Edited version of private ruling

Authorisation Number: 1011513775728

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Ruling

Subject: GST and input tax credits

Questions:

1. Does XYZ Pty Ltd in its corporate capacity (XYZ) make taxable supplies of trustee services to XYZ Pty Ltd in its capacity as trustee for the XYZ Fund (the Fund), of the kind referred to under Item 29 in the table to sub-regulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)?

Answer: Yes.

XYZ make taxable supplies of trustee services to the Fund, of the kind referred to under Item 29 in the table to sub-regulation 70-5.02(2) of the GST Regulations.

2. Does XYZ make creditable acquisitions when it makes acquisitions from third party entities (third party acquisitions) to provide services with respect to its obligations outlined under the XYZ Trust Deed (the Trust Deed)?

Answer: Yes.

XYZ makes creditable acquisitions when it makes third party acquisitions to provide services with respect to its obligations outlined under the Trust Deed.

3. Is the consideration for the taxable supply of trustee services made by XYZ to the Fund represented by the recovery, from the Fund, of the cost of third party acquisitions referred to in question 2 above, which XYZ has proposed to account for as acquisitions it has made in its own right?

Answer: Yes.

The consideration for the taxable supply of trustee services made by XYZ to the Fund is represented by the recovery, from the Fund, of the cost of third party acquisitions referred to in question 2 above, which XYZ has proposed to account for as acquisitions it has made in its own right.

(All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless stated otherwise)

Relevant facts and circumstances

Background

XYZ is an Australian proprietary company limited by shares.

XYZ is the trustee of the Fund established under the Trust Deed.

XYZ and the Fund are treated as separate entities for GST purposes.

The Fund is a public offer superannuation fund, and is a "complying superannuation fund".

XYZ carries on an enterprise of providing the trustee services outlined in the Trust Deed. The Fund carries on an enterprise of a complying superannuation fund. Both entities are registered for GST purposes.

It is understood that the supply of trustee services by XYZ to the Fund is connected with Australia and is not a GST-free or input taxed supply.

The Fund provides consideration for the trustee services supplied by XYZ.

The Trust Deed outlines the powers and responsibilities that XYZ has in relation to its role as trustee of the Fund.

The Trust Deed relevantly provides that:

· XYZ has the complete management and control of all proceedings, matters and things in connection with the Fund and may do all acts and things which it considers necessary for the proper application, administration, maintenance and preservation of the Fund or any part of the Fund.

· XYZ has the power to deduct any management expenses from any benefit or any amount payable to or in respect of a Member.

· All costs and expenses of and incidental to the operation, management, administration and investment of the Fund (including all costs and expenses incurred by XYZ in and about the provision to the Fund of its services as Trustee) shall be payable out of the Fund.

· XYZ shall cause proper books of record and account to be kept showing all dealings with the assets of the Fund. The Trustee shall maintain the accounting records in such manner as will enable the preparation of financial statements.

The Trust Deed does not specify in any way how Fund expenses are to be paid or accounted for. In line with the requirement in the Trust Deed to keep proper books and accounts to enable the preparation of financial statements, XYZ is able to arrange to pay Fund expenses in any way as long as this requirement is fulfilled.

As a body corporate and legal person, XYZ engages various third party service providers to provide services to XYZ so it can fulfill its trustee obligations. The acquisitions made by XYZ from third party service providers are referred to in this ruling as third party acquisitions and the typical expenses in respect of these acquisitions include:

· the costs associated with the fund and member administration services provided by JKL Pty Ltd (JKL) (discussed in further detail below);

· costs related to managing the Fund's investment portfolio;

· salaries and related costs of staff employed by the XYZ and for the board of directors of XYZ;

· costs associated with general administration of the Fund, including administration of member accounts, dealing with member communications and preparation of financial reports and related accounting in relation to the Fund;

· costs associated with complying with various taxation, legal and industry regulatory requirements, including consulting costs associated with these obligations; and

· costs of a general operational nature, including office 'overheads', marketing and printing of publications and forms.

XYZ has delegated powers to the Fund's custodian, OPQ Pty Ltd (OPQ), in relation to custody of the Fund's investments and bank accounts from which OPQ is responsible for paying a number of fees to third parties related to the management of the Fund's investments and receiving all investment income of the Fund. In its role as custodian, OPQ maintains unit prices for all investment sectors of the Fund's portfolio. These unit prices are used to derive crediting rates for the Fund. In order that these unit prices and hence crediting rates are correct OPQ must continue to receive all investment income and meet all investment expenses.

XYZ has also appointed JKL, a provider of superannuation fund administration services, under an agreement to provide a range of fund and member administration services to XYZ in respect of the Fund, and to hold a bank account for and on behalf of the Fund. This is necessary to comply with regulatory requirements which prescribe that the Fund's bank accounts be custodially held.

Third party acquisitions do not include the custodial services provided by OPQ as, noted above, those custodial services are directly acquired by the Fund and are the Fund's acquisitions.

For accounting purposes at present, a number of items of income and expense are accounted for in an administration reserve account within the Fund as follows:

· Monthly account fees paid by members of the Fund;

· Exit fees charged to Fund members;

· Interest and earnings on money in the account; and

· The "insurance differential", which is the difference between the premium charged to members for life insurance benefits and the aggregate of the premiums paid to the Fund's insurers and claims management expenses.

In the ordinary course of events, the revenue allocated to the administration reserve account exceeds the expenses that are allocated against the account. Therefore the account accrues an annual surplus. That surplus is retained within the Fund to cover the uninsured operational risks of the Fund.

The administration reserve account is held in the Fund, whereas the expenses are incurred by XYZ in performing its trustee role for the Fund.

Current GST treatment of transactions undertaken by XYZ

The vast majority of all expenses related to the operations of the Fund (incurred by XYZ in both its capacities) have in the past generally been accounted, for GST purposes as well as for income tax and general accounting purposes, as acquisitions of the Fund. Therefore, the Business Activity Statements ("BASs") submitted on behalf of the Fund for past tax periods have been prepared on the basis that all acquisitions incurred by XYZ in fulfilling its duties as Trustee, and acquisitions paid for by OPQ in relation to the Fund's investments, were acquisitions of the Fund.

The other expenses, including fees and related costs paid to directors of XYZ and trustee liability insurance premiums, have been treated as consideration for the taxable supply of trustee services provided by XYZ to the Fund, and a GST liability accounted for accordingly. The transactions relating to these expenses are reported as consideration for the supply of trustee services in XYZ's BASs.

Proposed changes to how XYZ transactions are accounted for

XYZ intends to alter the method it has previously applied to account for expenses it incurs in carrying out its role as trustee of the Fund for GST, accounting and income tax purposes.

In providing trustee services to the Fund pursuant to the Trust Deed, XYZ engages third party service providers. Under the arrangements with these service providers, XYZ is liable to pay consideration to them in return for their services. XYZ will pay for the third party acquisitions from a bank account held in the name of XYZ, which it is authorised to hold in its own name.

XYZ proposes to account for the third party acquisitions as acquisitions of XYZ in carrying on its enterprise of providing taxable supplies of trustee services to the Fund. However, this treatment will not apply to expenses related to managing the investments of the Fund for which OPQ as the Fund's asset custodian has been delegated responsibility to manage and pay on behalf of the Fund.

The BASs prepared for XYZ will include input tax credits for acquisitions made by XYZ in providing trustee services to the extent they are creditable acquisitions for GST purposes. The BASs will also include GST payable by XYZ calculated on the amounts (including expenses that were not originally subject to GST, e.g. staff salaries) recovered by XYZ from the Fund as consideration for the supply of trustee services that XYZ provides.

Reasons for decisions

1. Does XYZ make taxable supplies of trustee services to the Fund, of the kind referred to under Item 29 in the table to sub-regulation 70-5.02(2) of the GST Regulations?

A recipient's entitlement to input tax credits

The GST Act provides that you are entitled to the input tax credits for any creditable acquisitions that you make.

The definition of a creditable acquisition is provided under section 11-5 which states that:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

* denotes a term defined in section 195-1.

The requirement at paragraph 11-5(b) is that the supply of the thing to the recipient is a taxable supply.

The definition of a taxable supply is provided at section 9-5 which states that:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

Section 9-40 also provides that an entity is liable to pay the GST payable on any taxable supply that it makes.

We are of the view that it is the objective intention of the parties in question that will determine whether an acquisition is made by XYZ in its personal capacity or in its capacity as trustee of a trust (i.e. the fund itself).

Where acquisitions are made by XYZ in its personal capacity they are capable of forming an input into a supply of trustee services that XYZ, acting in its personal capacity, makes to the fund. Acquisitions that are made by the fund (in other words acquisitions that the trustee makes in that capacity) are not capable of forming an input into the supply of trustee services.

In this case, the supply of trustee services by XYZ to the Fund is made in the course of XYZ's enterprise and is understood to be connected with Australia. Therefore it is clear that, as a result of the proposed changes to the operations of XYZ, the supply of the trustee services that XYZ makes to the fund is made for consideration. This supply meets the remaining requirements of section 9-5 and therefore it is a taxable supply.

The question is then whether XYZ's supply of trustee services would be a reduced credit acquisition (RCA) when it is supplied to the recipient (the Fund).

As mentioned above, one of the requirements for making a creditable acquisition is that an entity must make that acquisition solely or partly for a creditable purpose.

The meaning of creditable purpose is provided under section 11-15. The general rule under that section is that an acquisition will be denied creditable purpose if it relates to making supplies that would be input taxed.

Entitlement to reduced input taxed credits on acquisitions related to making financial supplies

One of the exceptions to the general rule exists under Division 70 which extends the meaning of creditable purpose.

Subsection 70-5(1) states that an entitlement to a reduced input taxed credit may arise for acquisitions of a specified kind relating to making financial supplies known as RCAs. Subsection 70-5(1A) also states that an acquisition is not a RCA to the extent that, without Division 70 applying, an entity is entitled to an input tax credit for the acquisition.

The table in subregulation 70-5.02(2) of the GST Regulations provides a list of acquisitions that are RCAs within the meaning of subsection 70-5(1).

Trustee and custodial services

Item 29 in the table to subregulation 70-5.02(2) of the GST Regulations falls under the broader category of trustee and custodial services and is in the following terms:

(a) Trustee and custodial services (except safe custody of money, documents and other things), including:

(b) transfer of cash without purchase, sale or transfer of assets, excluding cash delivery and collection from branches of Australian ADIs; and

(c) undertaking and settling of securities transactions by a financial supply facilitator; and

(d) collecting income and other payments; and

(e) registration of interests and rights; and

(f) proxy voting; and

(g) exercise of options and warrants; and

(h) opening and maintaining accounts with Australian ADIs;

(i) nominee services in relation to financial supplies

Paragraphs 664 to 698 of Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1) provide the Commissioner's view on what types of acquisitions are regarded as RCAs under item 29. Of particular relevance to question 1 are paragraphs 664 to 668 which provide that:

664. The examples listed in items 29(a) to 29(h) indicate that item 29 is directed specifically at custodial and related functions in connection with the holding of a member's (in the case of a superannuation scheme) or an investor's (in the case of a managed investment scheme) assets. These functions may be carried out by either a trustee, as part of the trustee's responsibilities, or by a custodian appointed by a trustee of a fund, or a responsible entity of a managed investment scheme. The custodian may also be appointed by specific agreement with either the trustee, responsible entity or by an investment manager contracted by either.

665. The use of the term including before items 29(a) to 29(h) means that although the listed acquisitions are trustee and custodial services for the purposes of the item, they are not the only trustee and custodial services to which the item may apply.

Trustee services

666. Notwithstanding the focus on custodial functions, the reference to trustee services in item 29 is capable of applying widely to services acquired from a trustee. Where a trust has been established by a deed, the deed will normally set out the rights, duties and obligations of the relevant parties to the trust, including the trustee. As such, the duties carried out by the trustee in compliance with the terms of the deed are trustee services, the acquisition of which is a reduced credit acquisition under item 29.

667. Where the trust acquires services from the trustee which are not provided for in the deed, the acquisition is not a reduced credit acquisition unless it is of custodial services, or it is a reduced credit acquisition under another item within subregulation 70-5.02(2). For example, where an entity acquires trustee services specific to investment portfolio management, that acquisition may be a reduced credit acquisition under item 23(c).

668. Custodial services are recognized as services provided by an entity that holds and safeguards financial assets, such as cash or securities, on behalf of other parties.^F93 These services are normally provided by a custodian, and usually include the provision of administrative and accounting functions in relation to the holding of the relevant financial assets.

The Commissioner's view as per the above paragraphs is that the reference to trustee services in item 29 is capable of applying widely to services acquired from a trustee and that the duties carried out by the trustee in compliance with the terms of the trust deed, under which the rights, duties and obligations of the trustee are set out, are trustee services for the purposes of item 29.

In this case, XYZ carries on an enterprise of providing trustee services outlined in the Trust Deed to the Fund and the Trust Deed outlines the powers and responsibilities that XYZ has in relation to its role as trustee of the Fund.

In consideration of the circumstances at hand, our opinion is that XYZ makes taxable supplies of trustee services to the Fund of the kind referred to under Item 29. As the supply of trustee service by XYZ is a taxable supply, XYZ will be liable to pay the GST payable on its supply of trustee services.

2. Does XYZ make creditable acquisitions when it makes third party acquisitions to provide services with respect to its obligations outlined under the Trust Deed?

As stated above, the definition of a creditable acquisition is provided under section 11-5.

Paragraphs 54 and 56 of Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9) (footnote omitted) relevantly provide that:

54. To make an acquisition you have to be the 'recipient' of the supply of the thing you are acquiring. Although the term 'recipient' does not appear in Division 11, it is defined in section 195-1 to mean the entity to which the supply was made. This definition suggests that there is a supplier, a recipient and that something is passed from the supplier to the recipient.

Creditable acquisitions and input tax credits

56. If you make an acquisition and the other requirements of section 11-5 are met then the acquisition is a creditable acquisition. However, if you are not the recipient of the supply you will not have made a creditable acquisition, even if you provide consideration for the supply.

As advised, XYZ proposes to account for third party acquisitions as acquisitions made by XYZ in its own right in carrying on its enterprise of providing trustee services to the Fund. In XYZ's opinion, this method of accounting for third party acquisitions will better reflect the terms of the Trust Deed and the legal relationships between XYZ and other suppliers of services in relation to the operation of the Fund.

On the understanding that XYZ's proposed method of accounting for third party acquisitions correctly reflects that those acquisitions are made by XYZ in its own right in carrying on its enterprise of providing trustee services to the Fund, those acquisitions would be for a creditable purpose as they satisfy subsection 11-15(1). On the further understanding that all the other requirements of section 11-5 are satisfied, those third party acquisitions will be creditable.

3. Is the consideration for the taxable supply of trustee services made by XYZ to the Fund represented by the recovery, from the Fund, of third party acquisitions referred to in question 2 above, which XYZ has proposed to account for as acquisitions it has made in its own right?

We consider that the recovery of funds represents consideration for the supply of trustee services. This conclusion is reached from an objective assessment of the activities performed by XYZ in meeting its obligations under the Trust Deed. The Trust Deed specifically provides for a recovery of expenditure XYZ has incurred in meeting those obligations.

Consequently, the BASs prepared for XYZ will include GST payable by XYZ calculated on amounts recovered from the Fund for the cost of third party acquisitions.

The decisions made in this ruling are based on information submitted and circumstances applying at the time of issuing this ruling. The decisions in this ruling may no longer apply to XYZ if those circumstances change.

Furthermore, please note that application of the general anti avoidance provisions under Division 165 to your circumstances has not been considered in this ruling.

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