Edited version of your written advice

Authorisation Number: 1012836503336

Ruling

Subject: GST and managed investment schemes

Questions

(1) Will a managed investment scheme be entitled to be registered for goods and services tax (GST)?

(2) Will the managed investment scheme be entitled to claim reduced input tax credits in respect of fees charged by its RE in its personal capacity?

Answer

(1) Yes, the managed investment scheme will be entitled to be registered for GST. However, it is noted that the Commissioner adopts the practice of registering a trust entity under the title of the trustee/responsible entity in recognition that it is through the legal person acting in that capacity that the trust entity is able to exercise the rights conferred, and discharge the obligations imposed, by the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Accordingly, for the purposes of this ruling (unless otherwise stated), a reference to the managed investment scheme is intended to be a reference to the RE acting as the responsible entity for the managed investment scheme.

(2) Yes, the managed investment scheme will be entitled to claim reduced input tax credits (RITCs) in respect of the GST incurred on the 'fees' charged by the RE in its personal capacity, as the fees are consideration for a reduced credit acquisition (of responsible entity services) that the managed investment scheme makes from the RE. Furthermore, the amount of the RITC is determined as follows:

• For responsible entity services that the managed investment scheme acquired from the RE before 1 July 2012, the amount of the RITC is equal to 75 % of the GST incurred on the fees;

• For responsible entity services that the managed investment scheme acquires from the RE on or after 1 July 2012 the amount of the RITC is equal to:

- 75% of the GST incurred on the 'Model Portfolio Management fee' component of the 'responsible entity service fee',

- 75% of the GST incurred on the 'Administration fee' component of the 'responsible entity service fee' to the extent that the 'Administration fee' component is consideration for the provision of 'administration' services.

- 55% of the GST incurred on the 'Administration fee' component of the 'responsible entity service fee' to the extent that the 'Administration fee' component is consideration for the provision of other services which include, but are not limited to, undertaking functions in compliance with Chapter 5C of the Corporations Act 2001 concerning the governance of the managed investment scheme.

Relevant facts and circumstances

The RE is the responsible entity of and issuer of the interests in, the managed investment scheme Portfolio. The managed investment scheme is a management investment scheme and is registered as such with the Australian Securities and Investment Commission (ASIC).

The managed investment scheme is applying to be a separately managed account (SMA) structure through which each investor retains beneficial ownership of underlying securities of the subject of the scheme.

Supplies made by the RE in its capacity as the responsible entity of the managed investment scheme are financial supplies.

The framework within which the managed investment scheme operates is set out in several documents.

The managed investment scheme is established under the Constitution as a trust of which the RE is the trustee. Under that trust, the RE must hold the Scheme Property on trust for Members.

Scheme property must be identified as property of the managed investment scheme and held separately from any other property held by the RE in any other capacity.

Scheme Property - this is defined in the Constitution as the agreement between each Member and The RE to allow the Assets of the Member to be invested and managed by the RE jointly with the Assets of other Members.

A Member - is a person recorded in the register of members (required to be kept by the RE) as the holder of an interest (that is the members' interest in the scheme property).

The significance of being a Member is that only a Member is entitled to exercise, and have the benefit of, the rights and powers in relation to the managed investment scheme.

Consistent with the managed investment scheme applying to an SMA structure, each interest held by a Member constitutes a separate class from each interest held by each other Member (although all interests generally rank equally).

Legal title to Members Assets is held by a custodian.

The RE has arranged for another entity to provide custody services in connection with the managed investment scheme on the terms set out in the Custody Deed.

The application form in the PDS enables a Member to appoint this other entity as their custodian on these terms.

Members, however, can appoint a custodian and the arrangements with the custodian must be acceptable to the RE.

Upon becoming a member of the managed investment scheme, a Member must provide the custodian with cash or Preserved Assets of a value equal to the Minimum Application Amount.

Investment by a person in the managed investment scheme involves that person making an application to the RE to become a Member of the scheme by submitting the form set out in the PDS together with payment.

The person will become a Member upon the RE accepting the application and recording the person in the register of Members.

Through its custodian, the managed investment scheme holds a single bank account with an Australian authorised deposit taking institution (ADI). Through this 'Omnibus' account, the managed investment scheme pools the cash holdings recorded in each client's model portfolio, and is the cash that is drawn upon to execute client/investment manager instructions.

The role of the RE

Upon becoming a member of the managed investment scheme, a Member appoints the RE as its investment manager and authorises the RE (when acting as investment manager) to manage the Assets of the Member, jointly with the Assets of the other Members, as its agent. In this regard, the RE has appointed Model Portfolio Managers to provide investment advisory and research services.

The Responsible entity will:

a) invest and manage each Members Assets in accordance with Proper instructions given by the member. A Member is required to appoint an authorised representative (typically the Members' financial advisor) to give Proper instructions to the RE on behalf of the Member,

b) give directions to the custodian in relation to a Members' assets as determined by the RE,

c) keep each Members' assets under review,

d) assist the custodian to keep proper books of account in relation to each Members' portfolio, and

e) exercise all due diligence and vigilance in undertaking its functions.

The powers of the RE are broad. They include giving directions to the custodian.

Fees payable to the RE

The Constitution provides for each Member to pay the RE a yearly management fee of up to 2% of the Members Asset Value.

Currently each Member must pay an administration fee of a certain percentage per annum of the Member's portfolio balance (administration fee) and a model portfolio manager fee of another percentage per annum of the Member's portfolio balance to the RE (model portfolio manager fee).

The product disclosure statement (PDS) states the following:

'..the 'Administration Fee' is paid for "holding (custody) and administering your investment, preparing and consolidating the reporting (including tax reporting) on all investments and overseeing the operations of the Scheme'.

Fees payable by a Member are paid out of the Member's cash trust account held by the custodian at the direction of the RE.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 184-1,

A New Tax System (Goods and Services Tax) Act 1999 9-20,

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

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

Further issues for you to consider

Does Part IVA apply to this ruling?

Reasons for decision:

Will the managed investment scheme be entitled to be registered for GST?

Subsection 23-10(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that '[y]ou may be registered if you are carrying on an enterprise (whether or not your turnover is, at, above or below the registration turnover threshold).' Section 195-1 of the GST Act provides that when the expression 'you' is used in the GST Act, it, relevantly, applies to entities generally.

Therefore, the managed investment scheme is entitled to register under the GST Act if it is an 'entity' that is 'carrying on an enterprise'.

Is the managed investment scheme an entity?

For GST purposes, the term 'entity' is defined by section 195-1 of the GST Act to have the meaning given by section 184-1. The meaning of 'entity' includes a trust under paragraph 184-1(1)(g).

However, in recognition of the fact that a right or obligation cannot be conferred or imposed on a trust because it is not a separate legal person under the common law, subsection 184-1(2) provides that the trustee of a trust, who is a legal person, will be taken to be the 'entity' when the trust entity is required to have a legal personality.

In relation to the managed investment scheme facts, it is arguable that a separate trust relationship is created over the cash invested by each client, and over each investment made by the custodian in carrying out the instructions given by the appointed investment manager to effect the client's investment strategy. However, the Commissioner also considers that the facts demonstrate that these individual trusts co-exist with an overall trust relationship that practically facilitates the operation of the managed investment scheme.

On this basis, the Commissioner accepts that the overall trust relationship embodied by the practical operation of the managed investment scheme is a trust entity for the purposes of the GST Act. Furthermore, in accordance with subsection 184-1(2) of the GST Act, the RE is taken to be an entity when the managed investment scheme requires a legal personality to claim its entitlements or discharge its obligations under the GST Act.

Is the managed investment scheme carrying on an enterprise?

The term 'enterprise' is defined in section 9-20 of the GST Act. Relevantly, paragraph 9-20(1)(a) of the GST Act provides that an enterprise is an activity, or series of activities, done in the form of a business.

To determine whether the trust entity embodied by the managed investment scheme is carrying on an enterprise, it is necessary to examine whether the activities of the RE performed in its RE capacity are done in the form of a business.

From the facts, it is reasonable to conclude in this case that the activities performed by the RE have a distinct commercial flavour that permits the view that they are activities done in the form of a business.

Accordingly, the Commissioner accepts that the managed investment scheme is carrying on an enterprise in the form of a business through the activities performed by the RE in its RE capacity.

On this basis, The managed investment scheme is entitled to be registered for GST purposes as it is found to be an 'entity' within the meaning given by subsection 184-1(1) of the GST Act (and therefore answers the description of 'you' as used throughout the GST Act), that is carrying on an enterprise within the meaning given by paragraph 9-20(1)(a).

Furthermore, in recognition that the RE in its RE capacity is taken to be an entity in accordance with subsection 184-1(2) of the GST Act when the managed investment scheme is required to have a legal personality under the GST Act, the Commissioner will necessarily register the managed investment scheme by reference to the RE acting in that capacity.

1) Will the managed investment scheme be entitled to claim RITCs in respect of fees charged by the RE in its personal capacity?

In accordance with subsection 70-5(1) of the GST Act, acquisitions that relate to making financial supplies may attract an entitlement to an RITC if the acquisition is listed in the table in regulation 70-5.02 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). These acquisitions are termed 'reduced credit acquisitions'.

Furthermore, for the purposes of subsection 70-5(2) of the GST Act, regulation 70-5.03 of the GST Regulations prescribes the percentage to which input tax credits are reduced (i.e. the RITC rate).

In this regard, it is noted that the taxable supply of a service acquired by a 'recognised trust scheme', to the extent it is performed on or after 1 July 2012, is a reduced credit acquisition under item 32 of the table to subregulation 70-5.02(2) of the GST Regulations. In respect of such acquisitions, regulation 70-5.03 effectively prescribes the following RITC rates:

• for a reduced credit acquisition covered by item 32, the RITC rate is 55% of the GST incurred;

• for a reduced credit acquisition covered by item 32 and one or more other items of the table in subregulation 70-5.02(2) (i.e. it is an acquisition that contains separately identifiable parts, some of which are excluded from item 32 because they fall within the scope of items 32(b)(ii) - (vii)), the RITC rates are as follows:

- to the extent that the acquisition is covered by item 32, the RITC rate is 55% of the GST incurred,

- to the extent that the acquisition is excluded from item 32, the RITC rate is 75% of the GST incurred,

• for all other reduced credit acquisitions, the RITC rate is 75% of the GST incurred.

Finally, a 'recognised trust scheme' is defined in subregulation 70-5.02(4) of the GST Regulations to include a trust that is a managed investments scheme (excluding a securitisation entity or mortgage scheme) where the entity that acts in the capacity of trustee or responsible entity of the trust, is carrying on, in its own capacity, an enterprise that includes making taxable supplies to the trust.

The facts establish that the managed investment scheme makes financial supplies (in providing 'interests' to clients) and is therefore entitled to claim RITCs in respect of the GST incurred on its acquisitions to the extent that the acquisition qualifies as a reduced credit acquisition.

Has the managed investment scheme made any reduced credit acquisitions?

In this regard, the Commissioner firstly accepts that the services supplied by the RE in its personal capacity to the managed investment scheme may be described as 'responsible entity' services. Secondly, the Commissioner considers that the consideration given by the managed investment scheme for the provision of these services is an amount equal to the aggregated sum of the GST inclusive values of the 'Administration' and 'Model Portfolio Management' fees described in the managed investment scheme's PDS.

Additionally, the facts demonstrate that the managed investment scheme satisfies the description of a 'recognised trust scheme' for the purposes of the application of item 32 of the table to subregulation 70-5.02(2) of the GST Regulations.

On this basis, and as contended in the ruling application, the managed investment scheme makes an acquisition from the RE in its personal capacity that qualifies as a reduced credit acquisition under item 23(d) of the table to subregulation 70-5.02(2) of the GST Regulations. In turn, this entitles the managed investment scheme to claim a RITC amount equal to 75% of the GST incurred on the responsible entity fee charged by the RE in its personal capacity.

However, this RITC treatment is potentially altered to the extent that item 32 of the table to subregulation 70-5.02(2) of the GST Regulations applies to the acquisitions the managed investment scheme makes from the RE. This will be the case to the extent that the responsible entity service:

• is performed by the RE on or after 1 July 2012; and

• is not excluded from the application of item 32 by falling within one or more of the services listed under item 32(b)(ii) to (vii);

In this latter regard, it is further noted that the list of excluded services does not specifically include a single responsible entity service covered by item 23(d) of the table to subregulation 70-5.02(2) of the GST Regulations.

Consequently, the managed investment scheme's post 1 July 2012 RITC entitlement will be an amount equal to:

• 55% of the GST incurred to the extent that managed investment scheme's post 1 July 2012 acquisition of the responsible entity service supplied by the RE is covered by item 32, and/or

• an amount equal to 75% of the GST incurred to the extent that the service is not covered by item 32 because it is falls within one or more of the excluded services listed under item 32(b)(ii) to (vii).

Therefore, managed investment scheme's post 1 July 2012 RITC entitlement depends on the proper characterisation of the responsible entity service performed by the RE.

Characterising the acquisition of the supply made by the RE

Relevantly, the approach to properly characterising the acquisition of the supply made by the RE in this context is outlined by reference to paragraphs 25 to 30 of Goods and Services Tax Determination GSTD 2013/3 Goods and services tax: does item 32 of the table in subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 apply to some extent in respect of an acquisition for a single fee by a managed investment fund that is a recognised trust scheme from a Responsible Entity?

25. Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions refers to mixed and composite acquisitions in the context of determining whether an acquisition is a reduced credit acquisition.⁷ Paragraph 228 of GSTR 2002/2 notes that these terms are used to describe an acquisition that contains parts that are reduced credit acquisitions and parts that are not. The terms are intended to be similar to the concepts of a mixed supply and a composite supply and to adopt similar principles.⁸ GSTR 2002/2 refers to a mixed acquisition as containing separately identifiable parts where one or more of the parts are a reduced credit acquisition and one or more of the parts are not a reduced credit acquisition.⁹ However, the concept of a mixed acquisition can equally apply to an acquisition that consists of a number of parts that are reduced credit acquisitions subject to different percentage credit reductions.

26. GSTR 2002/2 provides that in a mixed acquisition, no part is dominant, and each part has a separate identity. A composite acquisition is an acquisition of one dominant part and includes other parts that are not treated as having a separate identity as they are integral, ancillary or incidental to the dominant part of the acquisition.¹⁰

27. It is a matter of degree whether the parts of an acquisition are separately identifiable, and retain their own identity or are alternatively characterised as being integral, ancillary or incidental to a dominant part of the acquisition. Having regard to all the circumstances of the transaction, indicators that a part may be integral, ancillary or incidental include where:

• it represents a marginal proportion of the total value of the package compared to the dominant part;

• it is necessary or contributes to acquisition as a whole, but cannot be identified as the dominant part of the acquisition;

• it contributes to the proper performance of the contract to acquire the dominant part; or

• an acquirer would reasonably conclude that it does not constitute for customers an aim in itself, but is a means of better enjoying the dominant thing acquired.¹¹

28. In considering whether part of the acquisition made by the managed investment fund from the RE falls within item 32, it is necessary to have regard to the essential character of the acquisition as well as the object and purpose of the item.¹²

29. Item 32 is structured so as to cover the acquisition of all supplies made by a recognised trust scheme unless specifically excluded. Relevantly to this Determination, item 32 excludes a service covered by paragraph (a), (b) or (e) of item 23 (concerning certain investment portfolio management functions),¹³ a service covered by paragraph (a), (b), (c), (d), (e), (f), (g), or (i) of item 24 (concerning certain administrative functions in relation to investment funds),¹⁴ and a custodial service covered by item 29¹⁵ of the table in subregulation 70-5.02 of the GST Regulations. It is notable that these exclusions do not cover all services that fall within these items such as acting as trustee of a trust or superannuation fund (item 23(c)), acting as a single responsible entity (item 23(d)), compliance with industry regulatory requirements (item 24(h)) and trustee services (item 29). Further, the exclusions from item 32 do not include item 31 which covers single responsible entity services. Paragraph 526 of Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax : reduced credit acquisitions sets out the view that trustee duties that relate to acting as a single responsible entity are the fiduciary obligations owed by an entity as a consequence of having scheme property vested in them, on behalf of the scheme members.

30. It can be inferred from the structure of exclusions that services not expressly excluded are intended to be separately recognised as being covered by item 32. Further, item 32 recognises that an acquisition of a supply may only partially be covered by the express use of the words 'to the extent that' in qualifying the application of paragraphs 32(a) and 32(b). Similarly, in setting the percentage credit reduction, regulation 70-5.03 of the GST Regulations specifically refers to a reduced credit acquisition covered by item 32 and one or more other items.

Taking into account this guidance and the facts of the managed investment scheme arrangement (which includes that the managed investment scheme is a registered managed investment scheme and that as its appointed responsible entity the RE owes certain obligations imposed by Chapter 5C of the Corporations Act 2001), it is evident that the RE is required to perform the following services in order to satisfy its duties/obligations to the managed investment scheme:

• investment management services (to which it is entitled to receive a Portfolio Management fee as compensation) which is excluded from the application of item 32 by reason of it falling within the scope of item 32(b)(iii);

• administration services (to which it is entitled to receive part of Administration fee as compensation), which is excluded from the application of item 32 by reason of it falling within the scope of item 32(b)(iv);

• other services, including, but not limited to, undertaking functions in compliance with Chapter 5C of the Corporations Act 2001 concerning the governance of the managed investment scheme as a managed investment scheme (to which it is entitled to receive part of the Administration fee as compensation), which falls within the scope of item 32.

Furthermore, the Commissioner considers that each of these services is a separately identifiable part of the overall responsible entity service performed by the RE which need to be recognised in determining the application of item 32 (in order to work out the managed investment scheme's RITC entitlement in respect of the GST incurred on the responsible entity fee charged by the RE). In terms of the separate recognition of the 'other services' performed by the RE, this is supported by the analysis contained in paragraph 36 of GSTD 2013/ which states that:

36. In considering the text of item 32 and regulation 70-5.03, the significance of the services that the RE supplies to the managed investment fund which include, but are not limited to, undertaking functions in compliance with Chapter 5C of the Corporations Act 2001 concerning the governance of the fund, and the underlying policy context referred to in the Explanatory Statement, the acquisition made by the managed investment fund is properly characterised as an acquisition of a mixed supply made by the RE, part of which falls within item 32.

On this basis, the Commissioner regards that the acquisition made by the managed investment scheme is properly characterised as an acquisition of a mixed supply made by the RE, part of which (the other services component) falls within item 32.

With regard to the apportionment of the single 'Administration' fee component of the responsible entity fee to its item 32 and non-item 32 parts, the Commissioner in paragraphs 37-40 provides guidance on how the managed investment scheme may undertake this exercise in order to determine the amount of its RITC entitlement.

Summary

The managed investment scheme will be entitled to claim reduced input tax credits (RITCs) in respect of the GST incurred on the 'fees' charged by the RE in its personal capacity, as the fees are consideration for a reduced credit acquisition (of responsible entity services) that the managed investment scheme makes from the RE. Furthermore, the amount of the RITC is determined as follows:

• For responsible entity services that the managed investment scheme acquired from the RE before 1 July 2012, the amount of the RITC is equal to 75 % of the GST incurred on the fees;

• For responsible entity services that the managed investment scheme acquires from the RE on or after 1 July 2012 the amount of the RITC is equal to::

- 75% of the GST incurred on the 'Portfolio Management fee' component of the 'responsible entity service fee',

- 75% of the GST incurred on the 'Administration fee' component of the 'responsible entity service fee' to the extent that the 'Administration fee' component is consideration for the provision of 'administration' services.
55% of the GST incurred on the 'Administration fee' component of the 'responsible entity service fee' to the extent that the 'Administration fee' component is consideration for the provision of other services which include, but are not limited to, undertaking functions in compliance with Chapter 5C of the Corporations Act 2001 concerning the governance of the managed investment scheme.

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