Edited version of your written advice

Authorisation Number: 1051330761259

Date of advice: 26 February 2018

Ruling

Subject: GST and contracts for difference

Question 1

Are you making an input taxed supply when you enter into a contract for difference with your client?

Answer

Yes. You are making an input taxed supply under item 11 in the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) when you enter into a contract for difference with your client.

Question 2

Is the fee charged for withdrawing from the on-line account consideration for a taxable supply?

Answer

Yes. The withdrawal fee is consideration for a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and it is not incidental to your supply of an interest in a contract for difference.

Relevant facts and circumstances

1. You are registered for goods and services tax (GST) effective from 17 March 20XX, account on a cash basis and has quarterly tax periods.

2. You own and operate a website wherein you trade in contracts for difference with your clients (clause 1.2 in the product disclosure statement).

3. A contract for difference is an over-the-counter financial product, which constitutes a contract between you and your clients, by which the client can make a profit or loss from changes in the price or level of a certain financial product without actually owning that financial product or having any interest in it (clause 2.1 in the product disclosure statement).

4. A contract for difference is issued by you and you act as the counterparty to the transaction with your client. When entering into a contract for difference, you act for yourself and not as an agent for any person, and you do not act as your client’s agent or broker for the transaction. (clause 4.1 of the product disclosure statement)

5. Before a client can transact with you, the client must open an on-line account with you. The account is governed by the account terms, which are available on your website. The client must accept the account terms before you approve the opening of an account. As part of the account opening process, you make available to the client a product disclosure statement and a financial services guide.

6. Under the account terms, a client may deposit funds into (and withdraw funds from) their account. For each withdrawal, you may charge a withdrawal fee of up to $50 or the same numerical amount in the currency in which the client has deposited into its account. (clause 8 of the product disclosure statement)

7. Your clients are in Australia.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 sections 9-5 and 40-5

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

Reasons for decision

Relevant law and rulings

Section 9-5 of the GST Act provides that you make a taxable supply if:

● you make the supply for consideration, and

● the supply is made in the course or furtherance of an enterprise you carry on, and

● the supply is connected with the indirect tax zone, and

● you are registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Section 40-5 of the GST Act provides that a financial supply, as defined in the GST Regulations, is input taxed.

Regulation 40-5.09 of the GST Regulations sets out supplies that are financial supplies. A supply is a financial supply if there is the provision, acquisition or disposal of an interest mentioned in subregulation 40-5.09(3) or (4). A derivative is listed in item 11 of the table in subregulation 40-5.09(3).

You must also satisfy the requirements in paragraphs 40-5.09(1)(a) and (b). That is, you must provide the interest for consideration in the course of an enterprise, the supply is connected with the indirect tax zone and you must be registered or be required to be registered and you must be the financial supply provider in relation to the supply.

Indirect tax zone means Australia but does not include external territories and certain offshore areas.

Our view on whether a contract for difference is a financial supply is set out in Goods and Services Tax Determination GSTD 2005/3: are contracts for difference and financial spread betting contracts financial supplies?

Paragraphs 1 and 27 of GSTD 2005/3 state:

1. …When the conditions for making a financial supply under regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) are satisfied, ….contracts for difference are financial supplies, being interests in derivatives mentioned in item 11 of the table in subregulation 40-5.09(3).

27. …a contract for difference, by its nature, involves both the acquisition and disposal of an interest in the derivative contract by each of the participants. Each party to the contract supplies an interest under a derivative at the time of entry into the contract. That is, each party both makes a supply of the interest and provides non-monetary consideration to the other entity in the form of an interest under the derivative. The payment, which may be payable by either party, that arises from the operation of the contracts is additional consideration for the supply of the interests under…the contract for difference.

GST Regulation 40-5.06 provides that 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.

GST Regulation 40-5.10 provides that the supply of something is an incidental financial supply, if it is:

a. incidental to the financial supply; and

b. supplied at or about the same time, as the financial supply but not for separate consideration; and

c. the usual practice of the entity to supply the thing (or similar things) and the financial supply together in the ordinary course of the entity's enterprise;

d. supplied by the same supplier to the same recipient as the original financial supply; and

e. supplied directly in connection with a financial supply.

Application of the law and rulings to your case:

Contract for difference

When you enter into a contract for difference with your client, you provide an interest in a derivative for consideration and provide it in the course or furtherance of your enterprise. The provision of the interest is connected with the indirect tax zone because the provision of the interest is done, or made through an enterprise that you carry on, in the indirect tax zone.

You are the financial supply provider of the interest as you create the derivative when making the supply.

As all of the elements of regulation 40-5.09 of the GST Regulations are satisfied, you are making a financial supply under item 11 in the table in subregulation 40-5.09(3) of the GST Regulations when you enter into a contract for difference with your client. This supply is input taxed under section 40-5 of the GST Act.

Withdrawal fee

We consider that the supply of the on-line account is not incidental to the supply of an interest in the contract of difference. Rather, it is a separate supply and its GST status considered separately from the supply of the contract of difference.

As all of the elements of a taxable supply under section 9-5 of the GST Act are satisfied, the withdrawal fee is subject to GST. This is because it is consideration for a supply made in the course or furtherance of your enterprise, the supply is connected with the indirect tax zone and you are registered for GST.

Its taxable status is not changed because it is not an input taxed supply for the purposes of the GST Act. The supply of the on-line account is not a financial supply listed in regulation 40-5.09 of the GST Regulations.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).