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Ruling

Subject: Financial supplies and apportionment methodology

Question 1

Is Entity A entitled to claim a reduced input tax credit (RITC) under:

(a) item 16 of the table in subregulation 70-5.02 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) (Item 16) in respect of IT and telecommunication services acquired from Entity B;

(b) item 16 in respect of internet marketing and web services acquired from Entity C;

(c) item 6(a), 7(a) and 7(f) of the table in subregulation 70-5.02 of the GST Regulations (item 6(a) and items 7(a) and 7(f)) in respect of transactional banking services acquired from Entity D; and

(d) item 13 of the table in subregulation 70-5.02 of the GST Regulations (item 13) in respect of its acquisition of loan protection insurance?

Answer

Entity A is entitled to claim RITCs under:

(a) item 16 in respect of IT and telecommunication services acquired from Entity B;

(b) item 16 in respect of internet marketing and web services acquired from Entity C;

(c) item 6(a) and items 7(a) and 7(f) in respect of transactional banking services (switching fees, affiliation fees, credit and debit card transaction processing charges) acquired from Entity D; and

(d) item 13 in respect of its acquisition of loan protection insurance.

Question 2

Is Entity A entitled to claim input tax credits (in addition to RITCs) for the acquisition of telecommunication line rental services from Entity B?

Answer

Yes. Entity A is entitled to claim input tax credits for that proportion of its acquisition of telecommunication line rental services from Entity B that relates to its enterprise.

Question 3

Does the proposed revenue-based apportionment methodology as set out in the facts, provide a fair and reasonable basis for calculating the extent of creditable purpose (ECP) in relation to the general acquisitions of Entity A?

Answer

Yes. In accordance with the Commissioner's view 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), Entity A's revenue-based apportionment methodology to determine the ECP for general acquisitions will be considered to be fair and reasonable provided that it does not include revenue from the disposal of fixed assets in its revenue-based formula.

Question 4

Is Entity A entitled to update the financial data in relation to its revenue-based formula and backdate the resulting claims for acquisitions it makes?

Answer

Yes. Entity A is entitled to update the financial data in relation to its revised revenue-based formula and backdate the resulting claims for the acquisitions it makes. This is provided that the revised revenue-based formula is modified to remove revenue received from the sale of fixed assets.

Relevant facts and circumstances

Entity A is registered for GST.

Entity A is an Authorised Deposit-Taking Institution that is regulated by the Australian Prudential Regulation Authority and holds an Australian financial services licence that is regulated by the Australian Securities and Investment Commission.

Entity A provides banking services to its clients.

Entity A sells insurance products as agent for an insurance company.

Entity A makes a combination of input taxed and taxable supplies for GST purposes although predominantly it makes input taxed financial supplies. Historically, Entity A has recovered partial input tax credits by the use of a revenue-based formula and claimed RITCs for eligible acquisitions made.

Entity A exceeds the financial acquisition threshold (FAT).

Acquisitions by Entity A

Entity A makes acquisitions of IT and communication services from Entity B and internet marketing and web services from Entity C. Historically Entity A has claimed partial input tax credits under its revenue-based apportionment methodology on these acquisitions.

Entity B and Entity C are wholly owned by two or more banking authorities.

Entity A acquires various transactional banking services from Entity D in order to provide transactional banking services to its members. Historically, Entity A has claimed partial input tax credits (under its revenue-based apportionment methodology) in respect of the acquisitions from Entity D.

Entity A also makes acquisitions of loan protection insurance to ensure its financial position is protected in the event that a borrower is unable to make loan repayments. Historically Entity A has only claimed input tax credits based on its revenue-based apportionment methodology.

Apportionment methodology

Entity A has not been able to apply direct attribution for a large majority of its acquisitions. Given this, Entity A is proposing the use of an entity-based general formula based on the proportion of revenues from non-input taxed activities of the enterprise to estimate its extent of creditable purpose. This involves the utilisation of a revenue-based formula as follows:

Extent of creditable = Revenue (Other than revenue from input taxed supplies)

Purpose Total revenue (including revenue relating to input taxed supplies)

Entity A provides a significant proportion of its services for a fee, however a limited proportion of Entity A's services are provided without a fee being charged.

Where possible, Entity A has classified its income from supplies as taxable, GST-free or input taxed.

For the purpose of the revenue-based formula, interest income is calculated net of interest expense based on a whole of enterprise approach. That is, the calculation of the net interest is the difference between the gross interest raised by Entity A for all products and the interest expense paid by Entity A for all products.

Entity A allocates all of its acquisitions based on a GST code assigned to the general ledger account when the acquisition is processed through the general ledger system. For the limited acquisitions where Entity A can directly attribute, it claims X% of the input taxed credits to the extent that they relate only to the making of taxable and GST-free supplies.

For acquisitions that directly relate to making input taxed supplies, Entity A has not claimed any input tax credits other then a RITC where applicable.

For acquisitions which have been classified as RITC eligible and also relate to the making of taxable supplies the revenue-based formula is also applied to the remaining Y% portion of the GST.

Additional Information

This private ruling does not address the application of paragraph 11-15(5)(a) of the GST Act to Entity A's circumstances. In addition it has not sought to determine whether Entity A has correctly classified the revenue category of the supplies made as input taxed, GST-free and taxable.

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 subsection 11-15(4).

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

A New Tax System (Goods and Services Tax) Regulations1999 Regulation 70-5.02

Reasons for decision

Question 1

Is Entity A entitled to claim a RITC under:

· item 16 in respect of IT and telecommunication services acquired from Entity B;

· item 16 in respect of internet marketing and web services acquired from Entity C;

· item 6(a), and items 7(a) and 7(f) in respect of transactional banking services acquired from Entity D; and

· item 13 in respect of is acquisition of loan protection insurance?

Section 11-20 of the GST Act provides that you are entitled to an input tax credits for any creditable acquisition you make and section 11-5 of the GST Act 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.

The meaning of creditable purpose is given is section 11-15 of the GST Act which states that 'you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise'. However, paragraph 11-15(2)(a) of the GST Act provides that you do not acquire something for a creditable purpose where that thing is acquired in relation to making supplies that would be input taxed.

An acquisition is not treated, for the purposes of paragraph 11-15(2)(a) of the GST Act, as relating to making input taxed supplies where the FAT is not exceeded. This exception is provided under subsection 11-15(4) of the GST Act. In this case as Entity A exceeds the FAT this exception does not apply. Therefore, where Entity A makes an acquisition in relation to making financial supplies that would be input taxed it is denied an input tax credits.

However, in some cases, acquisitions that relate to making financial supplies may attract a RITC. Subsection 70-5(1) of the GST Act states that an entitlement to a RITCs may arise for acquisitions of a specified kind relating to making financial supplies known as reduced credit acquisitions.

The table in subregulation 70-5.02(2) of the GST Regulations provides an exhaustive list of acquisitions that are reduced credit acquisitions within the meaning of subsection 70-5(1) of the GST Act.

Acquisition from Entity B and Entity C

Entity A has acquired IT, telecommunication and internet/intranet services from Entities B and C. Historically it has only claimed partial input tax credits under its revenue-based apportionment methodology. Entity A now submits that it is also entitled to RITCs for these acquisitions as they are reduced credit acquisitions under item 16.

Item 16 provides that the following is a reduced credit acquisition:

Supply to a credit union by:

(a) an entity that is wholly owned by 2 or more credit unions; or

(b) an entity that is wholly owned by an entity mentioned in paragraph (a)

Paragraphs 417 of Goods and Services Tax Ruling GSTR 2004/1, Goods and services tax: reduced credit acquisitions (GSTR 2004/1) provides that item 16 deals with supplies to credit unions by entities that are collectively owned by credit unions.

Paragraph 418 and 421 of GSTR 2004/1 state:

418. Credit unions make reduced credit acquisitions under item 16 when they make acquisitions from an entity that is either wholly owned by two or more credit unions, or one that is wholly owned by an entity that is wholly owned by two or more credit unions.

421. Supply is a defined term in the GST Act, and in the absence of words to limit its application in a particular provision, takes that meaning. Consequently, for the purposes of item 16 a credit union makes a reduced credit acquisition when it acquires a supply in any form whatsoever from a relevant entity.

Entity A submits that Entities B and C are wholly owned by two or more banking institutions and as such satisfy the requirements of paragraph (a) of item 16.

Based on Entity A's submissions that Entities B and C are wholly owned by two or more credit unions, the Commissioner agrees that the IT, telecommunications, internet marketing and web services acquired by Entity A from Entities B and C are reduced credit acquisitions.

As such, Entity A is entitled to RITCs under item 16 in relation to these acquisitions but only to the extent that input tax credits have not already been claimed by applying the revenue-based formula to these acquisitions.

Acquisition from Entity D of transactional banking services

In this case Entity A has advised that it acquires direct entry services and EFTPOS services from Entity D as described in the facts. Entity A has also advised that it has claimed partial input tax credits (under its revenue-based apportionment methodology) in respect of these acquisitions from Entity D. However, Entity A submits that these services are also reduced credit acquisitions pursuant to item 6(a) and items 7(a) and 7(f). Therefore Entity A is entitled to RITCs in respect of these acquisitions.

Item 6(a), 7(a) and 7(f) of the table in subregulation 70-5.02(2) of the GST Regulations state:

Item 6

Supplies to which the following payment system fees relate:

(a) fees charged by the operator of a payment system to a participant in the system;

Item 7

Processing, settling, clearing and switching transactions of the following kinds:

(a) direct credit and debit;

(f) ATM;

Paragraphs 244 of GSTR 2004/1 explains that the range of item 6 of the table in subregulation 70-5.02(2) (item 6) depends upon the meanings given to the expression payments system, operator of a payment system and participant in a payments system and third party.

Paragraph 246 of GSTR 2004/1 state:

246. For the purposes of item 6, a payment system includes, but is not limited to, a system or network that facilitates the transfer of funds through the following transactions:

· cheque transactions;

· direct entry transactions;

· debit/credit/charge card transactions;

· automated teller machine (ATM) transactions;

· electronic funds transfer at point of sale (EFTPOS) transactions;

· third party bill payment transactions; and

· GiroPost transactions.

Paragraph 247 of GSTR 2004/1 provides that the expression 'operator of a payment system' is taken to mean any entity that is engaged in a business of providing a payment system. Further, paragraph 249 of GSTR 2004/1 provides that a participant in the context of a payment system is a financial intermediary that provides services to customers (such as a bank, building society or credit union).

Paragraph 252 of GSTR 2004/1 provides that acquisitions which item 6(a) relate to include but is not limited to the following fees:

· membership/participation fees;

· authorisation fees;

· service fees;

· marketing fees

· risk management fees; and

· multi-currency fees

An acquisition under items 7(a) and 7(f) is a reduced credit acquisition where it is the acquisition of a service of processing, settling, clearing and switching of direct credit and debit transactions and ATM transactions.

Based on the facts of this case, the Commissioner agrees that consistent with the above paragraphs, Entity A is entitled to claim RITCs under item 6(a) for the participation fees it incurs in relation to the payment system services it acquires from Entity D. Further Entity A is entitled to claim RITCs for acquisitions from Entity D that relate to direct entry and EFTPOS supplies under items 7(a) and 7(f).

However, this entitlement is only to the extent that input tax credits have not already been claimed under the revenue-based apportionment methodology for these acquisitions.

Acquisition of Loan protection insurance

Entity A has made acquisitions of loan protection insurance to ensure its financial position is protected in the event that a borrower is unable to make loan repayments. Historically Entity A has only claimed input tax credits based on its revenue-based apportionment methodology. However, Entity A submits that it is also entitled to RITCs under item 13.

Item 13 provides that 'loan protection insurance' is a reduced credit acquisition.

Paragraph 367 of GSTR 2004/1 explains that in some cases loan protection insurance provides cover in the event of the borrower's death or permanent disablement. In such cases the acquisition of loan protection insurance may be an acquisition of life insurance. Where this is the case the acquisition is not a reduced credit acquisition.

To the extent that the insurance is not a life insurance, the Commissioner agrees that Entity A will be entitled to claim RITCs in relation to acquisitions relating to loan protection insurance under item 13.

However, Entity A can only claim RITCs on these acquisitions to the extent that it has not already claimed input tax credits under its revenue-based apportionment methodology.

Question 2

Is Entity A entitled to claim input tax credits (in addition to RITCs) for the acquisition of telecommunication line rental services from Entity B?

Historically Entity A has claimed RITCs pursuant to item 16 for its acquisition of telecommunication line rental from Entity B. However, Entity A submits that this acquisition relates to its overall enterprise and as such, it should also be entitled to claim input tax credits, as determined by the revenue-based apportionment methodology, in addition to any RITCs that it has already claimed.

GSTR 2006/3 discusses the inter-relationship of apportionment method and Division 70 in paragraphs 135 to 144. In particular paragraph 138 of GSTR 2006/3 state:

138. The following approach coordinates the operation of these parallel systems:

Step 1: identify those acquisitions or importations that you make in carrying on your enterprise, separately identifying those acquisitions or importations that relate to making input taxed supplies or that are of a private or domestic nature. Work out the extent to which you plan to use them for making each type of supply using a fair and reasonable basis.

Step 2: calculate the extent to which those acquisitions or importations give rise to input tax credits under Divisions 11 or 15. This will be claimed as part of the 'extent of creditable purpose' calculation in section 70-20.

Step 3: of those acquisitions or importations that relate to making input taxed supplies, identify the extent (if any) to which they relate to making financial supplies.

Step 4: of those acquisitions or importations that relate to making financial supplies, calculate the extent (if any) to which they give rise to a reduced input tax credit under Division 70.

This principle is demonstrated by Example 8 as set out in paragraphs 142 to 144 of GSTR 2006/3. In the example, the extent to which an acquisition is for a creditable purpose is determined as follows:

55% (as determined by ECP) + (45% x 75%) = 88.75%

Consistent with the principle set out in the above paragraphs and based on the fact that the acquisition of the telecommunication line rental is an enterprise cost, the Commissioner agrees that Entity A is entitled to claim input tax credits for its acquisitions of telecommunication line rental services from Entity B.

However, this entitlement is only to the extent that RITCs have not already been claimed in respect of these acquisitions.

Question 3

Does the proposed revenue-based apportionment methodology as set out in the facts, provide a fair and reasonable basis for calculating the ECP in relation to the general acquisitions of Entity A in accordance with Division 11 of the GST Act?

As discussed in question 1 above, section 11-20 of the GST Act allows an entity to claim an input tax credit for any creditable acquisition, and the term creditable acquisition is defined in section 11-5 of the GST Act.

Relevantly, a creditable acquisition is one which is acquired solely or partly for a creditable purpose. Section 11-15 of the GST Act states:

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

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

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

(b) the acquisition is of a private or domestic nature.

Accordingly, Entity A acquires a thing for a creditable purpose to the extent that it acquires the thing in carrying on its enterprise.

In this case Entity A has exceeded the financial acquisitions threshold provided for in subsection 11-15(4) of the GST Act and therefore it does not acquire a thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed.

Based on the facts as stated above, Entity A's enterprise involves it making a combination of: 

· financial supplies that are input taxed;

· GST-free supplies; and

· taxable supplies.

Where acquisitions made by Entity A are used or intended to be used only for a non-creditable purpose, these acquisitions are not fully creditable and Entity A does not claim input tax credits in relation to these acquisitions, except to the extent that a reduced input tax credit is available, or to the extent that the 'borrowing exception' under 11-15(5) of the GST Act applies.

However, there are acquisitions made by Entity A that are both for a creditable purpose (that is, for making GST-free or taxable supplies) and an input taxed purpose (that is, making financial supplies). Accordingly, these acquisitions are partly creditable.

In respect of such acquisitions, the amount of input tax credits to which Entity A is entitled depends upon the extent of creditable purpose as provided for in section 11-30 of the GST Act. The phrase extent of creditable purpose is defined in subsection 11-30(3) to mean the extent to which the creditable acquisition is for a creditable purpose, expressed as a percentage of the total purpose of the acquisition. On this basis an apportionment of these acquisitions would need to be made by Entity A to determine their extent of creditable purpose.

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) outlines the Commissioner's views on apportionment and the methods of calculating the extent of creditable purpose of an entity's acquisitions or importations.

Paragraphs 33 and 73 of GSTR 2006/3 make it clear that the method chosen to allocate or apportion acquisitions between creditable and non-creditable purpose needs to: 

· be fair and reasonable;

· reflect the intended use of the acquisition (or in the case of an adjustment, the actual use); and

· be appropriately documented in your individual circumstances.

Accordingly, the apportionment method adopted must be fair and reasonable in the circumstances of Entity A's enterprise and must appropriately reflect the intended or actual use of its acquisitions or importations.

Paragraphs 81 and 103 of GSTR 2006/3 explore the Commissioner's view on direct and indirect methods of estimation and circumstances where these methods may be considered appropriate:

81. The Commissioner considers that the use of direct methods, including direct estimation (see paragraphs 92 to 101 of this Ruling) best accords with the basic principles explained above (see paragraph 73). If it is not possible or practicable to use a direct method, you may use some other fair and reasonable basis, including an indirect estimation method.

103. Indirect estimation methods may be appropriate in circumstances where there are overhead expenses that are not directly referable to particular supplies or activities. They may also be appropriate if the direct methods do not apportion acquisitions or importations to the level of supplies, or groups of supplies, that require different treatment for GST purposes. It may also be the case that the direct attribution of a large number of small acquisitions or importations is not cost effective. In all cases where indirect methods are used, the method chosen should be fair and reasonable in the context of your enterprise.

Further, paragraphs 105 to 107 of GSTR 2006/3 consider the use by an entity of an entity-based general formula. These paragraphs state:

105. The entity-based general formula provides an estimate of the use (or intended use) of acquisitions or importations based on the proportion of revenues from non-input taxed activities of the enterprise, expressed as a percentage of total revenues of the enterprise. A decision taken to use this method should be based on a fair and reasonable expectation that the use of acquisitions or importations will be accurately reflected in the revenue flows (input taxed and non-input taxed) of the overall enterprise (or GST group). The formula to be used is that expressed in the revenue-based formulas section below, using entity-wide revenue figures.

106. A fundamental issue to be addressed prior to adopting this method is whether the use of the formula is fair and reasonable, based on the information available to you.

107. As the entity-based general formula uses the entity-wide (or GST group-wide) revenue flows as the basis for apportionment, it may be especially suitable for use by a smaller financial institution such as a credit union. Such an institution may have little or no access to methods of direct estimation as discussed above. The method might also be appropriately used by financial supply providers other than financial institutions, who may need to apportion overheads (sometimes referred to as enterprise costs) to the limited number of financial supplies (or classes of supplies) that they make.

Paragraph 162 of GSTR 2006/3 considers the exclusions in relation to a revenue-based formula and state:

162. A revenue-based formula aims to establish the extent of creditable purpose using trading income. Certain items are excluded from the numerator and denominator of the ratio of the general formula as they might otherwise distort the calculation of an accurate ratio. In particular the denominator and numerator should exclude extraordinary items (by their nature and/or timing, and/or extent) even if they would otherwise come within the component. Items to be excluded will depend on the nature of the enterprise, but the following would not normally be included in a revenue-based formula:

· dividends received from wholly owned companies, (except where the company is part of a financing structure), for example, a special purpose company acquired by a bank to facilitate a transaction for a customer of the bank; and

· capital receipts from asset sales, for example the sale of a head office building, whether or not the sale is a taxable supply.

Application of the GST Law to Entity A's circumstances

Consistent with the above paragraphs the Commissioner will accept any basis of apportionment of acquisitions which are applied indifferently to all supplies made, provided it is fair and reasonable in the individual circumstances.

In this case, Entity A proposes to use a revenue-based formula as its indirect estimation method. This formula identifies the revenue from supplies Entity A makes as part of its business activities as the basis for calculating the extent of creditable purpose.

Where possible, Entity A has classified its income from supplies as taxable, GST-free or input taxed. It is noted that revenue from the disposal of fixed assets is included in the formula both as taxable income and total income. Paragraph 162 of GSTR 2006/3 provides that the inclusion of revenue from the sale of fixed assets to establish the extent of creditable purpose will produce a distortive result in the calculation of ECP.

As such, we consider that the theoretical aspect of Entity A's GST apportionment method will be fair and reasonable provided the revised revenue-based formula is amended to exclude the income from the sale of fixed assets.

Further, provided the practical application does not result in a distortive outcome, we consider the method used by Entity A will fall within the ambit of being fair and reasonable in accordance with GSTR 2006/3.

This is based on the facts as presented to us in Entity A's submissions. However, if those circumstances change, Entity A may be required to review this methodology to determine if it remains fair and reasonable and accurately reflects the intended use of its acquisitions.

Question 4

Is Entity A entitled to update the financial data in relation to its revenue-based formula and backdate the resulting claims for acquisitions it makes?

ATO Interpretative Decision ATO ID 2008/75 Goods and Services Tax GST and retrospective application of a changed apportionment method under Division 11 (ATO ID 2008/75) provides guidance in relation to retrospective changes due to a change in the apportionment method.

ATO ID 2008/75 provides that an entity can change its apportionment method and revise an earlier net amount by applying a new apportionment method which is also fair and reasonable. However the entity must notify the Commissioner of the change within four years after the end of the original tax period.

We have considered Entity A's revised revenue-based apportionment methodology in Question 3 and have concluded that this methodology will only produce a fair and reasonable result if revenue received from the sale of fixed assets is removed from the calculation of the revised revenue-based formula.

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