Edited version of your private ruling

Authorisation Number: 1012578179616

Ruling

Subject: Entitlement to input tax credits

Question

Is the Trust entitled to reduced input tax credits on GST included in fees paid by the Trust to The Company for investment portfolio management, asset allocation and facilitation services provided?

Answer

The acquisition of services from The Company by the Trust can be described as the acquisition of funds management services, which is an acquisition of a kind that gives rise to an entitlement to reduced input tax credits.

Relevant facts and circumstances

· The Trust makes financial supplies, which are input taxed. The Trust holds listed securities worth a certain amount and term deposits and cash at bank worth a certain amount.

· The Trust's GST turnover is more than a certain amount per annum and it is registered for GST.

· In a financial year the Trust exceeded the financial acquisitions threshold for GST credits as the amount of GST credits it could claim for financial acquisitions was more than a certain percentage of the total amount of GST credits it could claim for all purchases.

· An agreement was made between the Trust and The Company. The Company agreed that it would make recommendations to the Trust as to investment allocations into listed securities. The management services include asset allocation recommendations, establishment of an investment strategy, execution of that strategy, refinement of the strategy over time and facilitation of the acquisition and disposal of securities.

· Under the Agreement between the Trust and The Company:

· The Company undertakes to provide the Trust with investment advice and to send related investment reports at regular intervals. Under the agreement, The Company undertakes to send an Exit Notice to the Trust if it recommends that the Trust exit the investment,

· if the Trust did not proceed with the investment advice, the Trust would undertake to not trade in the relevant securities for a certain period of time,

· The Company would be paid a fee equal to a certain percentage of any distributions earned by the Trust from each investment allocation over a certain internal rate of return.

· Further elements of the agreement between the Trust and The Company are as follows:

· The Company would make arrangements with a stockbroking firm for the acquisition and sale of the securities and would issue relevant instructions to this stockbroking firm on behalf of the Trust,

· The Company would monitor the performance of the Trust's investments and make recommendations regarding the sale of the securities. It would also make recommendations as to new investment allocations to be made,

· Where there was a vote required by holders of securities, The Company would provide guidance as to how the Trust should proceed with that vote.

Relevant legislative provisions

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

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

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

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

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

Reasons for decision

An entity is entitled to claim input tax credits on creditable acquisitions that they make. However, if a supply is input taxed then no GST is payable on the supply, and there is no entitlement to an input tax credit for anything acquired or imported to make that supply. Subsection 40-5(1) of the GST Act states that a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that 'financial supply' has the meaning given by the regulations. We have been advised that the Trust makes financial supplies that are input taxed. Therefore, the Trust is not entitled to input tax credits in respect of related acquisitions. However, as per the exception provided in subsection 11-15(4) of the GST Act entities that do not exceed the financial acquisitions threshold can claim input tax credits on acquisitions that relate to making financial supplies. That exception does not apply in this case as we have been advised that in the 2012/13 financial year, the Trust exceeded the financial acquisitions threshold

Are the relevant acquisitions made by the Trust, of a kind specified in the regulations as giving rise to an entitlement to a reduced input tax credit?

Pursuant to subsection 70-5(1) of the GST Act certain acquisitions that are classified as reduced credit acquisitions (RCAs) may give rise to reduced input tax credits. Section 70-5 of A New Tax System (Goods and Services Tax) Act 1999 states:

(1) The 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 are reduced credit acquisitions .

(1A) 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.

Note: Acquisitions relating to financial supplies can give rise to input tax credits: see subsections 11-15(4) and (5).

(2) For each kind of * reduced credit acquisition specified, the regulations must specify a percentage to which the input tax credit is reduced.

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

Regulation 70-5.02 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) GST Regulations states which acquisitions are RCAs. Funds management services are listed at item 23 of the table to subregulation 70-5.02(2) of the Regulations.

Item 23 states:

Item Reduced credit acquisition

23. The following investment portfolio management functions, including those functions for superannuation schemes:

(a) management of a client's asset portfolio;

(b)  management of an investment portfolio for a trust or superannuation fund;

(c)  acting as a trustee of a trust or superannuation fund;

(d)  acting as a single responsible entity;

(e)  asset allocation services

The meaning of these investment portfolio management functions are elaborated on at paragraphs 481 to 539 of Goods and Services Tax Ruling 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1). Paragraph 485 of GSTR 2004/1 explains that the expression 'asset portfolio', which relates to the composition of physical and intangible resources owned by a particular entity, in this context is synonymous with the term 'investment portfolio'.

Could the services provided by The Company in respect of the Trust's investment portfolio be described by either item 23(a) or 23(b) of subregulation 70-5.02(2) of the Regulations, being the management of a client's asset portfolio or, alternatively, the management of an investment portfolio for a trust?

Paragraph 484 of GSTR 2004/1 states that 'management', in the context of item 23(a), refers to the professional administration of business concerns, public and similar undertakings. The word 'managing' implies the existence of control or authority over the thing being managed. Paragraph 486 of GSTR 2004/1 states: "A fundamental characteristic of this service is that the entity supplying the investment management services exercises control or authority over the asset portfolio in carrying out its obligations. This service involves more than the mere provision of advice to be acted upon by the client. An acquisition of advice, by itself, is not a reduced credit acquisition under item 23(a)." However, example 58, at paragraphs 487 to 488 indicates that the acquisition of investment advice that is provided in the course of portfolio management is a reduced credit acquisition under item 23(a) of subregulation 70-5.02(2) of the Regulations.

In this case, there is more than mere provision of investment advice. If the Trust chooses to proceed with an investment on the basis of advice supplied by The Company, The Company then undertakes subsequent activities including: monitoring the performance of the Trust's investments; providing reports to the Trust, refining the investment strategy on the basis of new information including making recommendations regarding the sale of the securities and making recommendations as to new investment allocations to be made; making arrangements with a stockbroking firm for the acquisition and sale of the securities and issuing relevant instructions to this stockbroking firm on behalf of the Trust; and providing guidance as to how the Trust should vote as a holder of securities.

Furthermore, the Trust pays The Company a fee on the basis of distributions earned by the Trust from each investment allocation rather than just for the provision of investment advice.

At paragraph 492 of GSTR 2004/1 it is stated that for the purposes of paragraph 23(a), investment management services include, but are not limited to, the following services:

· The establishment of a financial plan or investment strategy together with the ongoing implementation, execution, or refinement of that plan or strategy; and

· The ongoing implementation or execution of a given investment mandate; and

· The provision of ancillary reports or statements to clients.

Paragraph 493 of GSTR 2004/1 states: "While implementing, executing or refining a particular plan or strategy, the manager may undertake such activities as collating information, monitoring investment performance, reviewing external consultant reports, and issuing instructions to brokers and custodians."

Accordingly, we are of the view that, the majority of the services described in paragraphs 492 and 493 of GSTR 2004/1 are provided by The Company to the Trust.

It can therefore be concluded that The Company supplies the Trust with fund management services that fall within item 23 and, accordingly, the Trust is entitled to reduced input tax credits on GST included in the fees paid to The Company for the services.

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