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  • GST and financial institutions that issue credit cards

    Background

    Following extensive consultation with the financial services industry on claiming GST credits in a credit card issuing business, and in order to provide certainty and consistency on this issue, the ATO:

    1. has published GSTD 2018/D1: Determining the creditable purpose of acquisitions in a credit card issuing business for public consultation. The due date for comments on the draft GSTD has been extended and they are now due 15 March 2019;
    2. will progress developing legislative instruments under subsections 11-30(5), 15-25(4) and 70-20(3) of the GST Act 1999. These instruments will specify the apportionment method to be applied to acquisitions in a credit card issuing business that are partly for a creditable purpose.

    To assist us to develop an apportionment method that can be applied by all the financial institutions that issue credit cards, we invite you to provide responses to the questions below. This is the first step in the consultation process – we will have further consultation on a draft legislative instrument in 2019 and will provide you with updates as we progress.

    Feedback

    Responses to the consultation questions should be provided by email to Peter.Joseph@ato.gov.au by 15 March 2019.

    Question 1 – How does your accounting system procure and allocate costs?

    Credit card issuers employ a wide range of accounting systems within their businesses with varying degrees of complexity and sophistication. Some issuers use very sophisticated enterprise resource planning systems that have the functionality to assign general ledger accounts to purchase orders and then allocate each acquisition made by that business to specific product types or a business area/cost unit based on that general ledger account. They are then able to apply an individual extent of creditable purpose to that acquisition for the purposes of Divisions 11, 15 and 70.

    In providing a response to this question, please consider the following:

    • The draft GST determination provides the ATO's considered preliminary views on the treatment of specific acquisitions that were identified through consultation with industry. Do you have comments on whether you are able to, and how you may implement, an apportionment method for costs in your credit card issuing business that recognises two pools of costs - one for classes of costs which only have a relevant connection to the supply of the credit card facility, and one for classes of costs which have a relevant connection to both the supply of the credit card facility and the supply of interchange services?
    • Can you also include costs that may be allocated to a separate cost centre (such as branch network occupancy costs, marketing costs or information technology costs); to the extent you recognise that the costs are used in the credit card issuing business.
    • Please also consider whether the functionality within your existing accounting system allows you to track a purchase order from the credit card issuing business area to the eventual purchase of the item and posting of the cost to that business area.

    Question 2 – What are your thoughts on the inclusion of a transactor/revolver allocation step in a proposed apportionment method?

    A number of credit card issuers currently use an apportionment method that allocates acquisitions in the credit card issuing business between two types of customer pools; transactors and revolvers.

    Broadly, transactors pay off their credit card balance every month, thus availing themselves of the period of interest-free credit under the terms of the credit, and revolvers don’t pay off their credit card balance each month and so pay interest on the credit obtained.

    Once acquisitions are allocated to these two customer pools a separate extent of creditable purpose rate is calculated for each pool and then a blended extent of creditable purpose rate between the two pools is used for GST recovery.

    In providing your response to this question, please consider the following:

    • Do you currently allocate acquisitions to transactor and revolver customer pools?  
      • If yes, how do you determine that a customer is a transactor or a revolver (e.g. what definition do you use, and is it through your accounting system or do you do a separate calculation)?
      • Which pools do you place cardholders in who have never used their cards or have not used their cards in a particular month?
       
    • If you use revenue for the credit card business as the driver to calculate the extent of creditable purpose rate for each customer pool, do you use the actual revenue for each customer pool (e.g. interest and interchange revenue) or an estimate of such revenue? What are the practical issues in using actual revenue?
    • Do you regularly move customers between pools and on what basis do you make any changes (e.g. Do you move them each billing cycle?)
    • When it commences on 1 January 2019, what effect, if any, will section 133BS of the National Consumer Credit Protection Act have on the transactor and revolver pools? What is the expected percentage change in net interest revenue arising from these changes? Broadly, section 133BS prevents the charging of retrospective interest. Currently when a transactor moves to a revolver, interest is charged retrospectively from the purchase date of the transaction not the due date on the statement. This will change and interest must only be charged from the day after the due date for example. This means that there will be more interest-free credit provided overall which will not be measured in a revenue method.
    • If you do not currently use a transactor/revolver allocation, is your current system capable of identifying these customer pools and the revenues that relate to each pool?

    Question 3 – What are the appropriate drivers for allocation and recovery?

    When you apply an apportionment method that allocates acquisitions that are made partly for a creditable purpose between transactor and revolver customer pools or calculates the extent of creditable purpose rate that is to be applied to your acquisitions, a driver is used to measure the proportion of acquisitions allocated to each customer pool or the extent of creditable purpose. Such drivers are based on inherent characteristics of, or factors directly connected with, the acquisitions.

    • Are your systems capable of identifying accurate information to enable the following drivers to be used to either allocate acquisitions to the transactor and revolver customer pools or calculate the extent of creditable purpose for each customer pool?  
      • revenue
      • transaction count
      • transaction spend
      • account balances
      • number of accounts
       
    • Do you have any feedback on the drivers listed above?
    • Are there any other drivers that you consider would result in a more accurate allocation of costs or amount of GST recovery?

    Question 4 – Do you regularly review the extent of creditable purpose that you apply to acquisitions in your credit card business?

    In answering this question, please consider the following:

    • How often you review the calculations e.g. monthly, every 6 months or annually?
    • How often are you capable of resetting your extent of creditable purpose calculations and then applying that new rate in your accounting systems?
    • Other than revenues that relate to supplies of credit card facilities and supplies of interchange services, do you have other significant revenue items or supplies that are included your apportionment formula for credit card issuing?
      Last modified: 15 Feb 2019QC 57696