment
The simplest method uses the ratio of creditable (taxable) turnover to total turnover as the apportionment percentage.
Apportionment percentage = Taxable supply revenue ÷ Total revenue
Example: a business with $800,000 in taxable supply revenue and $200,000 in input-taxed supply revenue has an apportionment percentage of 80%. It can claim 80% of the ITC on shared costs (e.g., accounting fees, general administration, IT systems).
The turnover method is accepted by the ATO for most businesses and is the default for businesses that have not chosen a different method. The advantage is simplicity; the disadvantage is that it may not accurately reflect the actual use of each acquisition.
The turnover calculation must exclude:
- Financial supplies (loans, deposits, share transactions) where the entity is not a financial institution — the "reduced credit acquisition" rules apply here, not the standard turnover method
- The proceeds from the sale of capital assets, unless the entity is in the business of buying and selling assets
Method 2: Direct Attribution
Where an acquisition can be directly attributed to either the taxable or the non-creditable supply, it should be — full ITC claimed if attributable to taxable; no ITC if attributable to input-taxed. Only acquisitions that cannot be attributed directly (shared or overhead costs) need to be apportioned.
This is not a separate apportionment method but rather the correct approach to be applied before any apportionment: direct attribution first, then apportion the remainder.
Example: for a dental practice with a separate waiting room for private-pay patients and a separate one for CDBS patients, the maintenance costs of each waiting room can be directly attributed. Administrative software used for both streams must be apportioned.
Method 3: Floor Area or Use-Based Methods
For businesses where the nature of the activities differs by physical location (e.g., a mixed commercial/residential building, a hospital with both private and public wings), a floor area or usage-time method may more accurately reflect the actual use of acquisitions.
Under GSTR 2006/4, businesses can use any fair and reasonable method — the turnover ratio is the default but not the only option. A retail pharmacy whose dispensary (GST-free prescriptions) occupies 40% of the floor area and whose front-of-shop (taxable OTC products, cosmetics) occupies 60% might choose floor area as a more accurate proxy than turnover.
Any method other than the standard turnover method should be documented in writing and, ideally, discussed with the ATO in advance through a private binding ruling if the amounts are material.
Reduced Credit Acquisitions for Financial Institutions
Businesses in the financial services sector — banks, insurers, brokers — face a specific regime called "reduced credit acquisitions" under Division 70 of the GST Act. These are acquisitions that are most directly used in making financial supplies. The ITC entitlement is reduced to 75% of the full credit, regardless of the entity's overall taxable-to-total supply ratio.
The reduced credit acquisitions regime applies to a defined list of input categories (IT services, administrative services, professional advice) when acquired by a financial institution for use in its financial supply activities. General practitioners or bookkeepers advising financial sector clients should be aware this regime exists and refer the detailed calculation to a GST specialist.
Documenting the Apportionment Methodology
Whatever method is used, the documentation must include:
- A written description of the method and why it was chosen
- The inputs used in the calculation (turnover figures, floor area measurements, etc.)
- The resulting apportionment percentage for each period
- A record of any changes to the method from one period to the next (methods should be consistent year-to-year; arbitrary changes to obtain a better result are not acceptable)
For businesses with material mixed supply positions, the ATO recommends obtaining a private binding ruling to confirm the methodology is acceptable before applying it to large ITC claims.
Annual Adjustments
For capital acquisitions (purchases above $1,000 that are adjusted over a 10-year adjustment period under Division 129), the initial apportionment is based on the intended use at the time of acquisition. Each year, the actual use is compared to the originally assumed use — if the actual use differs, an adjustment is made at the annual BAS.
For example, if a mixed-use building is acquired with an assumed 60% taxable use and the actual use in the first full year is 70% taxable, an increasing adjustment (additional ITC) is triggered. If it drops to 50%, a decreasing adjustment (partial ITC repayment) is triggered.
The annual adjustment obligation is often overlooked. Any business that has claimed ITCs on a capital acquisition based on an assumed apportionment should have a diary reminder to review and adjust each year.