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Ruling

Subject: GST and input tax credits/reduced input tax credits for brokerage fees

Question

Are you, a trust, entitled to claim input tax credits on brokerage fees incurred by your trustee on behalf of you?

Answer

Yes, provided you do not exceed the financial acquisitions threshold (FAT), you are entitled to claim full input tax credits on the brokerage fees incurred by the trustee on behalf of you.

If you exceed the FAT, you are entitled to a reduced input tax credit of 75% of the GST paid on the brokerage fees incurred by the trustee on behalf of you.

Relevant facts and circumstances

You are a trust and are registered for GST.

You conduct an enterprise of share trading. As part of that enterprise you also write covered calls options on the shares that you have purchased.

Your shares and options are traded with domestic counterparties.

Your shares and options are traded for consideration.

The trading of your shares and options are connected with Australia.

Your trustee acquires brokerage services and thereby incurs brokerage fees on your behalf in conducting your share trading enterprise and as such you are the acquirer of the brokerage services.

You provide consideration for the brokerage services.

The supply of the brokerage services are taxable supplies to you.

The brokerage services acquired by you are not of a private or domestic nature.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 9-5,

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

A New Tax System (Goods and Services Tax) Act 1999 189-1 and

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

Reasons for decision

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act sets out the requirements that must be satisfied for an acquisition to be a creditable acquisition and states:

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 of the GST Act)

In this case, the supply of the brokerage services is a taxable supply from the broker to you. You provide consideration for that supply and you are registered for GST. Therefore, paragraphs 11-5(b), (c) and (d) of the GST Act are satisfied.

However, it is necessary to ascertain whether you acquire the brokerage services solely or partly for a creditable purpose and therefore satisfy paragraph 11-5(a) of the GST Act.

Section 11-15 of the GST Act refers to the meaning of 'creditable purpose' and states, in part:

You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

However, you do not acquire the thing for a creditable purpose to the extent that:

1) the acquisition relates to making supplies that would be *input taxed; or

2) the acquisition is of a private or domestic nature.

In respect of subsection 11-15(1) of the GST Act, it is necessary to ascertain whether you acquire the brokerage services in carrying on an enterprise. The word 'enterprise' is defined in paragraph 9-20(1)(da) of the GST Act as including an activity, or series of activities, done by a trustee of a complying superannuation fund. As you are carrying on an enterprise of shares and options trading and acquired the brokerage services in carrying out that enterprise, you satisfy subsection 11-15(1) of the GST Act.

In this case, paragraph 11-15(2)(b) is not applicable as the brokerage services acquired by you are not of a private or domestic nature.

Paragraph 11-15(2)(a) of the GST Act

The GST Act provides that a financial supply is input taxed and has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Subregulation 40-5.09(1) of the GST Regulations states that:

(1) 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.

Listed in the table in subregulation 40-5.09(3) of the GST Regulations are items 10 and 11 which respectively concern an interest in or under securities as well as an interest in or under a derivative.

Shares in a body is listed as an example of item 10 in the GST regulations (item 2 of Part 8 of Schedule 7 of the GST Regulations).

Option contracts the value of which depend on, or are derived from, share or stock prices or equity index values is listed as an example of item 11 in the GST regulations (item 1 of Part 9 of Schedule 7 of the GST Regulations).

A financial supply provider is defined at regulation 40-5.06 to mean:

(1) An entity, in relation to the supply of an interest that was:

(a) immediately before the supply, the property of the entity; or

(b) created by the entity in making the supply;

is the financial supply provider of the interest.

Examples of interests to which paragraph (a) applies

1 A share or bond that is sold

2 Rights assigned under a derivative

Examples of interests to which paragraph (b) applies

1 A share or bond that is issued

2 A derivative that is entered into

(2) The entity that acquires that interest is also the financial supply provider of the interest.

In your case, your trading of shares and options involves the provision, acquisition or disposal of interests in or under items 10 and/or 11 in the course of your enterprise for consideration.

The trading of your shares and options are connected with Australia and you are also registered for GST and are a financial supply provider in relation to your supply of the interests in or under items 10 and/or 11.

Your trading of shares and options therefore constitutes the making of input taxed financial supplies.

As your brokerage services are acquired in relation to the making of your input taxed financial supplies they will be denied creditable purpose under paragraph 11-15(2)(a) of the GST Act. Therefore paragraph 11-5(a) of the GST Act is not satisfied and you will not be entitled to an input tax credit for acquisition of brokerage services under the basic rules of the GST Act.

Financial acquisitions threshold

An exception rule exists under section 11-15(4) of the GST Act which provides that an acquisition is not treated as relating to making supplies that would be input taxed, if the only reason it would be input taxed is because it relates to making financial supplies and you do not exceed the financial acquisitions threshold (FAT).

The purpose of the FAT is to allow entities that make a relatively small amount of financial supplies, as compared to their taxable supplies or GST free supplies, to claim full input tax credits relating to those financial acquisitions. If you do not exceed the FAT, you will be entitled to full input tax credits for your acquisitions relating to making financial supplies.

You exceed the financial acquisitions threshold if you make, or are likely to make, financial acquisitions where the input tax credits related to making those acquisitions would exceed the lesser of either:

· $150,000, or such other amount specified in the Regulations (first limb test), or

· 10% of the total amount of input tax credits to which you would be entitled (second limb test).

If either or both of these levels are exceeded, you will have exceeded the financial acquisitions threshold.

As per subsection 189-15 of the GST Act, a 'financial acquisition' is an acquisition that relates to the making of a financial supply (other than a financial supply consisting of a borrowing). In this case, your acquisitions of brokerage services are financial acquisitions.

To determine whether you exceed the financial acquisitions threshold in a given month you will need to consider your acquisitions in:

· that month and the previous 11 months (current acquisitions), and

· that month and the next 11 months (future acquisitions).

Subsection 189-5(1) of the GST Act states:

1) You exceed the financial acquisitions threshold at a time during a particular month if, assuming that all the *financial acquisitions you have made, or are likely to make, during the 12 months ending at the end of that month were made solely for a *creditable purpose, either or both of the following would apply:

a) the amount of all the input tax credits to which you would be entitled for those acquisitions would exceed $150,000 or such other amount specified in the regulations;

b) the amount of the input tax credits referred to in paragraph (a) would be more than 10% of the total amount of the input tax credits to which you would be entitled for all your acquisitions and importations during that 12 months (including the financial acquisitions).

Subsection 189-10(1) of the GST Act states:

1) You exceed the financial acquisitions threshold at a time during a particular month if, assuming that all the *financial acquisitions you have made, or are likely to make, during that month and the next 11 months were made solely for a *creditable purpose, either or both of the following would apply:

a) the amount of all the input tax credits to which you would be entitled for those acquisitions would exceed $150,000 or such other amount specified in the regulations;

b) the amount of the input tax credits referred to in paragraph (a) would be more than 10% of the total amount of the input tax credits to which you would be entitled for all your acquisitions and importations during those months (including the financial acquisitions).

If after having considered your current acquisitions under the first and second limbs tests and also you future acquisitions under the first and second limb tests results in you not exceeding the FAT, you will be entitled to full input tax credits on your financial acquisitions of brokerage services.

Reduced Input Tax Credits

If you exceed the FAT, you are not entitled to claim full input tax credits for the acquisition of brokerage services. However, under Division 70 of the GST Act, some acquisitions relating to financial supplies can attract a reduced input tax credit, even though no input tax credit could arise under the basic rules. Those acquisitions are referred to as reduced credit acquisitions and are listed in the table in subregulation 70-5.02(2) of the GST Regulations. Therefore, you may be entitled to claim a reduced input tax credit on your acquisition of brokerage services if the brokerage service is listed as a reduced credit acquisition under one of the items in the table in subregulation 70-5.02(2) of the GST Regulations.

Listed in the table in subregulation 70-5.02(2) of the GST Regulations are items 9 and 21(a) which respectively concern an arrangement by a financial supply facilitator of the provision, acquisition or disposal of an interest in a security as well as an arrangement by a financial supply facilitator of:

a) the supply of a derivative or the currency of a foreign country, or an agreement to buy or sell the currency; or

b) the sale of a forward contract

We consider that acquisitions of brokerage services on the trading of shares and share options would be reduced credit acquisitions under items 9 and 21(a) in the table in subregulation 70-5.02(2) of the GST Regulations respectively.

Regulation 70-5.03 of the GST Regulations specifies that the percentage of the input tax credit for each kind of reduced credit acquisition is 75%.

Subsection 70-5(1A) of the GST Act also provides that:

However, an acquisition is not a reduced credit acquisition to the extent (if any) that, without this Division applying, an entity is entitled to an input tax credit for the acquisition.

Therefore, you will be entitled to claim a reduced input tax credit on brokerage fees incurred, in relation to the reduced credit acquisition of brokerage services under section 70-5(1) of the GST Act to the extent that you are not already entitled to full input tax credits on the acquisition.

Conclusion

Provided you do not exceed the financial acquisitions threshold (FAT), you are entitled to claim full input tax credits on the brokerage fees incurred by the trustee on behalf of you.

If you exceed the FAT, you are entitled to a reduced input tax credit of 75% of the GST paid on the brokerage fees incurred by the trustee on behalf of you.

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