Edited version of private advice

Authorisation Number: 1052094064125

Date of advice: 13 June 2023

Ruling

Subject: GST - investor directed portfolio services

Question 1

Is the Entity in its capacity as Responsible Entity (RE) of theScheme an 'entity' which carries on an enterprise for Goods and Services Tax (GST) purposes?

Answer

Yes

Question 2

Does the Entity in its capacity as RE of the Scheme make reduced credit acquisitions pursuant to Division 70 of the A New Tax System Goods and Services Tax (Act) 1999 (GST Act) and Division 70 of Part 4.2 of the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations) when, in its corporate capacity, it provides RE management and administration services to the Scheme?

Answer

Yes

Question 3

If the answer to Issue 2 is affirmative, is the Entity in its capacity as RE of the Scheme entitled to reduced input tax credits (RITCs) for the acquisition of those RE management and administration services?

Answer

Yes

Relevant legislative provisions

Background

The Commissioner received an application from the Entity for a private binding ruling regarding their GST obligations when acting as Responsible entity (RE) for a Scheme.

The structure of the Scheme is as follows:

•                     The Scheme is a managed investment scheme under the Corporations Act and it is not a unit trust. It allows a client investor to have a separately managed account (SMA) that contains a portfolio of investments (Portfolio) beneficially owned by the investor and managed by the entity[1], as RE of the Scheme. Each Portfolio is aligned to a Scheme Model Portfolio selected by the investor.

•                     Investments held within the Scheme include listed securities and units in managed funds collectively referred to as 'securities' as well as cash depending on the Scheme Model Portfolio selected by the investor. The value of an investor's SMA will vary as the market value of the underlying investments held in the Portfolio(s) rises or falls.

•                     The entity categorises interests within the Scheme into different classes of investors. There is more than one class of SMA available, and the offer to investors is made under the Product Disclosure Statement is for a particular investor class. Typically, each class of investor is differentiated by fees, available investment options, risk level, asset class or distribution channels on offer.

•                     The Scheme offers investors a variety of Scheme Model Portfolios from a range of investment managers across asset classes such as Australian equities, international equities, property, fixed interest, alternative investments, and cash. An investor may select one Scheme Model Portfolio or a combination of Scheme Model Portfolios in order to meet the particular investor's investment needs, but the investor does not select the securities (including but not limited to, managed funds, wholesale funds and listed securities) that make up those MSMA Scheme Model Portfolios.

Each Scheme Model Portfolio has its own management fees payable to the entity as RE of the Scheme.

All assets within the Scheme are held in custody by another entity (entity 2) under a Custody Deed.

Entity 2 has been appointed custodian to hold in custody all assets (made up of investors' Portfolios) within the Scheme. While Entity 2, as custodian, holds legal title to those assets, it can only act in compliance of 'Proper Instructions' from the Entity as RE of the Scheme.

•                     According to a document that relates to the Scheme, the RE has all the powers in relation to the Scheme and each Portfolio that it could legally exercise if it were a natural person or corporation and the absolute owner of the Assets. In operating the Scheme, the RE must give all necessary instructions, consents and directions to the Custodian in order to give effect to the Scheme and to enable the Custodian to fulfil its obligations.

•                     The RE, and not the Client, has the right to determine how voting rights in respect of the Client's Assets should be exercised, and may make such determinations and cause such rights to be exercised in its absolute discretion.

•                     The RE may appoint a person, including an associate of the RE, as its delegate, attorney or agent to exercise its powers and perform its obligations.

•                     The RE may on behalf of Clients appoint a person to hold Assets for Clients. If at any time there is no such person appointed the Responsible Entity must hold Assets for Clients.

Reasons for the decision

A typical Investor Directed Portfolio Services (IDPS), such as the Scheme is considered to be a managed investment scheme as well as a collection of individual trusts. Such trusts co-exist within an overall trust relationship that practically facilitates the IDPS's managed investment scheme. The IDPS is a platform for acquiring and holding investments that involve custody of the assets and consolidated reporting, and typically involve a menu of investments from which an investor selects, that are not otherwise available to other investors. The IPDS provides a platform for the investor to make investment choices, directly or through authorising the operator (or through an adviser) to implement their choices. The operator obtains contributions from clients (here, Members) in exchange for those investors acquiring an interest in benefits produced by the IDPS. Member contributions are pooled to produce a return on the investment. Members (and advisers) do not have day-to-day control over the operation or management of the IDPS (in producing the benefits), this remains with the operator.

The Commissioner's view about whether an IDPS is (1) an entity, and (2) whether that entity is carrying on an enterprise, within the meaning of the GST Act is explained in Financial Services; questions and answers register - issues 13.3 and 13.4. [2]

The Scheme is an IDPS scheme, that is, the Scheme displays the features of an IDPS, including the features explained at paragraph 2 of Issue 13.3. Relevantly:

(a)          the investments held by the Entity are held on trust, through Entity 2 as custodian, for the investors; and

(b)          all money received by the Entity from investors, or in which investors have an interest, is paid into an account with an Australian ADI.

Accordingly, the Commisioner's view expressed in issues 13.3 and 13.4 applies equally to the Scheme.

Entity

The GST Act treats a trust as an entity[3]. An IDPS can be entitled to register for GST if it is carrying on an enterprise in the indirect tax zone and exceeds the registration threshold. Equally, a trustee or operator can be registered for GST if it is carrying on an enterprise, covering its activities as both as trustee and operator.

The Entity is appointed to act as operator and trustee of the Scheme under the Deed Poll. The relationship between an IDPS (as a managed investment scheme) and its operator satisfies the fundamental elements of a trust such that it is recognised as an entity for the purposes of the GST Act.

In this instance, as explained at paragraph 10 of issue 13.3, it is the Entity, as RE, that has day-to-day control over the operation of the Scheme (not the investors) and clients' contributions are pooled to produce benefits.

The Entity has a separate GST registration for making supplies in the course of carrying on its' corporate enterprise.

Accordingly, in line with explanations at paragraphs 13 and 14 of Issue 13.3, the Scheme (in its managed investment scheme) is considered to be an entity, for the purposes of the GST Act.

Carrying on an enterprise

We now turn to consider if the IDPS, acting through the RE is carrying on an enterprise. Issue 13.4 includes the following comments:

...

"In terms of trusts, a passive investment vehicle like a family discretionary trust (that merely holds shares and term deposits and receives investment income) will not be an enterprise. This is because it lacks the requisite actions to satisfy the enterprise test of activities done in the form of a business. However, a public unit trust will satisfy the enterprise test of activities done in the form of a business, notwithstanding that it may follow a passive investment mandate. The rationale in this case is that the public unit trust is established for commercial reasons and therefore exhibits the necessary business-like activities to satisfy the stated enterprise test".

...

Where the overall trust relationship (that practically facilitates the managed investment scheme aspect of an IDPS), the Commissioner considers that the associated activities of the operator typically correlate with the activities performed by a single responsible entity of public unit trust. Where this is found to be the case, the activities performed by the operator will have a distinct commercial flavour that permits a view that they constitute activities carried out in the form of a business.

Goods and Services Tax Ruling, GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1),explains the application of Division 70 of the GST Act and Division 70 of Part 4-2 of the GST Regulations in relation to reduced credit acquisitions, and also provides guidance about the role/duties of a single responsible entity as operator of an IDPS as follow:

...

Single responsible entity

521. The explanation for single responsible entity in the glossary to GSTR 2002/2 directs readers to the explanation of responsible entity which is:

Relates to managed investment schemes. The RE role, established in the Managed Investments Act 1998, combines the functions of both the trustee and fund manager, with the RE directly responsible for the fiduciary duties and responsibilities previously held by the trustee.

522. The expressions single responsible entity and responsible entity are interchangeable: the former highlighting the historical merging of the manager and trustee entities into one entity. Both terms relate to managed investment schemes.⁷²

523. While the operator of an investor-directed portfolio service (IDPS) is exempted from certain obligations under chapter 5C of the Corporations Act, their role equates to that of a single responsible entity. Consequently, for the purposes of item 23(d), the operator of an IDPS is a single responsible entity.

524. Narrowly viewed, the phrase acting as a single responsible entity may refer only to the service of agreeing to perform portfolio management services for a managed investment scheme. However, because item 23(d) refers to funds management services, the paragraph has a broader scope that extends to the acquisition of ongoing funds management and trustee services.

525. The funds management aspect of acting as a single responsible entity equates, in part, to the role of an investment manager as discussed in items 23(a) and 23(b). The funds management role in item 23(d) includes duties associated with the administration of the managed investment scheme. These services typically include the services outlined in item 24 with the exception of paragraph 24(g).

526. The trustee duties that relate to acting as a single responsible entity are the fiduciary obligations⁷³ owed by an entity as a consequence of having scheme property vested in them, on behalf of the scheme members.

...

Furthermore, as provided at paragraph 72 of MT 2006/1 [4], the GST Act does not create two separate entities - the trust and trustee - but rather the relevant entity is the trust, with the trustee standing as that entity if legal personality is required. The provisions do not create two separate entities, trust and trustee, rather the relevant entity is the trust, but the trustee stands as that entity when a legal person is required (such as to make an acquisition or enter into a contract) because a trust may be an entity for GST but has no legal personality for the purposes of contracting with a third party to supply or acquire anything. However, a trustee can also have a corporate capacity, and it is a separate entity when it acts as such, as opposed to acting for the trust.[5] -In the current case, the Entity has a separate GST registration for carrying on its corporate enterprise.

When applying principles drawn from the above Commissioner's view expressed in the relevant rulings referred to above, to the Scheme, we are of the view that the activities performed by the Entity, as RE in administrating and managing the Scheme, exhibit the necessary business-like activities to satisfy the enterprise test. Accordingly, the Entity in its capacity as RE (as trustee of the trust) is in fact carrying on an enterprise for GST purposes.

For completeness and as set out in the facts submitted in the ruling application we also need to consider the role of Entity 2 as custodian of all the assets (made up of investors' Portfolios) within the Scheme. We note that while, as custodian Entity 2 holds legal title to those assets, it can only deal with those assets in compliance of 'Proper Instructions' from the Entity as RE of the Scheme. In this instance, the activities of Entity 2 are essentially passive in nature (that is, it only possesses legal duties to guard the assets and can only act on instructions from MISL in dealing with the assets). As such, Entity 2's relationship in the role as custodian amounts to that of a bare trust. As explained at paragraph 37 of GST Ruling GSTR 2008/3 Goods and services tax: dealings in real property by bare trusts, Entity2 as bare trustee does not carry on an enterprise by virtue of its dealings with the trust property.

The Entity, being trustee and operator in its capacity as RE of the Scheme, manages the collection and payment of all client contributions into a trust account held with an Australian ADI, to facilitate the operation of the Scheme. In this case, the contractual framework (the Deed Poll) supports the view that the Entity, as RE, facilitates the managed investment scheme aspect of the Scheme. Accordingly, the activities performed by the Entity as operator and trustee constitute activities carried out in the form of a business. As such, this overall trust relationship, through the Entity's activities as RE would be an enterprise for the purposes of the GST Act, as set out in section 9-20(1) of the GST Act[6].

Where the Entity acts in the capacity as trustee and also in its own corporate capacity, acquisitions made in the course of acting as trustee and operating the trust are made in the Entity's capacity as trustee, and on behalf of the Scheme. This is confirmed by the Commissioner in paragraphs 669-685 of GSTR 2004/1.

Practically it is often difficult for entities to characterise the dealings that occur between an entity acting in its corporate capacity and acting on behalf of the trust. When the Entity pays an amount of GST for a taxable supply made to it by a third party, which it engages with in its' capacity as trustee, it makes a creditable acquisition on behalf of the trust. Further, it can also be making taxable supplies in its corporate capacity of trustee, administration and other services to the trust, whilst simultaneously be making creditable acquisitions of such supplies in its capacity as trustee, standing for the trust, the Scheme.

The Commissioner's guidance in GSTR 2004/1 states:

(a)          where the trustee makes acquisitions on behalf of the trust entity for which it can be reimbursed through a right of indemnification for liabilities incurred in the administration of the trust (in this case as provided for in clause 9.1 and Schedule 1 of the Deed Poll), the acquisition is made by the trust entity[7]; and

(b)          where the trustee adds a mark-up for the on-supply of the thing to the trust entity, this may indicate that the entity is supplying something to the trust entity in its own corporate capacity, rather than acquiring it on behalf of the trust and seeking recovery through a right of indemnity[8].

Reduced credit acquisitions

Is the Entity as RE (trustee) of the Scheme making financial supplies?

For the Entity as RE (trustee) of the Scheme to be making reduced credit acquisitions, the relevant acquisitions must relate to making financial supplies (section 70-5). Financial supplies are identified in Subdivision 40A of the GST Regulations. Relevantly, item 10 in the table in subsection 40-5.09(3) of the GST Regulations which identifies as a financial supply, an interest in or under securities including:

(a)          a debenture described in paragraph (a), (b), (c), (e) or (f) of the definition of debenture in section 9 of the Corporations Act 2001; and

(b)          a document issued by an individual that would be a debenture if it were issued by a body corporate; and

(c)           a scheme described in paragraph (e), (i) or (m) of the definition of managed investment scheme in section 9 of the Corporations Act 2001; and

(d)          the capital of a partnership or trust.

The Commissioner's position regarding whether an IDPS makes financial supplies is to be found in Goods and Services Tax Ruling, GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2). Line D24 in the table at Schedule 2 of GSTR 2002/2 guidance provides that where the supply consisting of an interest in an IDPS such as wrap accounts,member discretionary masterfunds, or IDPS-like arrangements is made, in each case it is necessary to consider whether or not an enterprise is being carried on in respect of the product.[9] Where the IDPS amounts to an entity that is carrying on an enterprise, an interest in the IDPS will be an input taxed (financial) supply.

We concluded above, based on the Entity's circumstances from the information provided to the Commissioner, that the Entity as RE (trustee) of the Scheme is carrying on an enterprise. We therefore consider that the Scheme (as a trust) is making financial supplies of an interest in an investment portfolio under Item 10 in the table in subsection 40-5.09(3) in line with the Commissioner's guidance in GSTR 2002/2. Accordingly, the Entity, in its capacity as RE (trustee) of the Scheme, will be making reduced credit acquisitions of the supplies it simultaneously provides in its' corporate capacity by administering/managing the Scheme. Under subsection 70-5(1), such acquisitions will give rise to an entitlement for the Entity as trustee, to reduced input tax credits if those acquisitions are specified types of acquisitions in the table at subsection 70-5.02(1) of the GST Regulations.

For completeness, it should be noted that any acquisitions made from third parties by the Entity standing as trustee for the Scheme, will also only be creditable acquisitions to the extent they fall within the categories listed in subsection 70-5.02(1) of the GST Regulations.

Entitlement to reduced input tax credits

As explained above, in its capacity as RE (trustee) of the Scheme, the Entity will be making reduced credit acquisitions[10] of the supplies it provides in its' corporate capacity by administering/managing the Scheme if those supplies are specified as eligible acquisitions in the GST Regulations. If this is the case, under subsection 70-5(1), the Entity as trustee of the Scheme will be entitled to reduced input tax credits.

Section 70-5.02 of the GST Regulations specifies the kind of acquisitions that attract reduced input tax credits. Specified acquisitions that are relevant in terms of acquisitions made by the entity in the course of carrying on its enterprise as RE of the Scheme are those listed in the table in subsection 70-5.02(1) as follow:

•                     Funds management and administration services - Items 23 & 24;

•                     Trustee and custodial services - Items 29, to 31; and

•                     Supplies to recognised trust schemes - Item 32.

GSTR 2004/1, as explained above, provides guidance about the application of Division 70 of Part 4-2 of the GST Regulations in relation to reduced credit acquisitions. Whether the type of acquisition made falls within the specified type of acquisition in subsection 70-5.02(1) is dependent on the nature of the supply acquired. In regard to Item 23(d) (acting as a single responsible entity) in the table in subsection 70-5.02(1), GSTR 2004/1 states at paragraphs 520 that: the scope of that item depends on the meaning of the expression single responsible entity, and the context of the item.

Furthermore, regarding Item 31 (single responsible entity services), GSTR 2004/1 explains at paragraph 718 that the services referred to in that item are those that the single responsible entity provides in carrying out their duties as a single responsible entity as required by the Corporations Act, and not any other services.

Item 32 in the table in subsection 70-5.02(1) of the GST Regulations reads:

Item 32

Supplies acquired by a recognised trust scheme, to the extent that:

(a)          the supplies are acquired on or after 1 July 2012; and

(b)          the supplies acquired are not:

                                           (i)                a supply by way of sale of goods or supply of real property made by selling a freehold interest in land, selling a stratum unit, or granting or selling a long-term lease; or

                                          (ii)                a brokerage service covered by item 9 or 21; or

                                         (iii)                a service covered by paragraph (a), (b) or (e) of item 23; or

                                         (iv)                a service covered by paragraph (a), (b), (c), (d), (e), (f), (g), or (i) of item 24; or

                                          (v)                a custodial service covered by item 29; or

                                         (vi)                a service covered by item 30; or

                                        (vii)                a service covered by item 33

Item 32 (supplies to recognised trust schemes) covers all acquisitions of supplies made by a 'recognised trust scheme' (through its trustee, here the Entity) on or after 1 July 2012 except to the extent that they are specifically excluded by item 32(b). The items specifically excluded are themselves reduced credit acquisitions under other items - such as items 23(a), (b) and (e). An acquisition covered by item 32 will be subject to a reduced input tax credit at the rate of 55% as opposed to 75% for other reduced credit acquisitions[11].

For the purposes of item 32, a 'recognised trust scheme' is defined in section 196-1.01 of the GST Regulations to mean a trust that has the following features:

(a)          the entity that acts in the capacity as trustee or responsible entity of the trust, is carrying on, in its own capacity, an enterprise that includes making taxable supplies to the trust;

(b)          the trust is:

(c)           a managed investment scheme, or part of a managed investment scheme, other than a securitisation entity or a mortgage scheme; or

(d)          an approved deposit fund within the meaning of the Superannuation Industry (Supervision) Act 1993; or

(e)          a pooled superannuation trust within the meaning of the Superannuation Industry (Supervision) Act 1993; or

(f)            a public sector superannuation scheme within the meaning of the Superannuation Industry (Supervision) Act 1993; or

(g)          a regulated superannuation fund (other than a self-managed superannuation fund) within the meaning of the Superannuation Industry (Supervision) Act 1993.

From the information provided to the Commissioner, the Scheme is a trust that is a managed investment scheme (other than a securitisation entity or a mortgage scheme) and therefore meets the definition of a 'recognised trust scheme' for the purposes of item 32. As such, all acquisitions made by the Entity as RE (trustee) of the Scheme are covered by Item 32 to the extent that they are not specifically excluded (under paragraph (b)) - noting that services covered by Item 23(d) (acting as a single responsible entity) and Item 31 (Single responsible entity services) are not excluded.

As explained at paragraph 744 of GSTR 2004/1, an acquisition that is excluded from item 32 but covered by another item in the table in subsection 70-5.02(1) of the GST Regulations is subject to a reduced input tax credit at the rate of 75%. In this case, acquisitions made by the Entity as RE of the Scheme that will be excluded from item 32 by subparagraphs (b)(iii) and (b)(iv) are supplies of services covered by paragraph (a), (b) or (e) of Item 23, or paragraphs (a), (b), (c), (d), (e), (f), (g), or (i) of Item 24.

Therefore, it follows that:

(a)          to the extent the Entity as a corporate entity supplies portfolio and investment management and administration services to the Scheme, these will be covered by Item 23 (other than paragraphs (c) or (d)), or by Item 24 (other than paragraph (h)). When simultaneously, the Entity as RE (trustee) of the Scheme acquires such supplies, it will be entitled to claim reduced input tax credits at the rate of 75% for the acquisition of those services[12].

(b)          to the extent the supplies of any trustee services made by the Entity in its corporate capacity falls within paragraphs (c) or (d) in Item 23, or paragraph (h) in Item 24, the Entity as RE (Trustee) of the Scheme will be entitled to claim reduced input tax credits at the rate of 55%.

(c)           to the extent any acquisitions made by the Entity in its capacity as trustee, from third party suppliers, a reduced input tax credit of 75% is only available if the type of supplies can be characterised as falling outside the exceptions to Item 32[13], otherwise a rate of 55% of the GST arising is available.

[1] A search of the ABN Register revealed that MISL (ABN 73 071 745 401) is registered for GST.

[2] Australian Securities and Investments Commission (ASIC) Policy Statement 148 and ATO Goods and Services Tax: Financial Services - questions and answers 13.

[3] Sub-section 184-1(1)(g)

[4] GST Determination GSTD 2006/6 - Goods and services tax: MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? provides that MT 2006/1 has equal application in terms of the meaning of 'enterprise' for GST purposes

[5] Paragraph 72, MT 2006/1.

[6] This wide definition includes (relevantly) an enterprise is an activity, or series or activities, done in the form of a business; or in the form of an adventure or concern in the nature of trade

[7] See paragraphs 670 to 671 of GSTR 2004/1

[8] See paragraph 672 of GSTR 2004/1

[9] Item 10 subsection 40-5.09(3) of the GST Regulations

[10] Section 70-5

[11] Subsection 70-5.03 of the GST Regulations - see paragraph 17 of GSTR 2004/1.

[12] See paragraphs 751 and 756 of GSTR 2004/1.

[13] Item 23 (a), (b) and (e), Item 24 (a), (b), (c), (d), (e), (f), (g) and (i)

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).