Edited version of private advice

Authorisation Number: 1051936028955

Date of advice: 22 December 2021

Ruling

Subject: GST and foreign currency conversion

Question 1

Does the difference between the retail currency exchange rate charged to clients for which no direct fee is charged and the wholesale exchange rate paid to its unrelated international liquidity provider, Entity B, represent 'consideration' for the supply of the currency conversion service by Entity A to its clients for the purposes of section 9-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the difference between the retail currency exchange rate and the wholesale exchange rate is not consideration for the supply of the currency conversion service but forms part of the consideration for the supply of currency under the foreign exchange contract entered into between Entity A and Entity A's client. That is, the consideration for the supply of the currency from Entity A to its client is the amount calculated using the retail currency exchange rate agreed under the foreign exchange contract between Entity A and Entity A's client.

Question 2

(a)  Does any consideration for the currency conversion service provided by Entity A to its clients, where Australian currency (AUD) is converted into foreign currency by Entity B, represent consideration for:

•         an input taxed financial supply under section 40-5 of the GST Act from Entity A to its clients; or

•         a taxable supply of a currency exchange facilitation service under section 9-5 of the GST Act?

(b)  Alternatively, to the extent that Entity A becomes a 'principal' under its client agreement, does the supply represent a GST-free supply in these circumstances under section 38-190 of the GST Act where the converted AUD funds are for use outside of Australia?

Answer

Entity A is making a supply of currency to its clients. Therefore, where Australian currency is exchanged for foreign currency under a foreign exchange contract between Entity A and its client (assuming the client is an Australian resident) the GST outcomes are as follows:

(i)            where the client uses that foreign currency to make payments to a destination outside Australia, the supply to the client is GST-free under item 4(a) in the table in subsection 38-190(1) of the GST Act.

(ii)           where the client deposits the foreign currency into their Australian bank account, the supply of the foreign currency to the client is input taxed under item 9 in subsection 40-5.09(3) of the GST Regulations.

No part of the supply from Entity A to its client is a taxable supply of a currency exchange facilitation service and no part of the consideration payable by Entity A's client under a foreign exchange contract with Entity A is consideration for a currency exchange facilitation service.

Question 3

Does the currency conversion service provided by Entity A to its clients, where foreign currency is converted to AUD by Entity B, represent:

•         an input taxed financial supply under section 40-5 of the GST Act; or

•         a taxable supply of a currency facilitation service under section 9-5 of the GST Act?

Answer

Where Entity A supplies Australian currency in exchange for foreign currency to its clients (assuming the client is an Australian resident), the supply is an input taxed financial supply.

No part of the supply from Entity A to its client is a taxable supply of a currency exchange facilitation service and no part of the consideration payable by Entity A's client under a foreign exchange contract with Entity A is consideration for a currency exchange facilitation service.

Relevant facts and circumstances

Entity A is a company based in Australia that is registered for goods and services tax (GST).

Entity A provides foreign and Australian currency to a range of clients that need to exchange currency for various reasons.

Entity A is regulated by the Australian Securities and Investments Commission (ASIC), is a registered remittance provider with the Australian Transaction Reports and Analysis Centre (AUSTRAC), is a member of the Australian Financial Complaints Authority (AFCS) and holds an Australian Financial Services Licence (AFSL).

Entity A utilises a third-party international liquidity provider, Entity B, for wholesale currency conversion.

Copies of relevant documents/agreements were provided and form part of the identification and description of the scheme that is the subject of this private ruling.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sections 9-5, 9-10, 9-15, 9-30, 11-5, 40-5 and subsection 38-190(1)

A New Tax System (Goods and Services Tax) Regulations 2019 section 40-5.09

Reasons for decision

Under section 9-5 of the GST Act, a supply is a taxable supply if:

(a)  You make the supply for consideration; and

(b)  The supply is made in the course or furtherance of an enterprise that you carry on; and

(c)   The supply is connected with the indirect tax zone; and

(d)  You are registered or required, to be registered.

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

The term 'supply' is broadly defined in subsection 9-10(1) of the GST Act to mean 'any form of supply whatsoever'. Subsection 9-10(4) of the GST Act provides that a supply does not include a supply of money (defined in section 195-1) unless the money is provided as consideration for a supply that is a supply of money (that is, a supply of 'money for money').

The definition of 'money' in section 195-1 of the GST Act includes 'currency (whether of Australia or any other country)'.

Goods and Services Tax Ruling GSTR 2006/9 examines the meaning of 'supplies' and states at paragraph 119 that examining the agreement is the starting point in analysing an arrangement.

Accordingly, Entity A is making supplies to its clients for consideration in the course or furtherance of an enterprise that it carries on, the supplies are connected with Australia and Entity A is registered for GST. As such, supplies that Entity A makes meet all the requirements of paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act to be a taxable supply. However, the supply is not taxable to the extent that it is GST-free or input taxed.

Under subsection 9-10(2) of the GST Act, a supply includes a financial supply.

A financial supply is input taxed (subsection 40-5(1) of the GST Act) and 'financial supply' has the meaning given by the GST Regulations (subsection 40-5(2) of the GST Act).

The supply of various 'financial interests' (listed in subsection 40-5.09(3) of the GST Regulations) will be a financial supply if certain requirements are met. These requirements, set out in subsection 40-5.09(1) of the GST Regulations, are:

• the provision, acquisition or disposal of the interest is for consideration, in the course or furtherance of an enterprise and connected with the indirect tax zone, and
• the supplier is registered or required to be registered, and a financial supply provider in relation to the supply of the interest.

Section 40-5.06 of the GST Regulations provides that an entity is the financial supply provider of an interest if:

• the interest was the entity's property immediately before the supply;
• the entity created the interest when making the supply; or
• the entity acquires the interest supplied (referred to as an acquisition-supply).

Section 196-1.01 of the GST Regulations defines an interest as anything that is recognised at law or in equity as property in any form.

Paragraph 79 of GSTR 2002/2 explains, in relation to the term interest, that:

The term 'interest' is taken to be very broad even taking into account the use of the word property. The above examples are property or proprietary rights on a broad interpretation of the term and do not extend or contradict the generally accepted concept of 'property'. The examples indicate that the term is given its broadest application so that an interest is as wide as the legal and equitable concept of property, including rights arising under a contract.

Section 196-1.01 of the GST Regulations states that the provision of an interest includes allotment, creation, grant and issue of the interest.

Paragraph 26 of GSTD 2012/5 states that an entity supplying either foreign currency or Australian dollars to a customer is the 'financial supply provider' in relation to that supply. As stated above, we consider that under the agreements entered into between Entity A and its clients, Entity A is supplying currency to those clients. In line with GSTD 2012/5, Entity A is a financial supply provider in relation to those supplies.

Interests in or under items listed in the table in subsection 40-5.09(3) of the GST Regulations may amount to a financial supply for the purposes of subsection 40-5.09(1) of the GST Regulations. Item 9 in the table in subsection 40-5.09(3) (item 9) lists an interest in or under Australian currency, the currency of a foreign country, or an agreement to buy or sell currency of either kind.

Therefore, where Entity A supplies foreign currency for consideration in the form of Australian dollars, or supplies Australian dollars for consideration in the form of foreign currency to its clients, these supplies are input taxed under Item 9.

However, subsection 9-30(3) of the GST Act contemplates that to the extent a supply may be both GST-free and input taxed, it is GST-free. Hence, to the extent that the supply of a particular financial product has the character of being both GST-free and input taxed, it will be GST-free.

Section 38-190 of the GST Act deals with the supplies of things, other than goods or real property, for consumption outside the indirect tax zone.

Item 4(a) in the table in subsection 38-190(1) of the GST Act provides that a supply is GST-free if it is a supply that is made in relation to rights if the rights are for use outside the indirect tax zone.

Identification of the rights

In Travelex Ltd v. Commissioner of Taxation [2010] HCA 33; 2010 ATC 20-214; 76 ATR 329 (Travelex), the High Court found that the supply of foreign currency banknotes by an entity to a customer whose intention was to use the banknotes outside Australia is a GST-free supply under Item 4. The supply was GST-free because:

•         it was a supply that was made in relation to rights, and

•         the rights were for use outside Australia.

Following Travelex, the ATO modified its view of applying Item 4 to a supply. First, determine if the supply is one that can be said to be 'made in relation to rights'. Secondly, determine whether the relevant rights are for use outside the indirect tax zone. In regard to this second step, the relevant use is the intended use of the recipient and will depend on the nature of the right in question.

While the subject matter of the supply in Travelex was foreign currency banknotes (ie physical currency), it is the relevant rights attaching to them that was important. This is the approach to be taken to other supplies including currency exchange products. That is, the type of financial supply is not determinative of how Item 4 applies. Item 4 requires characterising the supply by reference to the rights (if any) to which it relates.

Entity A's agreements with its clients are for currency exchange. All Entity A's supplies are made electronically rather than by the actual movement of physical money. Entity A's supplies of money under these transactions are made by wire or electronic funds transfer (EFT).

The essential character of a supply of a wire transfer or electronic funds transfer is to transfer money to the bank account of a third party (the payee). What is referred to as a 'transfer' from one account to another via the banking system does not involve the actual transfer of physical currency or the transfer or assignment of ownership of a chose in action (a right). Rather, it involves the extinguishment (or reduction in value) of one chose in action (the payer's), and the creation (or increase in value) of another (the payee's), represented by the relevant accounting entries.

While the rights held by the payer are extinguished during the transfer process, it is accepted there is a dealing in rights, being the effective transfer of the value in the rights from the payer to the payee. Therefore, the essential character of the supply of the wire transfer is to facilitate a dealing in rights.

In this context, the relevant right is the chose in action represented by the deposit into the payee's account (rather than the extinguished chose in action of the payer, or the payer's contractual rights under the terms of the underlying agreement). That is, the right relates to the payee's account and where it is held.

Supply made in relation to rights

Having identified the rights, it must be determined if a supply is made in relation to rights. Goods and Services Tax Ruling GSTR 2003/8 requires such a supply to fall within one of three categories set out in the ruling:

Category 1 supplies identified in paragraph 9-10(2)(e) of the GST Act

Category 2 supplies of things comprising a bundle of rights that derive their value exclusively, or almost exclusively, from those rights.

Category 3 supplies of services directly connected with rights.

Paragraph 27E of GSTR 2003/8 states that a supply comes within Category 2 if:

•         the thing supplied derives its value exclusively, or almost exclusively, from those rights; and

•         through the supply, the supplier either supplies the rights to the recipient or surrenders the rights.

Entity A's supplies can be considered to be a Category 2 supply.

Rights for use outside the indirect tax zone

A supply that is made in relation to rights is GST-free under item 4(a) 'if the rights are for use outside the indirect tax zone'.

The ATO view on the use of rights that fall within Item 4 is largely contained in GSTR 2003/8. Paragraph 116A advises it is the intended use of the recipient that determines the question of where the relevant rights are for use.

Paragraph 124 of GSTR 2003/8 advises that a supply that is made in relation to rights is GST-free under item 4(a) to the extent that the rights were intended, at the time they were created, granted, transferred, assigned or surrendered, to be used outside the indirect tax zone.

Therefore, in Entity A's case, the wire or EFT transfers are the effective transfer of the rights to an overseas bank account in order for Entity A's clients to make payments for various reasons, such as to overseas suppliers to extinguish their liabilities with those suppliers. On the facts provided, it is accepted these rights are for use outside the indirect tax zone.

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