Draft Goods and Services Tax Determination

GSTD 2018/D1

Goods and services tax: determining the creditable purpose of acquisitions in a credit card issuing business

  • Please note that the PDF version is the authorised version of this ruling.

Exclamation This publication provides you with the following level of protection:

This publication is a draft for public comment. It represents the Commissioner's preliminary view about the way in which a relevant taxation provision applies, or would apply to entities generally or to a class of entities in relation to a particular scheme or a class of schemes.

You can rely on this publication (excluding appendixes) to provide you with protection from interest and penalties in the following way. If a statement turns out to be incorrect and you underpay your tax as a result, you will not have to pay a penalty. Nor will you have to pay interest on the underpayment provided you reasonably relied on the publication in good faith. However, even if you don't have to pay a penalty or interest, you will have to pay the correct amount of tax provided the time limits under the law allow it.

What this draft Ruling is about

1. This draft Determination[1] provides advice on the application of paragraph 11-15(2)(a)[2] of the A New Tax System (Goods and Services) Tax Act 1999 (GST Act) to acquisitions in a credit card issuing business of a financial supply provider (you). This Determination applies to you if you issue credit cards or charge cards[3] in a four-party (open loop) payment system.

2. The Commissioner's views on determining the extent of creditable purpose for financial supply providers are set out in:

·
Goods and Services Tax Ruling GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose?
·
Goods and Services Tax Ruling GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies.[4]

3. This Determination considers the application of these views in the specific context of a credit card issuing business, focusing on the analysis required to determine whether acquisitions are made solely or partly for a creditable purpose.

4. In this Determination, all legislative references are to the GST Act, unless otherwise indicated. Any reference to 'acquisitions' applies equally to importations under paragraph 15-10(2)(a). The indirect tax zone is referred to as 'Australia'.

Ruling

Supplies made in a credit card issuing business

5. In a four-party payment system, the supplies you make include both:

·
the financial supply of the credit card facility, which is the supply of a credit arrangement or right to credit supplied to the cardholder under their contractual arrangements with you (further discussed at paragraphs 7 to 10 of this Determination)
·
the taxable supply of interchange services to an acquiring entity, which are the authorisation, clearing and settlement activities that you undertake in exchange for interchange fees.

6. You may also make other supplies depending on the relevant facts, such as loyalty program membership and travel insurance supplied to the cardholder.[5]

7. In Commissioner of Taxation v. American Express Wholesale Currency Services Pty Limited [2010] FCAFC 122 (Amex), the Full Federal Court concluded that the supply of the credit card facility is a financial supply of the provision of an interest in or under a credit arrangement, or a right to credit.[6] In Amex, this financial supply encompassed the bundle of rights supplied to the cardholder on entry into the credit card contract, and the cardholder's exercise of these rights, including the exercise of the right to present the credit card as payment and to obtain credit.[7]

8. Each credit card transaction where the cardholder has exercised these rights is part of the supply of the credit card facility, instead of being a separate supply in itself. This is reflected in Part 2 of Schedule 7 to the GST Regulations which provides an example of 'opening, keeping, operating, and maintaining charge and credit card facilities'.[8]

9. In Commissioner of Taxation v. MBI Properties Pty Ltd [2014] HCA 49 (MBI Properties) at 35, the High Court noted that a transaction which involves a supplier entering into, and performing an executory contract will in general involve the supplier making at least two supplies. The first being the creation of contractual rights and obligations at the time of entry into the contract and secondly, a supply by means of contractual performance of the obligation. Typically at the time of entry into a credit card facility contract, the contract will be an executory contract, as prior to the cardholder's first transaction the credit card issuer has yet to perform its obligation to provide credit.

10. MBI Properties focused on what is sufficient to constitute a supply, rather than whether a course of action that might involve more than one thing satisfying the definition of supply should be characterised as one or more supplies. Amex is the relevant authority in this instance, as it specifically considered how a credit card facility should be characterised in the context of the financial supply provisions.[9]

11. The supply of the credit card facility is an input taxed financial supply, except to the extent it is GST-free. The supply of the credit card facility is GST-free under item 4 in subsection 38-190(1), to the extent it is anticipated that the credit card facility will be used by the cardholder to undertake transactions while they are physically outside Australia.[10]

12. The supply of the credit card facility is GST-free under item 3 in subsection 38-190(1), to the extent that the recipient is outside Australia when the thing supplied is done and the effective use or enjoyment of the supply takes place outside Australia (and the other requirements are satisfied). It is unnecessary to consider the application of item 3 to the supply of the credit card facility, because item 4 has a broader application in this context.[11]

13. The consideration for the supply of the credit card facility to a cardholder includes any amounts the cardholder pays as a result of their obligations under the credit card facility contract.

14. This includes overseas transaction fees, which form part of the consideration for the supply of the credit card facility. The ability of the cardholder to undertake transactions with overseas merchants is an integral part of the supply of the credit card facility, and overseas transactions are not separate supplies. This means the overseas transaction fees are not consideration for separate GST-free supplies under either item 3 or item 4 of subsection 38-190(1).

15. The consideration for the supply of the credit card facility also includes the cardholder's obligation to repay the debt owed, such as for cardholders that do not pay any fees and interest, as they repay the balance owed in the interest-free period.

16. The supply of interchange services you make to an acquirer is a taxable supply .[12]

17. The following diagram summarises the supplies made in a four-party payment system.

Diagram showing supplies made in a four-party payment system

18. If you have both a credit card issuing and an acquiring business, there may be 'on-us' transactions for which you are both the issuer and acquirer. In this situation, you do not make a supply of interchange services. This Determination does not address acquisitions in a credit card acquiring business.

Determining the extent to which an acquisition relates to the making of input taxed supplies

19. Paragraph 11-15(2)(a) specifically focuses on the relationship between an acquisition and the making of supplies that would be input taxed, by precluding an acquisition from being for a creditable purpose to the extent that it relates to the making of supplies that would be input taxed.

20. GSTR 2008/1 sets out the principles for establishing a relevant connection to supplies for these purposes. The connection may be direct, or indirect, substantial or real. It must be relevant and usually a remote connection would not suffice.[13] The required connection has also been described as 'sufficient and material', which would include a 'direct and immediate' connection.[14] In this Determination, we refer to the required connection as a 'real and substantial connection' or a 'relevant connection' interchangeably.

21. Determining whether there is a relevant connection between an acquisition and the making of supplies that would be input taxed requires an objective assessment of the surrounding facts and circumstances to determine whether the acquisition is intended to be used in making those supplies.[15]

22. If an acquisition only has a relevant connection to the making of input taxed supplies, paragraph 11-15(2)(a) precludes the acquisition from being for a creditable purpose. If an acquisition does not have a relevant connection to the making of input taxed supplies, it is solely for a creditable purpose.

23. If an acquisition has a relevant connection to both making input taxed supplies and to making taxable or GST-free supplies, it is partly for a creditable purpose.[16]

24. The Commissioner's view in GSTR 2008/1 is that applying paragraph 11-15(2)(a) requires an objective assessment.[17] This objective assessment can be contrasted with an enquiry into the moving cause or principal purpose behind the acquisition, or the relationship between the acquisition and the broader enterprise.[18]

25. The identification of the relevant connection does not turn upon a characterisation of the purpose, or the occasion of the purpose, of the supplier in the sense of a broader commercial objective of the enterprise.[19] If an objective assessment shows that an acquisition only has a relevant connection to the making of input taxed supplies, the acquisition is not to be apportioned merely because those supplies may also serve a broader commercial objective.[20]

Determining the creditable purpose for credit card issuing acquisitions

26. There is no general proposition that all acquisitions in a credit card issuing business have a relevant connection to both the supply of the credit card facility and the supply of interchange services. The application of paragraph 11-15(2)(a) requires the precise identification of the relevant acquisition and a factual enquiry into the connection between the acquisition and the making of supplies that would be input taxed.[21]

27. In the absence of any other potential supplies, such as loyalty program membership, an acquisition you make in your credit card issuing business will either:

·
not have a relevant connection to the supply of the credit card facility. If so, the acquisition is solely for a creditable purpose and apportionment is not required
·
only have a relevant connection to the supply of the credit card facility. If so, the acquisition is partly for a creditable purpose, to the extent the supply of the credit card facility is GST-free
·
have a relevant connection to both the supply of the credit card facility and the supply of interchange services. These acquisitions are partly for a creditable purpose. This includes acquisitions that have a direct connection to making both supplies (including acquisitions with distinct and severable parts that are devoted to particular uses, and which can be allocated between these uses), as well as acquisitions that have an indirect connection to all supplies made in the credit card issuing business.

28. It is not possible for this Determination to address all potential supplies and acquisitions that you may make. This Determination provides examples to illustrate how paragraph 11-15(2)(a) applies in the context of a credit card issuing business.

Examples

Note: each of the banks in these examples is a credit card issuer who participates in a four-party payment system, as set out in paragraph 17 (Diagram 1) of this Determination. Examples 9 and 11 to 15, do not address situations where the credit card issuer is also the acquirer for that transaction.

Example 1 - acquisition of debt collection services

29. Lilac Bank acquires debt collection services from Macmen Ltd, which is engaged to recover debts from Lilac's cardholders.

30. Macmen's services enable Lilac Bank to enforce their cardholder's obligations to repay the debts they incur by using the credit card facility. Lilac Bank's acquisition of debt collection services is intended to manage their debtor/creditor relationships with cardholders. Therefore there is a real and substantial connection to the supply of the credit card facility, as the debts arise from the cardholder's obligations to repay the credit obtained under the facility.

31. Whilst it is true that Lilac Bank also supplies interchange services to acquiring entities in authorising, clearing and settling the transactions that gave rise to the debt, that fact in itself is insufficient to support a conclusion that a relevant connection has been established between the interchange and the acquisition of the debt collection services. Put another way, the fact that the debts and the supply of interchange services arise from the same transaction is not sufficient to establish a real and substantial connection between the acquisition and the supply of interchange services.

32. Lilac Bank's acquisition of debt collection services only has a real and substantial connection to the supply of the credit card facility.

Example 2 - acquisitions to prepare credit card statements

33. Claret Bank acquires services from Frondescence Limited, which prints and posts statements to Claret Bank's cardholders.

34. The statements include information about:

·
the credit provided under the credit card facility
·
the cardholders' obligations to pay amounts including any fees, principal and interest.

35. Claret Bank has statutory obligations to ensure periodic statements are issued to cardholders that contain particular information.

36. Claret Bank acquires the services from Frondescence to help manage their debtor/creditor relationship with cardholders. The acquisitions have a real and substantial connection to the supply of the credit card facility.

37. Although Claret Bank supplies interchange services in relation to the credit card transactions that are recorded on the statements, this fact is not of itself sufficient to establish a real and substantial connection between the acquisition of credit card statement services from Frondescence and the supply of interchange services by Claret Bank to the acquiring bank.

38. Claret Bank's acquisitions to prepare credit card statements only have a real and substantial connection to the supply of the credit card facility.

39. The same analysis applies when Claret Bank acquires information technology services to perform equivalent functions through a website or mobile app.

Example 3 - acquisition of credit check services

40. Cobalt Bank purchases credit check services from Gimlet Partners to assist its credit card application and approval process.

41. The credit checking acquisitions help Cobalt Bank to determine whether it should enter into a debtor/creditor relationship with potential cardholders. These acquisitions relate to originating supplies of credit card facilities, and therefore have a real and substantial connection to the supply of the credit card facility.

42. Although Cobalt Bank makes supplies of interchange services to an acquiring bank which is triggered by the new cardholder undertaking transactions, this is not sufficient to establish a real and substantial connection between the acquisitions from Gimlet Partners of credit check services and the supply of interchange services. This is because the credit check services are only intended to determine the creditworthiness of the potential cardholder, in order to decide whether to offer them credit and make the supply of the credit card facility.

43. Cobalt Bank's acquisitions of credit check services only have a real and substantial connection to the supply of the credit card facility.

Example 4 - acquisition of branch network costs

44. Cherry Bank makes acquisitions to maintain its network of branches, including for rent, electricity, repairs and maintenance, cleaning and office equipment. Cherry Bank also acquires labour hire services to meet temporary staffing needs in its branches.

45. The branch network is customer-facing, providing a customer service channel for customers of Cherry Bank's retail and business banking products.

46. To reflect the activities of the branch staff, Cherry Bank allocates a proportion of its branch network costs to its credit card issuing area.

47. The activities of the branch staff in relation to Cherry Bank's credit card products include:

·
assisting with new credit card applications
·
providing customer service and assisting with enquiries from cardholders.

48. These activities of the branch staff help to manage Cherry Bank's relationship with cardholders. They do not relate to Cherry Bank's relationship with the acquiring entities that it supplies interchange services to in the course of participating in the payment system.

49. The proportion of the branch network costs allocated to the credit card issuing area has a relevant connection to the supply of the credit card facility. There is no real and substantial connection to the supply of interchange services.

50. These costs only have a real and substantial connection to the supply of the credit card facility.

Example 5 - acquisition of call centre services

51. Violet Bank outsources its credit card enquiries to the Talkativ Limited call centre.

52. Under the agreement, Talkativ must provide customer support within a specified service window. Violet Bank provides access to its systems so Talkativ staff can process new credit card applications, and resolve cardholders' enquiries.

53. Violet Bank's credit card facility has a loyalty program, but enquiries about this are not directed to Talkativ's call centre.

54. Similar to a branch, the call centre is customer-facing and its activities help Violet Bank to manage their relationship with cardholders. They do not relate to Violet Bank's relationship with acquiring entities that it supplies interchange services to in the course of participating in the payment system.

55. The acquisition of call centre services has a relevant connection to the supply of the credit card facility. There is no real and substantial connection to the supply of interchange services.

56. Violet Bank's acquisition of call centre services only has a real and substantial connection to the supply of the credit card facility.

Example 6 - acquisition of services to facilitate the introduction of new cardholders

57. Indigo Bank has an agreement with Cinereal Limited, under which Cinereal agrees to facilitate the introduction of new cardholders to Indigo Bank's credit cards.

58. This is a 'white labelling' arrangement, where Cinereal promotes and supports Indigo Bank's supplies of credit card facilities with Cinereal's existing customers. The physical credit card, credit card statements and promotional materials all bear Cinereal's branding.

59. Cinereal acts as Indigo Bank's agent in introducing current and potential Cinereal customers to Indigo Bank's credit cards. Cinereal enables these potential cardholders to make applications for the credit cards at its branches and on its website.

60. Indigo Bank supplies the credit card facility and provides credit to the cardholders. As such, Indigo Bank has all the usual responsibilities and obligations relating to operating a credit card issuing business. Under the agreement, Cinereal also has ongoing obligations to provide assistance to cardholders at its branches.

61. Indigo Bank pays various commissions to Cinereal:

·
an upfront commission for each new credit card contract
·
additional commissions when specific events occur, such as a new cardholder upgrading to a premium credit card, or for balance transfers
·
a trailing commission calculated from the net revenue earned from each new cardholder (including both revenue from interest and fees paid by the cardholder, and revenue from the interchange services supplied when the cardholder undertakes transactions).

62. Indigo Bank's acquisitions from Cinereal are intended to:

·
originate supplies of credit card facilities to cardholders
·
manage the relationship with cardholders (as Cinereal has an ongoing role in this).

63. As a result, Indigo Bank's acquisitions of services from Cinereal have a real and substantial connection to the supply of the credit card facility.

64. The fact that Indigo Bank supplies interchange services to an acquiring entity when a cardholder is provided with credit under the credit card facility is not sufficient to establish a real and substantial connection between the acquisitions and the supply of interchange services.

65. The fact that one of the commissions is partly calculated based on interchange revenues is irrelevant and does not alter the nature of the acquisition or how it is intended for use by Indigo Bank.

66. Indigo Bank's acquisitions from Cinereal only have a real and substantial connection to the supply of the credit card facility.

Example 7 - acquisition of advertising services to sign up new cardholders

67. Sepia Bank acquires advertising services from Behemoth search engine to advertise its platinum credit card. The advertisements are placed at the top of Behemoth search results lists when particular search terms are used.

68. The advertisements promote the features of the credit card, such as a 12-month interest-free balance transfer for new cardholders. The advertisements link to a page on Sepia Bank's website, which gives more information about the platinum credit card and how to apply. The advertisement is intended to attract new cardholders.

69. Considered objectively, this acquisition is made to promote Sepia Bank's credit card facilities, and is intended for originating these supplies. The acquisition of advertising services has a real and substantial connection to those supplies.[22]

70. The acquisitions from Behemoth do not have a real and substantial connection to any interchange services that Sepia Bank supplies when the new cardholder is provided with credit under the credit card facility. This is because the advertising is only intended to induce new cardholders to apply for credit, in order for Sepia Bank to make the supply of the credit card facility.

71. Sepia Bank's acquisition of advertising services only has a real and substantial connection to the supply of the credit card facility.

Example 8 - acquisition of advertising services to raise public awareness of the entity

72. Celadon Bank pays for advertising services for a television advertising campaign. The advertisement is focused on Celadon Bank's sponsorship of a local sporting team. The advertisement is intended to enhance and promote Celadan Bank's image to viewers, and is not focused on specific products or services.

73. Celadon Bank allocates part of the costs for the advertising campaign to their credit card issuing area. Considered objectively, the acquisition promotes Celadon Bank as a whole, rather than specific products or services. As the acquisition is to increase public awareness of the entity and its products in general, the acquisitions relate to all of the supplies that the bank makes.[23]

74. As this acquisition relates to Celadon Bank's enterprise as a whole, it does not have a direct connection to any particular supplies. This acquisition has an indirect connection to all the activities of the enterprise.

75. This acquisition is apportioned based on all of the supplies made by the enterprise, including the supply of the credit card facility and supply of interchange services.

Example 9 - acquisition of loyalty rewards points from a loyalty scheme operator

76. Fuchsia Bank offers a loyalty reward program for its credit cardholders, but does not make any taxable supplies of loyalty program membership to cardholders.

77. Access to loyalty program membership is incidental to, or a composite part, of the supply of the credit card facility by Fuchsia to their cardholders.

78. Fuchsia Bank enters into an agreement with an airline who is a loyalty program operator.[24] Fuchsia Bank acquires loyalty rewards points from the airline at the end of each statement period in order to update cardholders' points balances, based on the cardholder's purchase transactions during the statement period.

79. Fuchsia Bank structures the allocation of rewards points, so that cardholders earn one loyalty rewards point for each dollar they spend on purchase transactions using the credit card facility.

80. The acquisition of one loyalty rewards point from the airline requires the use of the credit card facility by the cardholder to spend $1. Each time a cardholder undertakes a transaction, the cardholder is provided with credit under the credit card facility, interchange services are supplied to an acquiring entity, and the cardholder is supplied with the loyalty rewards points.

81. The acquisition of loyalty rewards points are intended to incentivise and reward cardholder spending on the credit card, as Fuchsia Bank allocates (and therefore must acquire) loyalty points according to the value of their purchase transactions. When the cardholder enters into a purchase transaction, Fuchsia Bank necessarily provides credit under the credit card facility and supplies interchange services to an acquiring entity. The acquisition of the loyalty points has a relevant connection to both these supplies.

82. An alternative view is that the acquisitions would only have a relevant connection with the supply of the credit card facility. This is on the basis that Fuchsia Bank acquires the loyalty rewards points to fulfil its obligations to the cardholder under the loyalty program, which is an incidental or composite part of the supply of the credit card facility. This view has merit, but on balance the Commissioner considers that the acquisitions incentivise and reward increased transactional spend, and have a relevant relationship to both the supply of the credit card facility and the supply of the interchange services.

Example 10 - acquisition of loyalty rewards to retain cardholders

83. Following on from Example 9 of this Determination, for its platinum cardholders, Fuchsia Bank also acquires a complimentary domestic flight each year, which is allocated to the cardholder once they have paid their annual fee.

84. The complimentary domestic flight is a benefit provided to the cardholder under the supply of the credit card facility, and is intended to incentivise the cardholder to enter into the credit card facility contract and to continue to renew it each year. The acquisition of the flight has a real and substantial connection to the supply of the credit card facility.

85. The acquisition of the flight by Fuchsia Bank does not have a real and substantial connection to the interchange services that Fuchsia supplies when the cardholder undertakes transactions.

86. Fuchsia Bank's acquisition of the flight only has a real and substantial connection to the supply of the credit card facility.

Example 11 - acquisition of goods and services as loyalty rewards

87. Mauve Bank is the operator of its own loyalty program, as it acquires goods and services that it then provides to cardholders as loyalty rewards.

88. Mauve Bank charges a separate fee for loyalty program membership. In this case, the loyalty program membership supplied for a separate fee is not a composite part of the supply of the credit card facility, and is a separate taxable supply to the cardholder.

89. To receive membership and points in the scheme, a person must be a cardholder of the associated credit card facility, and use their card to make purchases.

90. Mauve Bank structures the loyalty rewards points, so that cardholders earn points for each dollar they spend on purchase transactions using the credit card facility. While Mauve makes a taxable supply of loyalty program membership, the earning of points by the cardholder, and therefore the acquisition of rewards, is contingent on the use of the supply of the credit card facility by the cardholder. There is a real and substantial connection between the loyalty reward acquisitions and Mauve Bank making the supply of the credit card facility.

91. Mauve Bank's acquisition of loyalty rewards has a relevant connection to both the supply of the credit card facility and the supply of interchange services (on the same basis as Example 9 of this Determination), as well as to the taxable supply of loyalty program membership.

Example 12 - acquisition of issuer scheme services

92. Sienna Bank pays issuer scheme fees to an operator to participate in a payment system. The system operator facilitates the authorisation, clearing and settlement of credit card transactions on behalf of the participants in the system.[25]

93. These acquisitions are separate from the acquisitions of acquirer scheme services where the fees are paid to the payment system operator by acquiring entities.

94. There is a complex fee structure for the payment system operator's services, including card service fees, data processing fees and transaction dispute fees. Most of these fees are charged by the transaction.

95. Sienna Bank must participate in a payment system so it can supply its credit card facility to cardholders, and supply interchange services to acquiring entities. The acquisitions of issuer scheme services have a real and substantial connection to both of these supplies.

96. The payment system operator provides services in facilitating the authorisation, clearing and settlement of each credit card transaction. The transaction is initiated by the cardholder, which initiates a series of steps through which Sienna Bank provides credit under the credit card facility and supplies interchange services to acquiring entities.[26]

97. Sienna Bank's acquisitions of issuer scheme services have a real and substantial connection to both the supply of the credit card facility and the supply of interchange services.

Example 13 - acquisition of credit card production services

98. Bank Noire acquires credit card production services so it can provide plastic credit cards to its cardholders. These cards must have the built-in features and technology specified by the payment system operator so the card will operate in the payment system. Bank Noire's agreement with the payment system operator makes these features a condition of their participation in the system.

99. When the cardholder's presents the credit card to a merchant, it enables Bank Noire to provide them credit under the credit card facility, and also initiates the operation of the payment system including supplies of interchange services by Bank Noire to acquiring entities in authorising, clearing and settling the transaction.[27]

100. Because the plastic credit cards need built-in technology to perform their function in initiating both the provision of credit under the credit card facility and the supply of interchange services, their production has a real and substantial connection to both supplies. As the plastic credit card initiates both supplies[28], and will only do so if it meets the payment system operator's specifications, the acquisition of the services to produce the plastic credit card has a real and substantial connection to both supplies.

101. This would apply equally if Bank Noire made acquisitions to develop and maintain applications on mobile phones or wearable devices which perform equivalent functions to a physical credit card.

102. Bank Noire's acquisition of credit card production services has a real and substantial connection to both the supply of the credit card facility and the supply of interchange services.

Example 14 - acquisition of credit card processing services in managing and operating the credit card facility account

103. Cinnamon Bank acquires credit card processing services. These services include processing both inbound and outbound data for the authorisation, clearing and settlement of credit card transactions, and debiting the cardholder's account for those transactions.

104. While there is no supply of a payment system to the cardholder[29], the credit card processing services supplied to Cinnamon Bank enable both credit to be provided under the supply of the credit card facility and the supply of interchange services to an acquiring entity in a payment system.

105. An objective assessment of the specific functions performed by the relevant software applications as part of the services acquired is required to determine which parts of the services:

·
only have a real and substantial connection to the supply of the credit card facility, or
·
have a real and substantial connection to both the supply of the credit card facility and the supply of interchange services.

106. Cinnamon Bank determines that part of the services involve applications and functions that are only intended to manage and operate the cardholders' credit card facility account. For example, this includes posting debits and credits to the cardholder's account, calculating and posting interest and fees to the account, and extracting transaction information from the account for use in preparing cardholder statements, including account information accessed via a website portal or mobile phone app.

107. These parts of the services relate to managing the debtor/creditor relationship and recording the credit provided under the supply of the credit card facility. There is no real and substantial relationship between these parts of the services acquired and the supply of interchange services made to acquiring entities.

108. These parts of the services acquired by Cinnamon Bank only have a real and substantial connection to the supply of the credit card facility.

Example 15 - acquisition of credit card processing services to process credit card transactions via the payment system

109. Following on from Example 14, Cinnamon Bank determines that part of the services relates to applications and functions that interact with acquiring entities and the payment system operator to process credit card transactions.

110. Cinnamon's service provider supplies a payment switch service to Cinnamon. The function of the switch is to act as a gateway to the credit card payment system, as it sends and receives transaction instructions from Cinnamon Bank's systems to the particular acquiring entity via the payment system. The switch is integral to receiving cardholder's requests to be provided with credit under the credit card facility, and to the performance of interchange services to acquiring entities in authorising, clearing and settling transactions.

111. The service provider also supplies:

·
an application that maintains real-time balances (a duplicate version of the cardholder's account that updates for transactions throughout the day), that is used to check if there is sufficient credit available as part of Cinnamon Bank authorising the transactions
·
an anti-fraud application to assess the authorisation request from an acquirer.

112. Both of these applications are also integral to the transaction authorisation process.

113. These parts of the services relate to making both the supply of the credit card facility and the supply of interchange services. These services allow the cardholder to request credit under the credit card facility via the payment system, and allow the subsequent posting of the transaction to the cardholder's account. These services are also used to supply the relevant acquiring entity with interchange services, as they allow the authorisation of the transaction instructions received from the acquiring entity.

114. The parts of the services acquired by Cinnamon Bank that relate to the switch, real time balances and anti-fraud applications, have a real and substantial connection to both the supply of the credit card facility and the supply of interchange services.

Date of effect

115. When the final Determination is issued, it is proposed to apply from the start of the tax period commencing after its date of issue.

Commissioner of Taxation
19 December 2018

Appendix 1 - Alternative view

Exclamation  This Appendix sets out an alternative view and explains why it is not supported by the Commissioner. It does not form part of the proposed binding public ruling.

116. An alternative view is that all acquisitions made in a credit card issuing business have a relevant connection to both the supply of the credit card facility and the supply of interchange services. The basis for this view is that the credit card issuing business, and specifically each credit card transaction, generates two simultaneous supplies. Under this view, the commercial reality is that credit card issuing revenues are generated in parallel through these interrelated supplies, and all of the acquisitions relate to derivation of both input taxed and non-input taxed revenue streams.

117. The Commissioner does not agree with this view because there is no general principle that two supplies made to separate recipients that are inter-dependent from a commercial perspective will be determinative in applying paragraph 11-15(2)(a) to acquisitions. Such dependency arguments were raised and rejected (in a different factual context) in both AXA, Rio Tinto - first instance and Rio Tinto -- appeal. In particular, Rio Tinto - appeal establishes that the identification of the relevant connection does not turn upon a characterisation of the purpose, or the occasion of the purpose, of the supplier in the sense of a broader commercial objective of the enterprise.[30] It is not permissible to reduce the extent to which an acquisition relates to making an input taxed supply merely because that supply may also serve some broader commercial objective of the supplier.[31] Instead, the application of paragraph 11-15(2)(a) requires the precise identification of the relevant acquisition and a factual enquiry into the connection between the acquisition and the making of supplies that would be input taxed.[32] This has been the approach in this Determination, which considers examples of common acquisitions using an objective assessment of the surrounding facts and circumstances.

Appendix 2 - Your comments

118. You are invited to comment on this draft Determination including the proposed date of effect. Please forward your comments to the contact officer by the due date.

119. In particular, we invite your comments on the conclusion in Example 9 of this Determination.

120. We also invite your comments on the different factual scenarios that may arise for loyalty rewards acquisitions and credit card processing services, and whether there are further examples that should be addressed in the final Determination.

121. Legislative instruments are proposed to be made under subsections 11-30(5) and 70-20(3) that will specify how acquisitions in a credit card issuing business that are partly for a creditable purpose should be apportioned. An equivalent legislative instrument will also be made under subsection 15-25(4) for importations. Those instruments will be released separately in 2019 for consultation. We will provide updates on the Consultation Hub on ato.gov.au.

122. A compendium of comments is prepared for the consideration of the relevant Public Advice and Guidance Panel or relevant tax officers. An edited version (names and identifying information removed) of the compendium of comments will also be prepared to:

·
provide responses to persons providing comments
·
be published on the ATO website at www.ato.gov.au.

Please advise if you do not want your comments included in the edited version of the compendium.

Due date: 15 February 2019
Contact officer: Virginia Gogan
Email address: Virginia.Gogan@ato.gov.au
Telephone: 03 863 24643
Address: Australian Taxation Office
GPO Box 9977
Melbourne VIC 3001

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Footnotes


All further references to 'this Determination' refer to the Determination as it will read when finalised. Note that this Determination will not take effect until finalised.


This Determination assumes that acquisitions have satisfied subsection 11-15(1), and does not address the application of subsections 11-15(3),(4) and (5), or entitlement to reduced input tax credits under Division 70.


For example, business and corporate cards issued for business-related use.


Practical Compliance Guideline PCG 2017/15 GST and Customer Owned Banking Institutions explains the Commissioner's practical administration approach to apportionment by customer owned banking institutions.


For example, see lines B46 to B49 of Schedule 2 to Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions, .


See Amex at 148 and 174. Item 2 of the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). For Authorised Deposit-Taking Institutions item 1 of the table in subregulation 40-5.09(3) of the GST Regulations also applies.


See Amex at 148 and 174. This position is also reflected in paragraph 21 of Goods and Services Tax Determination GSTD 2017/1 Goods and services tax: when is the supply of a credit card facility GST-free under paragraph (a) of item 4 in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?


See Amex at 153.


Regulation 40-5.09 of the GST Regulations.


See further explanation in GSTD 2017/1.


Further discussion on item 3 is provided in Goods and Services Tax Ruling GSTR 2007/2 Goods and services tax: in the application of paragraph (b) of item 3 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 to a supply, when does 'effective use or enjoyment' of the supply 'take place outside Australia'?. Paragraphs 106 and 294 of GSTR 2007/2 indicate that the 'effective use or enjoyment outside Australia' of a supply occurs if the supply is provided to an individual that is located outside Australia, provided the individual's presence at that location is integral to, as distinct from being merely coincidental with, the provision of the supply.


Item 4 of the table in regulation 40-5.12 of the GST Regulations. When the supply of interchange services is GST-free is not in the scope of this Determination.


HP Mercantile Pty Ltd v. Federal Commissioner of Taxation [2005] FCAFC 126; 2005 ATC 4571; (2005) 60 ATR 106; (2005) 143 FCR 553; (2005 219 ALR 591 (HP Mercantile) at paragraph 35, paragraphs 113 and 118 of GSTR 2008/1.


Rio Tinto Services Ltd v. Commissioner of Taxation [2015] FCA 94 (Rio Tinto - first instance) at 26 and 33.


Paragraph 119 of GSTR 2008/1.


Rio Tinto Services Ltd v. Commissioner of Taxation [2015] FCAFC 117 (Rio Tinto - appeal) at paragraph 7. HP Mercantile at paragraph 37.


As confirmed in Axa Asia Pacific Holdings Ltd v. Commissioner of Taxation [2008] FCA 1834 (Axa) at paragraph 124, RioTinto - first instance at paragraph 26 and Rio Tinto - appeal at paragraph 7.


Rio Tinto - appeal at paragraph 7, Rio Tinto - first instance at paragraph 26.


Rio Tinto - appeal at paragraph 8.


Rio Tinto - appeal at paragraph 7.


Rio Tinto - appeal at paragraph 7.


See also paragraph 126 of GSTR 2008/1.


See also paragraph 126 of GSTR 2008/1.


Consistent with the loyalty programs described in paragraphs 17 to 22 of GSTR 2012/1 Goods and services tax: loyalty programs, see paragraphs 17 to 22.


Visa International Service Association v. Reserve Bank of Australia [2003] FCA 977 (Visa) at 92.


Amex at paragraph 174 and Visa at paragraph 351.


Amex at paragraph 174 and 180 and Visa at paragraph 351.


The provision of credit for that transaction is not a separate supply, but it is part of the supply of the credit card facility.


Amex at paragraph 180 establishes that while the cardholder's presentation of the credit card triggers the operation of the payment system and the authorisation process, the subsequent operation of the payment system is not the cardholder's concern, as they are not supplied with an interest in the payment system.


Rio Tinto - appeal at paragraph 7.


Rio Tinto - appeal at paragraph 8.


Rio Tinto - appeal at paragraph 7.

Not previously issued as a draft

References

ATO references:
NO 1-GI5ZAMG

ISSN: 2205-6254

Related Rulings/Determinations:

GSTD 2007/1
GSTD 2017/1
GSTR 2002/2
GSTR 2006/3
GSTR 2007/2
GSTR 2008/1
GSTR 2012/1
PCG 2017/15
TR 2006/10

Business Line:  ITX

Legislative References:
ANTS(GST)A 1999
ANTS(GST)A 1999 11-15(1)
ANTS(GST)A 1999 11-15(2)(a)
ANTS(GST)A 1999 11-15(3)
ANTS(GST)A 1999 11-15(4)
ANTS(GST)A 1999 11-15(5)
ANTS(GST)A 1999 11-30(5)
ANTS(GST)A 1999 15-10(2)(a)
ANTS(GST)A 1999 15-25(4)
ANTS(GST)A 1999 38-190(1)
ANTS(GST)A 1999 Div 70
ANTS(GST)A 1999 70-20(3)
ANTS(GST)R 1999
ANTS(GST)R 1999 40-5.09
ANTS(GST)R 1999 40-5.09(3)
ANTS(GST)R 1999 40-5.12

Case References:
Axa Asia Pacific Holdings Ltd v. Commissioner of Taxation
2008 ATC 20-074
(2008) 71 ATR 1
[2008] FCA 1834
(2008) 173 FCR 50


Commissioner of Taxation v. American Express Wholesale Currency Services Pty Limited
2010 ATC 20-212
(2010) 77 ATR 12
[2010] FCAFC 122
(2010) 187 FCR 398
[2011] HCATrans 114

Commissioner of Taxation v. MBI Properties Pty Ltd
(2014) 315 ALR 32
2014 ATC 20-474
(2014) 92 ATR 241
(2014) 254 CLR 376
[2014] HCA 49

HP Mercantile Pty Ltd v. Federal Commissioner of Taxation
2005 ATC 4571
(2005) 60 ATR 106
(2005) 219 ALR 591
[2005] FCAFC 126
(2005) 143 FCR 553

Rio Tinto Services Ltd v. Commissioner of Taxation (first instance)
2015 ATC 20-489
(2015) 98 ATR 390
[2015] FCA 94

Rio Tinto Services Ltd v. Commissioner of Taxation
2015 ATC 20-525
(2015) 101 ATR 546
[2015] FCAFC 117
(2015) 235 FCR 159

Visa International Service Association v. Reserve Bank of Australia
[2003] FCA 977
(2003) 131 FCR 300