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  • Examples of decision-making methodology

    The following examples show how you can choose a method:

    These examples show how you can choose a method. They do not represent our view of whether any particular method is fair and reasonable.

    Example 1: Identifying an apportionment method for branches and lending business units

    Note: This example hasn't been updated to take into account the draft GSTD 2018/D1: determining the creditable purpose of acquisitions in a credit card issuing business which includes an example of branch network costs.

    A financial supply provider offers the following services to its customers: loans, everyday accounts, credit cards and insurance. The costs of operating the business are sometimes clustered into categories of staff, data processing, property, lending, marketing and general administration.

    The business activities often operate through business units of branches, lending, contact centre, cards and administration.

    In addition to each business unit bearing its own direct costs, the entity utilises an internal management costing system that reallocates the costs of administration to the other business units, based upon the ratio of the number of staff that are employed in each business unit. This means, for example, that overall administration costs are allocated to branches, lending, contact centre and cards and each of these business units has its own management accounts including all expenses related to that business unit.

    The business is then required to determine if this cost allocation, combined with further apportionment (as noted in the table below) provides a fair and reasonable method of determining entitlement to GST credits'.

    The following tables show the considerations and conclusions of the business in identifying an apportionment method for the branches and lending business units (the other business units have not been considered in this example).

    Apportionment methodology for branches

    Method

    1. Revenue

    2. Transaction count

    3. Time spent

    4. Floor space

    Formula

    Revenue from taxable and GST free supplies ÷ total revenue from all supplies × 100

    Number of taxable and GST free transactions ÷ number of all transactions × 100

    Staff time spent on taxable and GST free supplies ÷ staff time spent on all supplies × 100

    Floor area used wholly for taxable and GST free supplies ÷ floor area used for all supplies × 100

    Relationship between the supplies made, method and actual or intended use of the acquisition. (In general this factor will carry the greatest weighting)

    The supplies made and facilitated through branches include: operation of accounts, including general and everyday transactions. Some accounts have monthly fees and some facilitate the supplies of lending, credit cards and insurance. The activities will be mainly undertaken through face-to-face contact so those activities will use staff costs and also costs of branch premises, light, heat and power in those properties, general administration costs of maintaining premises, systems costs such as hardware, software and communications.

     

    The use of the acquisitions such as the premises and systems will have a close relationship to the number of staff in the branches and the way in which they use these resources. Given that many everyday accounts do not have revenue attached or are simply accounts that the customer holds to support other products such as mortgages, the revenue ratio may not be representative of the ratios of activities.

     

    In essence, the principle is that the cost of making any supply (such as input taxed, taxable or GST free) is relatively proportional to the revenue for that supply, regardless of the type of supply.

     

    Where the 'cost to revenue' ratios are not measurably consistent, there is a risk that the revenue method may not be fair and reasonable.

    There could be difficulty in determining within a branch what constitutes a transaction. For example the withdrawal of money from an account could be said to be one transaction but an enquiry on an account balance may not be a transaction. Further it may be necessary to determine that for example, a referral to lending or insurance is a transaction. These difficulties are likely to make the method impractical to operate.

    If the time spent by staff is measured to a degree which enables an analysis of effort between the various supplies that are made or to which the activities are connected, this would most likely represent a fair and reasonable apportionment of overall costs. This is because the activity principally uses staff time/resource which in turn is the driver for other costs such as premises and systems time.

    There is likely to be a limited relationship and ability to identify designated floor space areas within branches. There are areas for cash storage and handling which will in general be relative to the operation of everyday accounts but the cashier areas and general areas are used for multiple purposes as would offices.

    Adjustment or adaptation for distortive factors

    The branch activities are directed towards generating revenue for the bank as a whole and accordingly if revenue were to be used, it would need to include revenue for all areas. However it is expected this would be distortive in many ways as the use of resources for lending, (for example) may only be used to make a referral and sign documents but generate a higher level of revenue whereas conducting account activity may consume more resources but generate minimal or no revenue (fees on accounts/internal interest income).

     

    Supplies made for non-monetary consideration, may also not recognise the use of acquisitions towards the making of supplies.

    It is likely that the difficulty in determining what counts as a transaction would result in distortions arising.

    It is likely this would not be distortive as the staff time is reflective of the use of other acquisitions.

    The inability to identify designated floor space could result in the use of limited, unrepresentative data being applied with consequential distortions.

    Costs of compliance and administration

    The cost of compliance would be negligible. The revenue figures are readily available as part of normal business records.

    The cost of compliance is not significant as the transaction counts are system generated and simply require the reporting at the relevant periods.

    May be significant in staff recording time spent and capturing and analysing the information. However if undertaken for other management purposes there would be minimal additional cost.

    The cost of compliance may be significant if the business does not perform such analysis for any other purpose.

    How the method is determined and measured

    The method was considered as an option because revenue details are reported in financial statements which are the subject of independent audits.

    The transaction count information is readily available from within the systems.

    If the data is reported by systems it may be readily determined. If staff are required to record time spent the risk of human error arises.

    It is likely this is not readily measurable.

    Fair and reasonable

    The method is unlikely to be fair and reasonable because the activities as described do not have proportionate relationships to revenue. For example $100 of revenue from a loan may only use 5% of the resources whereas $100 account keeping fees for example may use 85% of the resources.

    The method is not likely to be fair and reasonable given the difficulty in determining what may constitute transactions and how that reflects the use of resources.

    The method is reflective of the use of acquisitions as staff time is the primary measure of the business activities and so the acquisitions that are used in those activities. It would not generally be distortive and the cost of compliance can be minimal, particularly if the time spent can be measures through sampling.

    It is likely this method would not be fair and reasonable as the floor space method cannot be measured effectively.

    Apportionment methodology for lending business units

    Method

    1. Revenue

    2. Transaction count

    3. Time spent

    4. Floor space

    Formula

    Revenue from taxable and GST free supplies ÷ total revenue from all supplies × 100

    Number of taxable and GST free transactions ÷ number of all transactions × 100

    Staff time spent on taxable and GST free supplies ÷ staff time spent on all supplies × 100

    Floor area used wholly for taxable and GST free supplies ÷ floor area used for all supplies × 100

    Relationship between the supplies made, method and actual or intended use of the acquisition. (In general this factor will carry the greatest weighting) 

    The supplies in lending include granting loans, mortgages and other forms of lending, which generate interest and fees. The activities involve marketing and selling products, customer liaison in setting up lending, legal and other costs in assessing and managing risk, document preparation and execution, systems processing, ongoing maintenance and general administrative and infrastructure costs. Much of the activity will be undertaken by staff in liaison with customers but there is also a high degree of systems activities.

    There could be some difficulty with transaction numbers if customer payments are treated as transactions, especially as loan repayments may be made weekly, fortnightly or monthly. If the transaction is the actual grant of the loan in the first instance this may be more appropriate if the costs of granting each loan are similar regardless of the type and size of the loan.

    Staff time spent may be a relevant measure if the use of other resources such as systems, legal, premises and others is reflective of the time spent by staff. However it is likely that some loan costs, such as document costs and ongoing systems costs are not reflected in the time spent by staff and accordingly the time spent may not be reflective of all acquisition usage.

    It is expected that the areas of a building that are dedicated to lending would not, within those areas, be readily dissected in discrete areas that deal with specific types of lending that are not input taxed. Accordingly it is considered this method is unlikely to be fair and reasonable.

    Adjustment or adaptation for distortive factors

    Where the revenue from lending is in general reflective of the resources used, the revenue method may be appropriate. For example if the costs of generating and maintaining a large loan are not vastly disproportionate to a small loan, this method may be fair and reasonable. If however, GST-free loans are, for example, typically 10 times greater than input taxed loans, this would distort the ratio and skew the outcome in favour of GST-free loans which would therefore be distortive.

    Distortion would occur if the activity of lending is not consistent, regardless of the size or type of lending.

    Distortion may arise if the time spent by staff is not reflective of the usage of other resources. For example it is unlikely that staff time will reflect the ongoing maintenance of the loan through systems that manage payments, interest charges, issue of statements etc.

    The inability to identify designated floor space could result in limited unrepresentative data being applied to a wider data set.

    Compliance and administration costs

    The cost of compliance would be negligible. The revenue figures are readily available as part of normal business records.

    The cost of compliance is not likely to be significant.

    Costs may be significant in staff recording time spent and capturing and analysing the information. However if this is undertaken for other management purposes there would be minimal additional cost

    The cost of compliance may be significant if the business does not perform such analysis for any other purpose.

    How the method is determined and measured

    The method was considered as an option because revenue details are reported in financial statements which are the subject of independent audits.

    The transaction count information is readily available from within the systems.

    If the data is reported by systems it may be readily determined. If staff are required to record time spent the risk of human error arises.

    It is likely this is not readily measurable.

    Fair and reasonable

    The method is likely to be fair and reasonable where there is limited difference between the average value and revenue from loans that are input taxed and those that are GST-free or even taxable.

    The method could be considered fair and reasonable if the transaction count is based on the number of loans and the costs related to the different types of loans are consistent and not excessively distortive.

    It is likely the method will not be fair and reasonable as the use of staff time across the term and activity of a loan is not consistent and hence not entirely representative of the use of acquisitions.

    It is likely this method would not be fair and reasonable as the floor space method cannot be measured effectively.

    Example 2: Investment trust issues units to investors and has investments that derive interest

    An investment trust issues units to investors and has investments of cash on deposit and commercial notes (offshore and domestic) that derive interest.

    Apportionment methodology

    Method

    1. Revenue

    2. Time spent

    3. Blend of revenue and time spent

    Formula

    Revenue from taxable and GST free supplies ÷ total revenue from all supplies × 100

    Time spent on taxable and GST free transactions ÷ time spent on all transactions × 100

    a) Staff time for measuring use of acquisitions in making supplies associated with members interests, and b) Revenue formula for measuring use of acquisitions for investment management

    Relationship between the supplies made, method and actual or intended use of the acquisition. (In general this factor will carry the greatest weighting) 

    The supplies made are: the issue of units to investors (members' interests); the credit arrangements with cash on deposit for which the trust receives interest; the credit arrangements with notes for which the trust receives interest.

     

    The activities of the trust are undertaken by the trustee and consist of, in the main, ongoing management and administration of the investments, unit member services and other general trustee functions. The trusts acquisitions are embodied in the trustee's fees and the services performed by the trustee in their own capacity. The revenue from cash on deposit and notes is reflective of the effort and use of trustee services in the investment management functions.

    Staff time spent on member interests as compared to investment management would likely enable a fair reflection of the use of acquisitions as both functions are primarily staff resource based. Time spent by staff on the differing forms of investment within the investment management activities may also be reflective of the use of resources, but this would require detailed analysis of time spent.

    This is not a single method but a two step method that firstly calculates the member interest usage through time spent and then investment management usage through revenue. It therefore uses the fair and reasonable elements of both of the other methods and avoids the parts of those methods that are not likely to be fair and reasonable.

    Adjustment or adaptation for distortive factors

    The revenue derived from cash on deposit and interest on notes would likely be reasonable in determining the extent to which the investment management costs may be used by the trust. However, it does not reflect the use of acquisitions by the trust in providing services to members which are separate and distinct from the activities of investment management. As such the inability of the method to reflect that usage could be distortive.

    The use of staff time in the investment management function may be reasonable for all supplies.

    There are no apparent distortions with the method.

    Compliance and administration costs

    The cost of compliance is considered negligible. The revenue figures are readily available as part of normal business records.

    Costs may be significant in enabling systems to extract and report the information. The compliance cost of staff completing time reports could be significant in the investment management functions.

    Cost of compliance is minimised by avoiding time recording by all staff across all activities.

    How the method is determined and measured

    The method was chosen as it was noted in the ATO ruling GSTR 2006/3 as a method. The revenue details are reported in financial statements which are the subject of independent audits.

    If data is reported by systems it may be readily determined. If staff are required to record time spent the risk of human error arises.

    Time spent on member interests is recorded and captured and revenue naturally reported through financial systems.

    Fair and reasonable

    The method is not likely to be fair and reasonable as it does not reflect the use of acquisitions in the making of supplies connected with member interests.

    The method may produce a reasonable result but the ability and cost of recording, capturing and analysing time spent by investment management staff on the differing investments could be onerous when an alternative of revenue may be more appropriate.

    The method recognises the effort in providing member services and also reasonably measures the usage of acquisitions in the investment management functions. It is considered that this method is fair and reasonable.

      Last modified: 30 Jul 2019QC 17480