Edited version of private ruling

Authorisation Number: 1011477351988

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Ruling

Subject: Cards Issuing Business Apportionment methodology

Detailed reasoning

Under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity is entitled to the input tax credit for any creditable acquisition that it makes.

An entity makes a creditable acquisition under section 11-5 of the GST Act when that entity:

(a) acquires anything solely or partly for a creditable purpose

(b) the supply of the thing to the entity is a taxable supply

(c) the entity provides, or is liable to provide, consideration for the supply, and

(d) the entity is registered or required to be registered.

Section 11-15 provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. Under subsection 11-15(2) however, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed; or

(b) the acquisition is of a private or domestic nature.

Accordingly, to the extent that acquisitions made by you relate to making supplies that would be input taxed, they are not acquired for a creditable purpose. Therefore such acquisitions are not, to that extent, creditable acquisitions and you are not entitled to input tax credits.

Based on the facts supplied, you make a range of supplies in its credit card business operations, namely, taxable, GST-free and input taxed financial supplies.

You directly allocate acquisitions that are used either wholly for a creditable purpose or a non-creditable purpose. However, some of your acquisitions are made for both a creditable purpose (for making taxable or GST-free supplies) and a non-creditable purpose (for making input taxed financial supplies).

Accordingly, these acquisitions are partly creditable and the amount of input tax credits to which you are entitled will depend upon the extent of creditable purpose as provided for in section 11-30 of the GST Act.

The 'extent of creditable purpose' is defined in subsection 11-30(3) of the GST Act to mean 'the extent to which the creditable acquisition is for a creditable purpose, expressed as a percentage of the total purpose of the acquisition.'

Consequently, an apportionment of these acquisitions is necessary to determine the extent of creditable purpose.

GSTR 2006/3

Goods and Services Tax Ruling GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies (GSTR 2006/3) sets out the Commissioner's views on apportionment and outlines suitable methods of calculating the extent of creditable purpose of your acquisitions.

Paragraph 73 of GSTR 2006/3 sets out the following principles for an appropriate method used to apportion acquisitions:

73. Following…..principles set out by the High Court, the method you choose to allocate or apportion acquisitions between creditable and non-creditable purposes needs to:

be fair and reasonable

reflect the intended use of that acquisition (or in the case of an adjustment, the actual use), and

be appropriately documented in your individual circumstances.

GSTR 2006/3 discusses the different methods which can be used to apportion the extent of the planned use of an acquisition for a creditable purpose:

Methods of calculating the extent of creditable purpose

80. To calculate the amount of your input tax credits, you need to adopt a method of estimating the extent of creditable purpose of your acquisitions and importations. The requirement that your estimation is fair and reasonable in your circumstances is a prerequisite for any decision you make.

81. The Commissioner considers that the use of direct methods, including direct estimation (see paragraph 92 to 101 of the Ruling) best accords with the basic principles explained above (see paragraph 73). If it is not possible or practicable to use a direct method, you may use some other fair and reasonable basis, including an indirect estimation method.

In regard to your card issuing business you have proposed use of an indirect estimation method, being a revenue based apportionment methodology as outlined in the facts section of this ruling above.

In relation to non-loyalty reward acquisitions, you have advised that some of the acquisitions relating to your credit card operations are subject to reduced input tax credits (RITC's) (75% of the input tax credit) and that the apportionment methodology is then to be applied to the remaining 25% of the input tax credit in respect of those acquisitions.

In response to the ATO's suggestion that some costs might be more appropriately allocated into transactor and revolver pools using an alternative to card spend, you developed a possible alternative approach whereby those acquisitions subject to a RITC are broken into two groups.

The first group of acquisitions were to be allocated to the transactor and revolver pools based on the number of accounts as the appropriate allocation driver and the second group were to be allocated to the transactor or revolver pools based on 'card spend' as the appropriate driver.

The following acquisitions make up the first mentioned group, (which you have advised represents approximately 57% of the cost of acquisitions subject to RITC):

Agent collection fees and credit reference checks;

Sundry technology costs;

Sundry plastic costs (card blanks, including personalisation and PIN mailers);

Sundry fees & services paid;

Sundry telecommunication costs;

Postage costs;

Stationery printing and other printing costs

Commissions paid; and

Outsourced other costs.

You have maintained that you consider card spend to be an appropriate driver to apportion all acquisitions between transactors and revolvers, but if you are required to do so by the ATO, you will apportion the above acquisitions on the basis of number of accounts.

The second mentioned group makes up 43% of the cost of acquisitions subject to RITC and you consider that the appropriate driver to apportion these acquisitions between transactors and revolvers is card spend. You have advised that the main acquisition in this category is scheme fees (including BPay fees).

With respect to all other relevant acquisitions, being those acquisitions which are not subject to a RITC, you propose to apportion such acquisitions on the basis of card spend.

Separate extents of creditable purpose (ECP) are then calculated based on a revenue formula for transactors and revolvers. Revenue from transactors in the numerator comprises 'Interchange', 'Loyalty fee' and 'GST-free Forex fees'. Revenue from transactors in the denominator comprises 'Interchange', 'Loyalty fee', 'Net interest' (if any), 'Card membership fees', 'Forex fees - all' and 'Transaction fees' (if any) and any other relevant revenue lines.

Revenue from revolvers in the numerator comprises 'Interchange', 'Loyalty fee' and 'GST-free Forex fees'. Revenue from revolvers in the denominator comprises 'Interchange', 'Loyalty fee', 'Net interest', 'Card membership fees', 'Forex fees - all' and 'Transaction fees' and any other relevant revenue lines.

You propose to apply the Annualised Recovery Rate to the apportionable GST on Cards Issuing Costs in the following financial year to determine your input tax credit entitlement. For example, the Annualised Recovery Rate based on revenue in the financial year ending 30 September 2009 will be applied to apportionable GST on cards Issuing Costs for BAS periods from 1 October 2009 to 30 September 2010.

You have stated in your ruling request, and illustrated in the additional information supplied, that you have undertaken a substantial amount of work to be able to apply different drivers to different costs, to split the costs into transactor and revolver pools.

In performing this analysis, the difference between using card spend as a driver for all cards issuing costs to applying the number of accounts to the relevant GL accounts as the allocation driver has resulted in a reduction in your input tax credit entitlement by only 1%.

You have noted that applying a different driver to different GL accounts for the purposes of allocating costs between the transactor and revolver pools complicates the apportionment method and imposes significant compliance burden. In addition you note that there is an increased risk of error due to this increased complexity.

Hence, you consider that the appropriate driver in applying the above formula to calculate your entitlement to input tax credits is card spend.

On the basis that card spend is the most appropriate driver available to you in the current circumstances for splitting costs into transactor and revolver pools and that it encompasses all necessary costs applicable to the operation of your credit card business, to the extent that a reduced input tax credit is not available, we are prepared to accept that your proposed apportionment methodology is fair and reasonable.

Question 2

Summary

Yes, you can calculate and apply the revised cards issuing apportionment methodology on an annual basis, provided that this does not result in a distortion of the outcome.

Detailed reasoning

As detailed above, the Commissioner is prepared to accept that the proposed apportionment methodology is fair and reasonable. On the understanding as discussed with you that you undertake an annual rolling review of all accounts, it is considered appropriate that you can apply this methodology consistently, so as to allow for an annual review of the extent of creditable purpose.

Question 3

Summary

Yes, you can implement your revised card apportionment methodology effective from the December 2004 tax period, subject to satisfying all normal requirements of the ATO in relation to substantiation of the revised methodology and this being consistent with prior notification requirements as established in our previous advice.

Detailed reasoning

We are aware that you have made previous representations in regard to this matter, and were advised of our decision in January 2009 that this is acceptable. This ruling affirms our previous decision, and will not disturb that, provided that the facts as outlined at that time remain current and relevant.