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Edited version of your written advice
Authorisation Number: 1051403143021
Date of advice: 20 July 2018
Ruling
Subject: Reduced credit acquisitions
Question
Have you made reduced credit acquisitions under certain agreements for which you will be entitled to reduce input tax credits (RITCs)?
Answer
Yes.
This ruling applies from
1 April 2016.
Relevant facts and circumstances
● You carry on an enterprise that creates and sells products that are financial supplies.
● You entered into certain agreements with other entities under which those entities facilitate the supply of your products and process the resulting transactions.
● The consideration you pay the other entities under those agreements is a percentage calculated on the value of the products that they sell.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 sub-section 70-5(1)
A New Tax System (Goods and Services Tax) Regulations 1999 sub-regulation 70-5.02(2) item 7
A New Tax System Goods and Services Tax) Regulations 1999 sub-regulation 70-5.02(2) item 27
Reasons for decision
Subsection 70-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that specific acquisitions (referred to as reduced credit acquisitions) that relate to making input taxed financial supplies may attract a RITC (referred to as a reduced input tax credit), even though no input tax credit would ordinarily arise under Division 11 of the GST Act.
Division 70 of Part 4-2 of the A New Tax System (Goods and Services Tax) Regulation 1999 (the GST Regulations) provides an exhaustive list of items that are reduced credit acquisitions. Item 27 in sub-regulation 70-5.02(2) (Item 27) provides that supplies “for which financial supply facilitators are paid commission by financial supply providers” are reduced credit acquisitions.
Requirements for the acquisitions under some of the agreements to qualify as reduced credit acquisitions under Item 27:
● the acquisitions must relate to making financial supplies
● you must be a financial supply provider of the financial supplies;
● the other entities must be a financial supply facilitator of the financial supplies; and
● the consideration for the acquisitions under the agreement must be “commission”.
Requirements for the acquisitions under some of the agreements to qualify as reduced credit acquisitions under Item 7 in sub-regulation 70-5.02(2):
● the acquisitions must relate to processing, settling, clearing or switching transactions covered by the relevant agreement(s), such as credit, debit and other such transactions.
Financial supply facilitator
Regulation 40-5.07 of the GST Regulations provides that a 'financial supply facilitator', in relation to the supply of an interest, is an entity facilitating the supply of the interest for a financial supply provider. An entity 'facilitates' a supply when its activities have the effect of helping forward or assisting the relevant supply of an interest, rather than those that simply assist the financial supply provider.
Whether the consideration under the agreement is commission?
The ATO view on what constitutes a commission is outlined in the glossary in Goods and Services Tax Ruling GSTR 2002/2: GST treatment of financial supplies and related supplies and acquisitions.
The Ruling provides:
Payment to an agent or similar entity, or to an employee for particular services rendered. The payment may be made on a fixed sum or fixed percentage basis, or on a sliding scale based on the value of the transaction.
Goods and Services Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions further explains at paragraph 653:
While the term commission may include corpus commission, income commission, trailing commission, and brokerage, not all of these are necessarily payments to a financial supply facilitator. Other fees, including those calculated on the value of work done, rather than a per transaction or percentage of value based calculation, and retainers, are not commission.
The consideration calculated on the percentage of the products sold represents commission as it is a payment calculated on the percentage of a value of a transaction.
Since the activities performed by the other entities under your agreements help forward, process or assist in your making the financial supply, your acquisitions are covered by Items 7 and 27. You are making reduced credit acquisitions and will be entitled to claim reduced input tax credits in relation to them to the extent that you are making financial supplies, as per sub-section 70-5(1) of the GST Act.
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