Edited version of your private ruling

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Subject: Goods and Services Tax and Reduced Credit Acquisitions.

Question 1

Is Entity A entitled to Reduced Input Tax Credits (RITCs) under item 11 of subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) for its acquisition of introduction and broking services and is therefore entitled to claim RITCs of 75% of the GST on its acquisition of these services?

Answer

Yes, Entity A is entitled to RITCs under item 11 of subregulation 70-5.02(2) of the GST Regulations for its acquisition of introduction and broking services and is therefore entitled to claim RITCs of 75% of the GST on its acquisition of these services.

Question 2

Is Entity A entitled to RITCs under item 2 of subregulation 70-5.02(2) of the GST Regulations for its acquisition of loan administration and processing services from Entity B under a Loan Agreement and is therefore entitled to claim RITCs of 75% of the GST on its acquisition of these services?

Answer

Yes, Entity A is entitled to RITCs under item 2 of subregulation 70-5.02(2) of the GST Regulations for its acquisition of loan administration and processing services from Entity B under the Loan Agreement and is therefore entitled to claim RITCs of 75% of the GST on its acquisition of these services.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity A carries on a business of lending to commercial property investors and developers to finance the purchase of, or investment in and in some instances construction of commercial property.

Entity A makes loans solely to Australian residents.

Entity A has exceeded the financial acquisitions threshold.

Entity A has engaged a number of different brokers to provide introduction and broking services.

The provision of these introduction and broking services are made pursuant to an agreement (Broking Agreement) between the brokers and Entity A.

Entity A has provided a copy of a Broking Agreement between itself and one of the brokers it uses as an example of the terms under which it acquires broking services.

Entity A out sourced its loan management and administration to Entity B. Prior to this, Entity A carried out these services in-house.

The provision of these loan management and administration services is made pursuant to a Servicing Agreement between Entity A and Entity B. Entity B is to perform the servicing function in accordance with this Servicing Agreement. The Servicing Agreement between Entity A and Entity B list the services Entity A acquires from Entity B.

In outsourcing the loan administration and management function to Entity B, there has been no transfer of equipment or infrastructure by Entity A to Entity B.

To date Entity A has not claimed an input tax credit or RITC for services it acquires from brokers or from Entity B.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15(1)

A New Tax System (Goods and Services Tax) Act 1999 section 11-15(2)

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 section 40-5

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

A New Tax System (Goods and Services Tax) Act 1999 section 70-5(2)

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 40-5.06(1)

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 40-5.09(3)

A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 40-5.09(4)

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

Reasons for decision

Question 1

Is Entity A entitled to RITCs under item 11 of subregulation 70-5.02(2) of the GST Regulations for its acquisition of introduction and broking services and is therefore entitled to claim RITCs of 75% of the GST on its acquisition of these services?

Section 11-20 of the GST Act provides that you are entitled to an input tax credit for any creditable acquisition that you make. For an acquisition to qualify as a creditable acquisition it must, among other things, be acquired solely or partly for a creditable purpose in accordance with section 11-5 of the GST Act.

Under subsection 11-15(1) of the GST Act, a thing is acquired for a creditable purpose to the extent that it is acquired in carrying on an enterprise. Under paragraph 11-15(2)(a) of the GST Act, a thing acquired in carrying on an enterprise is not acquired for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

Section 40-5 of the GST Act provides that a financial supply, as defined in the GST Regulations, is input taxed.

Under subregulation 40-5.09(1) of the GST Regulations, the provision, acquisition, or disposal of an interest in subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations is a financial supply if:

· the provision, acquisition or disposal is:

· for consideration;

· in the course or furtherance of an enterprise; and

· connected with Australia; and

· the supplier is

· registered or required to be registered; and

· a financial supply provider in relation to supply of the interest.

Relevantly, under subregulation 40-5.09(3) of the GST Regulations, a debt, credit arrangement or right to credit, including a letter of credit is listed under item 2 as a financial supply.

Subregulation 40-5.06(1) of the GST Regulations provides that an entity that creates and provides an interest in an item mentioned in subregulations 40-5.09(3) of the GST Regulations is a financial supply provider.

In this case, subject to the conditions in subregulation 40-5.09(1) of the GST Regulations being satisfied, it is considered that Entity A makes a financial supply consisting of the provision of an interest in a credit arrangement.

Notwithstanding that an acquisition relates to making financial supplies, section 70-5 of the GST Act indicates that you may be entitled to a RITC on specific types of acquisitions known as reduced credit acquisitions that are provided for in the GST Regulations to the extent that you are not already entitled to an input tax credit for that acquisition.

Subregulation 70-5.02(2) of the GST Regulations provides an exhaustive list of those acquisitions that are reduced credit acquisitions. Item 11 of subregulation 70-5.02(2) of the GST Regulations (item 11) lists the following as reduced credit acquisitions:

The following supplies by a financial supply facilitator:

(a) loan agency services;

(b) provision of a loan facility;

(c) mortgage broking;

(d) arranging syndicated loans;

(e) introducing and broking

The Commissioner's view on reduced credit acquisitions is set out in Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1). In relation to item 11 paragraph 319 of GSTR 2004/1 states:

Item 11 provides an exhaustive listing of services which can be characterised broadly as loans services. The opening words of the item impose a condition that the services listed must be provided by a financial supply facilitator.

The term financial supply facilitator is defined in regulation 40-5.07 of the GST Regulations and the Commissioner in paragraphs 30-35 of GSTR 2004/1 also outlines his view on the term. Relevantly, paragraphs 31-34 state:

31. A financial supply facilitator is defined in regulation 40-5.07 to be an entity facilitating the supply of an interest for a financial supply provider. The facilitating of a supply refers to activities that help forward (assist) the supply, rather than those that simply assist the financial supply provider. An entity facilitates the supply of an interest where its activities have the effect of helping forward or assisting the supply, therefore, the activities must have a sufficient nexus with the supply of an interest by a financial supply provider.

32. To have a sufficient nexus, the activities of the entity must have an identifiable association with the supply that goes beyond a mere general association. An identifiable association does not mean that the activities have to be directly linked to the supply, however it does require that there be a substantial connection so as to exclude activities that are only generally related (for example, promotion, advertising, product design, market research or similar types of activities). The activities must relate to and assist a particular supply, not merely contemplated supplies. In the absence of this identifiable association, an entity will not be a financial supply facilitator of the supply of an interest.

33. An entity is a financial supply facilitator of a particular supply. The fact that an entity is a financial supply facilitator in relation to one, or a number of transactions does not necessarily make it a financial supply facilitator in relation to another transaction. Being a financial supply facilitator is not a characteristic of an entity, but describes the entity's role in a particular transaction.

34. As a general rule, acting in an agent-like capacity on behalf of a financial supply provider (including the acquirer of a financial interest in relation to a particular transaction) indicates an identifiable association with the supply of an interest, as the activities of the agent are substantially connected with the supply of the interest. Acting as an agent, or in an agent-like capacity is the most common way in which the activities of an entity can have an identifiable association with the making of a financial supply, however, we recognise that it may not be the only way.

The Commissioner outlines his view on mortgage broking in paragraphs 339-347 of GSTR 2004/1. In particular paragraph 342 of GSTR 2004/1 states that:

342. An entity may source loans, that is, they may generate loan applications from borrowers seeking to fund the acquisition of property, and submit them to either a mortgage manager or a lender. The entity may have no further involvement in the loan. This entity is a mortgage broker. The acquisition of their services by a financial supply provider is a reduced credit acquisition under item 11(c).

Additionally, at paragraph 355 of GSTR 2004/1 the Commissioner states the following in relation to introducing and broking:

355. For the purposes of item 11, a supply of introducing must be by a financial supply facilitator, which requires that the service is directed towards a specific supply. It follows that introducing borrowers to lenders in a general sense is not sufficient to satisfy this requirement.

In analysing the Broking Agreement it is evident that the broker is in the business of arranging finance for borrowers and has agreed to originate transactions to Entity A. The Broking Agreement provides that origination services include sourcing and referring business to Entity A, completing applications for submission to Entity A and facilitating the process of applications. Accordingly, we are satisfied that there is a clear nexus, rather than an identifiable association, with the provision of the loan/credit arrangement provided by Entity A. Therefore, the services of the respective broker in generating loan applications are directly referable to the loan account generated by Entity A.

Furthermore, the Broking Agreement which typifies the arrangements Entity A has with other entities, has features that fall within the principles as outlined in the abovementioned paragraphs of GSTR 2004/1. Therefore, the acquisitions of these services constitute reduced credit acquisitions under item 11 and qualify for a RITC of 75% under subregulation 70-5.03 of the GST Regulations

Question 2

Is Entity A entitled to RITCs under item 2 of subregulation 70-5.02(2) of the GST Regulations for its acquisition of loan administration and processing services from Entity B under a Servicing Agreement and is therefore, entitled to claim RITCs of 75% of the GST on its acquisition of these services?

Item 2 of subregulation 70-5.02(2) of the GST Regulations (item 2) provides an inclusive list of processing services in relation to account information for account providers as follows:

Processing services in relation to account information for account providers, including:

· loan archives storage, retrieval and destruction services; and

· statement processing and bulk mailing; and

· processing and manipulation of information relating to accounts, including information about transactions to which item 7 applies.

Paragraph 73 of GSTR 2004/1 states:

73. An acquisition is a reduced credit acquisition under item 2 if it is the acquisition of processing services in relation to account information for account providers. Any reference to an account in this item is a reference to an account described in paragraph 51.

The description of account under paragraph 51 of GSTR 2004/1 states:

51. For the purposes of the regulations, the expression account has the meaning given by the Dictionary. Paragraph (a) of the definition establishes the meaning of account for the purposes of item 1 of subregulation 40-5.09(3) and subregulation 40-5.09(4). Paragraph (b) of the definition extends the meaning to include accounts with institutions other than authorised deposit-taking institutions (ADIs). Accounts offered by non-ADIs fall within the scope of the definition where the requirements of subparagraphs (i) to (iii) of the definition are satisfied in relation to the account offered.

The dictionary to the GST Regulations defines account as follows:

· means an account mentioned in item 1 in the table in regulation 40-5.09; and

· includes an account in relation to which the account holder (the customer) has the right:

· to have the account maintained by the account provider (the provider); and

· to repayment of the amount credited to the account by the provider; and

· to require the provider to act on directions by the customer that are in accordance with the arrangements, or any agreement, between the provider and the customer in relation to operation of the account.

Based on the above, it is evident that for the purposes of the GST Act the definition of "account" is broad and also captures the account made available by Entity A. Therefore, the issue that must be addressed is whether the processing services acquired by Entity A was in relation to this account.

Paragraph 88 of GSTR 2004/1 state:

88. In the context of item 2, processing services means services performed by an entity that have the character of being steps or actions directed towards achieving a specific processing outcome in relation to account information for an account provider.

Entity B provides services to Entity A in accordance with the Servicing Agreement. This Servicing Agreement sets out details of the loan servicing function provided by Entity B to Entity A.

On examination of the Servicing Agreement, it can be seen that Entity B receives the information from Entity A, collates and process it into a useful order whereby it is able to issue letters to borrowers and then transmits the information back to Entity A via an end of the period reporting schedule.

Therefore, the supply of these loan administration and processing services by Entity B to Entity A are reduced credit acquisitions under item 2. Accordingly, Entity A would qualify for a RITC of 75% under subregulation 70-5.03 of the GST Regulations.

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