Edited version of your private ruling

Authorisation Number: 1012605649974

Ruling

Subject: GST and creditable purpose

Question 1

Is the issue of units by the Fund to Australian resident unit holders an input taxed financial supply pursuant to section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the issue of units by the Fund to Australian resident unit holders is an input taxed financial supply pursuant to section 40-5 of the GST Act.

Question 2

Is the issue of units by the Fund to non-resident unit holders a financial supply which is GST-free under item 2 in the table in subsection 38-190(1) of the GST Act (item 2)?

Answer

Yes, the issue of units by the Fund to non-resident unit holders is a financial supply which is GST-free under item 2.

Question 3

Is the acquisition of shares by the Fund which is issued by entity X, an overseas limited liability company an acquisition supply which is GST-free under item 2?

Answer

Yes, the acquisition of shares by the Fund in Entity X is an acquisition supply which is GST-free under item 2.

Question 4

Are the acquisitions made by the Fund from the Trustee and other entities partly creditable acquisitions pursuant to section 11-30 of the GST Act?

Answer

Yes, acquisitions made by the Fund will be considered partly creditable pursuant to section 11-30 of the GST Act.

Question 5

Is the Fund entitled to claim input tax credits in respect of its acquisitions to the extent that those acquisitions do not relate to supplies that would be input taxed?

Answer

Yes, the Fund is entitled to an input tax credit for acquisitions to the extent that those acquisitions do not relate to supplies that would be input taxed.

Question 6

Is the Fund required to determine its entitlement to input tax credits in respect of the acquisitions it makes from the Trustee and other entities by apportioning the consideration payable for those acquisitions using a reasonable method of apportionment?

Answer

Yes, the Fund is required to use a fair and reasonable method of apportionment to calculate its entitlement to input tax credits for any acquisition it makes.

Relevant facts and circumstances

The Fund is a unit trust and is registered for GST.

The Fund has been established specifically to invest in the foreign property market.

The Fund's unit holders are predominantly Australian tax residents.

The Fund acquired 100 percent of the shares in an overseas limited liability company, (Entity X). Entity X will be used to facilitate investments in the foreign property market.

The funds raised from the issue of units by the Fund in Australia to unit holders are used to subscribe for additional shares in or possibly to make loans to, Entity X.

Entity X, in turn, uses the funds received by it to establish and fund separate wholly owned limited liability companies incorporated overseas that are used to purchase real property (also located overseas) identified as being suitable for investment.

The Trustee is the Responsible Entity ("RE") for the Fund in accordance with Part 5C.2 of the Corporations Act 2001 and supplies investment and management services to the Fund.

In addition to the services acquired from the Trustee, the Fund makes other acquisitions in the course of carrying on its enterprise, some of which are taxable supplies to the Fund.

The Fund does not charge any fees to the overseas limited liability companies.

The Fund also holds cash in a number of Australian bank accounts some of which are interest bearing.

At all times the Fund exceeds the Financial Acquisitions Threshold.

The Trustee is registered for GST.

In carrying out its duties as RE, the Trustee charges a management fee (Management fee) to the Fund. The Management fee is charged to the Fund on a monthly basis, calculated as a percentage of the total assets held under management by the Fund.

In addition to the Management fee, the Trustee also charges a Performance Fee to the Fund provided certain performance benchmarks are met. This is charged on a yearly basis.

The Trustee is also entitled to be reimbursed for expenses incurred in managing and operating the Fund.

The fees charged by the Trustee relate to all services the Trustee provides to the Fund in carrying out its duties as RE. These services include but are not limited to:

(i) providing investment management services to the overseas limited liability companies in which the Fund has invested;

(ii) making all decisions to buy, sell or hold securities, cash or other investments on account of the Fund;

(iii) providing all expertise, staff, facilities and ether resources necessary to complete the Services; and

(iv) various administrative functions including management of unit holder queries and ensuring compliance with governance requirements of the Fund,

In providing the investment management services to the overseas limited liability companies, the Trustee:

(i) determines all investments in real property which are to be made by the limited liability companies;

(ii) visits and inspects the properties;

(iii) undertakes all necessary due diligence in relation to the properties;

(iv) negotiates via its foreign realtors with the vendors of the properties in relation to contract price and settlement terms; and

(v) is responsible for overseeing the whole purchase process, complete with arranging funds for the purchase of the properties and ensuring settlement terms are complied with;

(vi) liaises with foreign based advisors regarding the structure and legal and tax issues.

Relevant legislative provisions

A New tax System (Goods and Services Tax) Act 1999 9-30

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

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

A New tax System (Goods and Services Tax) Act 1999 11-30

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

A New tax System (Goods and Services Tax) Act 1999 38-190

Reasons for decision

Questions 1 and 2

It is the Funds submission that the supply of units by the Fund is an input taxed supply where it is made to an Australian resident unit holder and a GST-free supply where it is made to a non-resident unit holder. We agree with this submission on the following basis.

Section 9-5 of GST Act provides that a supply is not a taxable supply to the extent that it is input taxed.

Subsection 40-5(1) of the GST Act provides that a financial supply is input taxed and according to subsection 40-5(2) of the GST Act 'financial supply' 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:

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.

The table in subregulation 40-5.09(3) of the GST Regulations contains eleven categories of interest; the provision, acquisition or disposal of which would constitute a financial supply where the requirements of subregulation 40-5.09(1) of the GST Regulations are satisfied. Relevantly item 10(d) of the table in subregulation 40-5.09(3) provides that for the purposes of subregulation 40-5.09(1) an interest in securities including 'the capital of a partnership or trust' is a financial supply.

In this case the Fund will issue units in the trust to resident and non-resident unit holders. Accordingly, on the understanding that the Fund satisfies the requirements of subregulation 40-5.09(1) of the GST Regulations, the supply of the units by the Fund to both resident and non-resident unit holders will be an input taxed supply.

GST-free supply

As a supply of a unit made to a non-resident has the potential of being a GST-free supply under Division 38 of the GST Act, it is necessary to consider the relevant GST-free provisions in regards to those supplies.

A supply that is both input taxed and GST-free

Subsection 9-30(3) of the GST Act contemplates a supply that may be both GST-free and input taxed, and provides that to the extent that a supply would otherwise have the character of both, the supply to that extent is GST-free and not input taxed. Hence, to the extent that the supply of the units has the character of being both GST-free and input taxed, it will be GST-free.

Supply by the Fund of units to non-resident unit holders

Section 38-190 of the GST Act defines certain supplies other than goods or real property for consumption outside of Australia as GST-free. The GST treatment of a supply of units in the Fund is appropriately considered under section 38-190 of the GST Act. Of particular relevance is item 2 which provides that a supply to a non-resident outside Australia is GST-free where it is:

a supply that is made to a *non-resident who is not in Australia when the thing supplied is done, and:

(a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with *real property situated in Australia; or

(b) the *non-resident acquires the thing in *carrying on the non-residents *enterprise, but is not *registered or *required to be registered.

* is a defined term under section 195-1 of the GST Act.

However, supplies that satisfy the circumstances described in item 2 may not be GST-free if they fall within the exclusion in subsection 38-190(3) of the GST Act. Further supplies that satisfy the circumstances described in items 2 to 4 may not be GST-free if they fall within the exclusion in subsection 38-190(2A).

In this case, the Fund has advised that it makes a financial supply of units to non-residents who are not in Australia. Accordingly, on the understanding that section 38-190(2A) and 38-190(3) of the GST Act do not apply we accept that the supply of the units by the Fund to a non-resident falls within item 2. On this basis, pursuant to Subsection 9-30(3) of the GST Act, to the extent that the supply of the units to non-residents has the character of being both GST-free and input taxed, it is treated as a GST-free supply.

Question 3

It is the Funds submission that the shares it acquired from Entity X are a GST-free acquisition-supply under item 2. We agree with this submission for the following reasons.

As explained above the meaning of a financial supply includes the 'provision, acquisition or disposal of an interest' where the requirements or regulation 40-5.09 are met. Therefore, a single transaction between two parties can involve two financial supplies; relevantly the provision or disposal of an interest for consideration and the acquisition of an interest for consideration.

Goods and services tax ruling, GSTR 2002/2, provides an example where a resident in Australia acquires shares from a non-resident company. Relevantly paragraph 150 of GSTR 2002/2 states:

Example 22: GST-free supply of a financial supply

150. Australian Enterprises is a share-trader resident in Australia with all its activities being in Australia. Therefore, supplies that it makes are connected with Australia. It acquires shares from American Inc. a company that is located in the United States and is not in Australia in relation to the supply. The GST regulations and GST Act operate so that in acquiring the shares, Australian Enterprises makes a financial supply (an acquisition-supply) to American Inc. The acquisition-supply to American Inc satisfies the requirements of subsection 38-190(1), item 2 and is GST-free. To the extent that anything acquired or imported by Australian Enterprises relates to making that financial supply (that is, acquiring the shares) it is for a creditable purpose.

Similarly in this case, the Fund has acquired shares from Entity X which is a non-resident company. Accordingly it has made an acquisition-supply which is a financial supply. However, the acquisition-supply by the Fund to Entity X is also a GST-free supply as the requirements under item 2 are met. Accordingly, on the understanding that section 38-190(2A) and 38-190(3) of the GST Act do not apply the supply (i.e. the acquisition-supply) by the Fund is a GST-free supply.

On this basis, pursuant to subsection 9-30(3) of the GST Act to the extent that the acquisition-supply to Entity X has the character of being both GST-free and input taxed, it is treated as a GST-free supply.

Questions 4, 5 and 6

Division 11 of the GST Act deals with entitlement to input tax credits. Section 11-20 of the GST Act provides that you are entitled to the input tax credits for any creditable acquisition you make. 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.

The first requirement of a creditable acquisition is that it must be acquired solely or partly for a creditable purpose. Subsections 11-15(1) and 11-15(2) of the GST Act state:

(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

According to subsection 11-15(4) of the GST Act, 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. In this case as the Fund exceeds the FAT, subsection 11-15(4) does not apply. The Fund submits that for any ongoing acquisitions they do not solely relate to making supplies that are input taxed. Relevantly for the Funds ongoing acquisitions from the Trustee and any other entity the Fund is required to apportion the acquisitions to determine the extent to which they:

• relate to input taxed supplies and

• do not relate to making input taxed supplies

In support of their submission the Fund makes reference to the case of HP Mercantile Pty Ltd v Commissioner of Taxation [2005] FCAFC 126 (HP Mercantile case) and comments expressed by Hill J at 36 and 52 of the related case judgement

Section 11-30 of the GST Act provides that an acquisition will be partly for a creditable purpose under subsection 11-30(1) if one or both of the following apply:

• the acquisition is only partly for a creditable purpose; or

• you provide or are liable to provide only part of the consideration.

Goods and Services Tax, GSTR 2008/1, explains the Commissioners view in respect of acquiring anything for a creditable purpose. Relevantly paragraph 106 of GSTR 2008/1 states:

106. Paragraph 11-15(2)(a) does not require tracing to a specific supply. Nevertheless, unlike subsection 11-15(1), it requires some form of connection to the supplies that the entity makes, made or intends to make.

Further paragraph 119 of GSTR 2008/1 it states:

119. For the purposes of paragraph 11-15(2)(a) a sufficient connection is established if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or intended to be used, solely or to some extent for the making of supplies that would be input taxed.

In this case we have not been provided with a list of all the acquisitions made by the Fund. However based on the circumstances set out in the facts we accept that where the Fund makes an acquisition from the Trustee and other entities its acquisition will not related solely to making input taxed supplies. Relevantly we accept that to the extent that the acquisition relates to the supply of:

• units to Australian resident unit holders it relates to supplies that would be input taxed and is not used for a creditable purpose, and

• units to unit holders outside Australia, acquiring shares from (or making loans to) Entity X it relates to supplies that would not be input taxed and therefore is used for a creditable purpose.

For completeness we also note that acquisitions by the Fund may also relate (to some extent) to the relevant bank accounts held by the Fund.

On this basis the acquisitions by the Fund are partly creditable acquisitions pursuant to subsection 11-30(1) of the GST Act. Therefore, to the extent that the acquisition relates to supplies that would be input taxed paragraph 11-15(2)(a) applies and the Fund is denied an input tax credit. However, to the extent that the acquisition relates to supplies that are GST-free, paragraph 11-15(2)(a) does not apply and the Fund will be entitled to an input tax credit.

Apportionment

Goods and Services Tax Ruling GSTR 2006/3 (GSTR 2006/3) provides guidance on methods that can be used for calculating input tax credits by providers of financial supplies. This ruling makes clear that any method used in calculating input tax credits must be fair and reasonable in the circumstances of the conduct of the relevant enterprise. Relevantly paragraph 73 of GSTR 2006/3 states:

73. Following the principles set out by the High Court, the method you choose to allocate or apportion acquisitions between creditable and non-creditable purposes needs to:

• be fair and reasonable;

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

• be appropriately documented in your individual circumstances.

In this case the Fund makes acquisitions from the Trustee and other entities in respect of its activities. Further the Fund accepts that in respect of its acquisitions it will be required to determine an appropriate and reasonable method of apportionment to determine the extent to which management services and other acquisitions made by the Fund relate to its input taxed supplies and GST-free supplies.

The Fund therefore submits that to the extent that its acquisitions relate to the two categories of supplies, it is reasonable to apportion the management fees, performance fees and other general acquisitions made by the fund on a reasonable basis that reflects the supplies made.

We agree with the submission by the Fund that in respect of the acquisitions made by the Fund it is required to determine the extent of creditable purpose by way of a fair and reasonable apportionment method consistent with the principles set out in GSTR 2006/3.

Additional information

As explained above, to the extent that the Fund made acquisitions that would relate to input taxed supplies, pursuant to paragraph 11-15(2)(a) of the GST Act the Fund is denied an input tax credit. However provided the Fund satisfies the relevant requirements under Division 70 of the GST Act it may be entitled to claim a reduced input tax credit.

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