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Ruling

Subject: extent of creditable purpose

Question 1

Should interest revenue earned by Entity X from money it invests externally in other financial institutions be included in the numerator of the general formula?

Answer

No. The interest revenue earned by Entity X from money invested externally should not be included in the numerator of the general formula.

Question 2

Does the general formula allow for interest expenses relating to customer deposits and Entity X's liquidity/borrowing needs to be offset against interest revenue from customer and interest revenue from Entity X's monies invested externally?

Answer

Yes.

Relevant facts

Entity X is conducting an enterprise which makes supplies to customers in the form of loans, lines of credit, overdrafts and other services.

Entity X is registered for GST.

Entity X calculates its entitlement to input tax credits using the entity-based general formula approach outlined in the Goods and Services Tax Ruling 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3).

Entity X has interest revenues which consist of:

· Interest revenue from money borrowed by their customers in products such as loans, lines of credit and overdrafts; and

· Interest revenue from monies invested externally with third parties. That is, Entity X invests money in term deposits and banks accounts with other financial institutions which pay interest revenue to Entity X.

Entity X has interest expenses which consist of:

· Interest expense on monies invested in Entity X by it's customers in products such as loans, lines of credit and overdrafts; and

· Interest expense on Entity X's borrowings as part of its liquidity management such as lines of credit and issue of subordinate debt.

Reasons for decision

Question 1

In Goods and Services Tax Ruling GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3), the Commissioner provides guidance to financial supply providers on methods that can be used for calculating input tax credits.

At paragraph 27 of GSTR 2006/3, the Commissioner advises that, in calculating input tax credits, an entity needs to make a fair and reasonable estimation of the extent of creditable purpose for its acquisitions. Accordingly, the requirement that the estimation be fair and reasonable is a prerequisite for any apportionment methodology decision made.

In this case, Entity X has advised that it uses the general formula for the purpose of calculating its entitlement to input tax credits. Paragraph 109 of GSTR 2006/3 states:

Revenue-based formulas

109. The basic revenue-based formula (also applicable to the entity-based general formula above) can be expressed as follows:

Percentage credit allowed

Revenue* (other than revenue from

input taxed supplies) x 100

Total Revenue* (including revenue

relating to input taxed supplies)

*'Revenue' may be either net revenue or gross revenue depending on which provides the more appropriate reflection of the use of acquisitions in your circumstances. In any case, a consistent approach (gross or net) should be used for the same revenues occurring in both the numerator and denominator.

If net revenue is used, it should ignore income tax. That is, do not reduce your revenue in the formula by the amount of the income tax deductions to which you may be entitled. The value of non-monetary consideration should also be included in revenue.

The revenue-based formula which is also applicable to an entity-based general formula requires that revenue from input taxed supplies be excluded from the calculation of the numerator. Therefore in this case what needs to be considered is wether the interest revenue earned by Entity X from money it invests externally in other financial institutions is 'revenue from input taxed supplies'.

Section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a financial supply (having the meaning given by the GST regulations) is input taxed.

Under the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations), the table in sub-regulation 40-5.09(3), lists a number of financial supplies.

In Goods and services tax ruling 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) the Commissioner clarifies what is, and is not, a financial under the GST Regulations. In particular paragraph 37 and 39 state:

37. When an entity borrows money from a lender on terms that include payment of interest, it creates an interest in a debt that includes the payment of interest. The lender creates and supplies an interest in a credit arrangement. Aside from the operation of subsection 9-10(4) each entity would make a supply of a financial interest (under item 2 in subregulation 40-5.09(3)) to the other, and each supply would be consideration for the other.

39. The supply of an interest in a credit arrangement is provided for (monetary) consideration (namely the debt) and is a financial supply.

Further from the Financial Services Questions and Answers on the Taxation Office website question 3.2 states:

3.2. Is interest paid to, or received from, a bank subject to GST?

Non-interpretative - other references (see GSTR 2002/2 - Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions)

Interest paid to, or received from, a bank is not subject to GST if it is the consideration for the provision, acquisition or disposal of an interest in or under a bank account or credit account under items 1 and 2 respectively in the table in subregulation 40-5.09(3) of the GST Regulations.

Consistent with GSTR 2002/2 where Entity X received interest revenue from monies it invests in other financial institutions, this is consideration for the provision, acquisition or disposal of an interest in or under a bank account or credit account under items 1 and 2 respectively in the table in suregulation 40-5.09(3) of the GST Regulations. Therefore where the other requirements of a financial supply under sub-regulation 40-5.09(1) are satisfied this is considered input taxed.

Consequently, when calculating the revenue in the numerator of the general formula it does not include the interest revenue from Entity X's monies invested externally with third parties. That is, we consider the interest received by Entity X will be revenue from an input taxed supply.

Question 2

Entity X seeks to confirm their understanding that interest expenses can be netted against interest revenue.

For the purposes of determining 'revenue' used in the general formula paragraph 109 of GSTR 2006/3 above states that 'Revenue' may be either net revenue or gross revenue depending on which provides the more appropriate reflection of the use of acquisition in your circumstance.

The term 'net revenue' is further considered in paragraph 203 of GSTR 2006/3 which states:

Net revenue

203. Net revenue is used in the revenue-based formula to mean an amount of income after deducting corresponding outgoings

Consistent with paragraph 203 of GSTR 2006/3, where an entity uses a net amount as the basis of calculating its interest, the general formula allows that interest revenue be netted off against all forms of interest expense.

On this basis the general formula allows Entity X to net off its interest expenses. That is, we confirm that Entity X can deduct their interest expenses which consist of interest expenses from monies invested by its customers and interest expenses from its liquidity management activities from the corresponding interest revenues.

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