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Ruling

Subject: Reduced credit acquisitions

Question

Are we entitled to claim reduced input tax credits (RITC) on acquisition of services to prepare annual operation statement and statement of financial position?

Answer

Yes, you are entitled to claim RITC on acquisition of services to prepare annual operation statement and statement of financial position.

Relevant facts and circumstances

· You are the trustees of a superannuation fund (Fund).

· The Fund is a regulated superannuation fund and its acquisitions exceed the financial acquisitions threshold.

· You are registered for the goods and services tax (GST).

· You engaged a third party entity to prepare the annual operation statement (profit & loss statement) and the statement of financial position (balance sheet) of the Fund.

· You required these statements to comply with the superannuation regulatory requirements.

· The third party entity has issued to you a letter in which the entity has provided some information relating to the fees for services acquired by you in the capacity of the trustees of the superannuation fund.

· You require clarification from the Australian Taxation Office (ATO) on the entitlement to claim reduced input tax credits (RITC) on acquisitions made to comply with industry regulatory requirements.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 70-5(1)

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 40-5.09(1)

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 70-5.02(2)

Reasons for decision

Subregulation 40-5.09(1) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) states that the provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) is a financial supply if:

a) The provision, acquisition or disposal is:

(i) for consideration; and

(ii) in the course or furtherance of an enterprise; and

(iii) connected with Australia; and

b) the supplier is:

(i) registered or required to be registered; and

(ii) a financial supply provider in relation to supply of the interest.

Subregulation 40-5.09(3) of the GST Regulations states that, for subregulation (1), the interest is an interest in or under the matter mentioned in an item in the table given in that subregulation. Item 4 in subregulation 40-5.09(3) states:

A regulated superannuation fund, an approved deposit fund, a pooled superannuation trust or a public sector superannuation scheme within the meaning of the Superannuation industry (Supervision) Act 1993, or an RSA (retirement savings account) within the meaning of the Retirement Savings Accounts Act 1997

In this case you supply interests in a regulated superannuation fund to the members, which, by above definitions, are financial supplies.

Subsection 70-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that the GST Regulations may provide that acquisitions of a specified kind that relate to making financial supplies can give rise to an entitlement to a reduced input tax credit. These acquisitions are reduced credit acquisitions

Item 24(h) in the table in subregulation 70-5.02(2) of the GST Regulations specifies that administrative functions relating to complying with industry regulatory requirements, (excluding taxation and auditing services), for superannuation schemes are acquisitions that attract reduced input tax credits.

Goods and Services Tax Ruling GSTR 2004/1, which provides the Commissioner's view on reduced credit acquisitions, explains in detail what acquisitions constitute reduced credit acquisitions. The scope of item 24(h) in the table in subregulation 70-5.02(2) of the GST Regulations is given in paragraphs 584 -585 of GSTR 2004/1:

Item 24(h) - compliance with industry regulatory requirements, excluding taxation and auditing services

584. The scope of item 24(h) depends upon the meanings of the expressions, compliance, industry regulatory requirements, taxation services, and auditing services and the overall context of the item.

585. The following extract from the explanatory statement accompanying the amendments to item 24(h) and 26(h) assists in interpreting the meaning of these paragraphs:

New paragraphs 24(h) and 26(h) correct a drafting error and also clarify the scope of the item. An acquisition is a reduced credit acquisition under that paragraph if it is acquired for compliance with industry regulatory requirements, excluding taxation and auditing services. This means that costs incurred for preparation of tax returns or Business Activity Statements are not reduced credit acquisitions. These services are excluded as they are not principally or specifically acquired to comply with a regulatory requirement related to providing funds management services (item 24) or life insurance services (item 26).

The term "compliance", in the context in which it is used in item 24(h) is explained in GSTR 2004/1 in paragraphs 586 to 592.

586. In item 24(h), the expression compliance is taken to mean 'the act of complying' and complying means to 'do as required or requested'. Accordingly, compliance refers to the performance of some activity as a direct consequence of a formal order or instruction.

587. The acquisition of a thing or service which assists the acquirer to comply with an industry regulatory requirement will not, of itself, be an acquisition of an administrative function of compliance with industry regulatory requirements under item 24(h). Rather, an acquisition of an administrative function of compliance with industry regulatory requirements is an acquisition of a function which will, in itself, result in compliance being achieved.

Example 69 - compliance with industry regulatory requirements

588. The Axiomatic Group (Axiomatic) is a financial services entity seeking to issue units in a new managed investment scheme called the Phalanx Fund No. 1. Axiomatic engages the services of Maxima Fund Management Services (Maxima) to manage the offer and provide on-going management services.

589. Maxima carries out all the preparatory work necessary to issue the units, including, drafting of a prospectus in consultation with legal advisers, arranging the printing and distribution of prospectuses, and handling all applications for units in the fund. Maxima invoices Axiomatic for a range of services including 'preparation and distribution of prospectuses'.

590. The function carried out by Maxima in ensuring compliance with the regulatory requirement to issue a product disclosure statement (such as a prospectus) under the Corporations Act, is a reduced credit acquisition by Axiomatic under item 24(h).

Example 70 - not compliance with industry regulatory requirements - legal costs and printing of prospectus

591. Speilberg Income Fund (Speilberg) proposes to offer a new investment fund to investors and is required by the Corporations Act to issue a product disclosure statement in relation to the offer. Spielberg undertakes the function of compliance with industry regulatory requirements in-house by drawing together the elements of the disclosure statement. In the course of issuing the product disclosure statement to interested investors, Speilberg subsequently acquires legal services from Hartley & Co Solicitors relating to the statement's content, as well as printing services from Pressburger Printers Ltd.

592. Neither of these acquisitions, considered individually, is a reduced credit acquisition under item 24(h), as neither is an acquisition of an administrative function of compliance with industry regulatory requirements which, in itself, results in compliance with the requirement.

You informed us that the annual operation statement (profit & loss statement) and the statement of financial position (balance sheet) of the Fund are required to comply with the superannuation regulatory requirements. Paragraphs 595 to 597 of GSTR 2004/1 explain what is meant by 'industry regulatory requirements' as follows:

595. For the purposes of item 24(h), the expression industry regulatory requirements refers to a command or instruction in an Act or Regulation of the Commonwealth, States or Territories of Australia, that applies to a branch or segment of the funds management industry. For example, any requirement in the SIS Act is an industry regulatory requirement for the purposes of item 24(h).

Example 71 - compliance with industry regulatory requirements

596. Mercurial Superannuation Fund (Mercurial) is required under the provisions of SIS Act to have an actuary's certification that they are able to meet promised payments when they fall due. Mercurial engages the services of Aardvaark Actuarial Services (Aardvaark) to provide the necessary certificate.

597. The acquisition of actuarial services from Aardvaark is a reduced credit acquisition under item 24(h) as an acquisition of an investment portfolio management function of compliance with industry regulatory requirements.

Where it is required by the appropriate industry regulatory authority for you to provide operation statement (profit & loss statement) and the statement of financial position (balance sheet) of the Fund, then, these acquisitions are reduced credit acquisitions.

However, taxation services acquired to comply with a tax administered by the Commissioner of Taxation or any State taxation or revenue authority do not give rise to an entitlement under the provisions for reduced credit acquisitions. Paragraph 598 of GSTR 2004/1 provides this explanation:

598. The expression taxation services in item 24(h), refers to any service in respect of the imposition or payment of a tax administered by the Commissioner of Taxation or any State taxation or revenue authority. Taxation services includes, but is not limited to:

· the provision of taxation advice;

· the preparation and lodgment of any form of tax return /statement or specific requests for information made by the Commissioner of Taxation; and

· representing clients in connection with any audit activities instigated by the Commissioner of Taxation.

Further, paragraphs 608 and 609 of GSTR 2004/1 state in respect of auditing services:

608. For the purposes of item 24(h), auditing services are any services that provide for:

...the systematic examination of accounting records and financial statements for the purpose of assessing whether these records and statements give a true and fair view of the business carried on.

609. An acquisition of compliance with an industry regulatory requirement is a reduced credit acquisition under item 24(h) to the extent that it is not a taxation or audit service.

However, GSTR 2004/1 at paragraphs 610 and 611 provides the circumstances under which some taxation and auditing services may give rise to reduced credit acquisitions. These two paragraphs are quoted below:

610. Notwithstanding that an acquisition may include the provision of a taxation or auditing service that is ancillary, incidental or integral to the service of complying with industry regulatory requirements, that part of the service comprising the taxation or audit service must be excluded for the purposes of determining the entitlement to a reduced input tax credit arising from an acquisition under item 24(h).

611. However, where a taxation or auditing service is an ancillary, incidental or integral element of a function (or group of functions) listed under item 24 paragraphs (a) through to (g) inclusive, the taxation or auditing service is to be considered part of that function or group of functions and need not be excluded by virtue of the specific exclusion in paragraph (h) when determining entitlement to a reduced input tax credit.

The paragraphs (a) through to (g) of Item 24 referred to in paragraph 611 of GSTR 2004/1above are:

1. maintaining member and employer and trustee records and associated accounting;

2. processing of applications, contributions, benefits and distributions;

3. processing transfer between funds and trusts;

4. production and distribution of reports, statements and forms to members, employers and trustees;

5. handling of inquiries and complaints made by members;

6. archive storage and retrieval and destruction services;

7. statement processing and bulk mailing.

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