Edited version of private ruling

Authorisation Number: 1011592183862

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Ruling

Subject: GST & Managed Discretionary Account Service

Questions

(1) Is the Managed Discretionary Account Service (MDAS) which invests in and manages portfolios of securities and cash securities for Clients an 'entity' for the purposes of Division 184 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer: Yes, the MDAS which invests in and manages portfolios of securities and cash securities for Clients is an 'entity' for the purposes of Division 184 of the GST Act.

(2) Do the activities of the MDAS constitute an 'enterprise' for the purposes of section 9-20 of the GST Act?

Answer: Yes, the activities of the MDAS constitute an 'enterprise' for the purposes of section 9-20 of the GST Act.

(3) Is Entity A as the Operator of the MDAS entitled to register for GST under Division 23 of the GST Act?

Answer: Yes, Entity A as the Operator of the MDAS is entitled to register for GST under Division 23 of the GST Act.

(4) Do fees paid for the respective acquisitions by Entity A as the Operator of the MDAS constitute 'reduced credit acquisitions' under section 70-5 of the GST Act?

Answer: Yes, fees paid for the respective acquisitions by Entity A in its capacity as Operator of the MIS are reduced credit acquisitions, under section 70-5 of the GST Act.

Relevant facts and circumstances

Entity A enters into agreements with Clients (investors) in relation to the operation of the MDAS.

Under a standard MDAS Contract, the Client engages Entity A as the MDAS Operator in relation to one or more of its portfolios of securities and cash securities. We have been provided with a copy of the standard MDAS Contract and Product Brochure.

Entity A as the MDAS Operator will in effect be the responsible entity (RE) and will provide RE, investment and administration services as and when required.

The MDAS is regulated under an Australian Securities Investment Commission (ASIC) Class Order CO 04/194 (the Class Order) dated 11 March 2004 issued under the Corporations Act 2001, and operates in accordance with the ASIC Regulatory Guide 179.

Under the MDAS Contract, Clients are required to make a selection of Investment Options offered by the MDAS.

The Client delegates the day to day investment decision making to Entity A in its RE capacity. Each Investment Option is managed by one or more Investment Manager(s) appointed by and operating as part of the MDAS provided by Entity A.

This is in contrast to an Investor Directed Portfolio Service where the investment decisions are made by the clients themselves.

The investments (i.e. assets) held for a particular Client's MDAS are managed together with the investments (i.e. assets) of all other MDAS Clients' that have elected to have their portfolios managed under the same Investment Option.

Upon the execution of the MDAS Contract with a Client, Entity A and its agents are authorised to select and acquire a portfolio of assets for the Client, undertake transactions in relation to securities and other assets in the portfolio and take such steps as are required to manage the portfolio of assets in an efficient and appropriate manner.

Under the MDAS, the Client appoints Entity A as the Custodian for all of its assets invested in one or more Investment Options.

The appointment is effected pursuant to the Custody Agreement.

The relevant Agreements authorise Entity A to hold the assets that are generally fungible, in one or more omnibus accounts together with investments and other assets of the same descriptions held by Entity A for its other MDAS Clients.

Accordingly, under the MDAS, a Client does not have any right to any specific assets and has only an entitlement to an amount of securities and other assets of the same class and denomination equivalent to the assets held for the Client.

To comply with the requirements of its Australian Financial Services Licence and to provide additional protection to Clients, Entity A, as the MDAS, has entered into a sub-custody agreement with Entity B.

Under the sub-custodian arrangement, all of the securities and other assets which are to be held by Entity A are held by Entity B , for and on behalf of Entity A.

Thus, Entity A holds various assets of similar type and description together as a 'Trustee' for all its MDAS Clients. The MDAS Contract and ASIC Regulations applicable to the MDAS allow for pooling of cash by way of operating one or more omnibus accounts by Entity A.

It was confirmed that the pooling of cash was done merely for administrative purposes. However, each client's entitlement is recorded and held on trust.

Entity A, as the MDAS Operator, is entitled to engage third parties such as advisers and investment managers to assist it in performing the services under the MDAS Contract.

As the MDAS Operator Entity A carries out the following activities on a regular basis:

a. Managing applications and receipt of funds and assets to invest through the MDAS;

b. Managing withdrawal of funds from the MDAS;

c. Managing and investing the MDAS assets;

d. Engaging investment managers and other agents to assist in the activities of the MDAS;

e. Collecting, calculating and distributing income;

f. Maintaining and managing the omnibus accounts;

g. Responding to corporate actions arising from securities held in the MDAS (such as placements, rights issues and takeover offers); and

h. Managing the MDAS.

Entity A is entitled to remuneration for operating the MDAS and performing its duties under the MDAS Contracts.

Further Features & Advantages of MDAS

The MDAS provides Clients with a number of Investment Options including professionally constructed and managed investment portfolios comprising securities, such as Australian listed shares and cash. Each portfolio is distinctive in the type of shares invested, cash component, investment strategy and risk level.

Through the MDAS, Clients are able to access a range of different Investment Options. The Clients obtain professional investment management of their investment portfolio through the Investment Options of the MDAS.

The professional investment managers are appointed by Entity A as the MDAS Operator, to manage and actively monitor the Investment Options.

Entity A is responsible for ensuring that investment managers manage the Investment Options in accordance with the investment strategies and asset allocation guidelines.

The investments are held in the name of Entity B as the sub-custodian acting for Entity A.

The Clients therefore do not acquire any direct interest in securities and other assets of the Investment Options. These rights are acquired by Entity A (through Entity B) on behalf of the MDAS.

The Clients retain entitlement to the underlying shares and cash. If the Clients decide to leave the MDAS they can request an in-specie transfer of the underlying shares and cash.

Entity A as the MDAS Operator and the investment managers are responsible for making and implementing decisions in respect of corporate actions. These actions include rights issues, placements and takeover offers that arise from securities held under Investment Options.

Also, Entity A as the MDAS Operator provides a number of services to Clients in respect of transfers of shares and assets, switching between portfolios, withdrawals, rebalancing portfolios, trading consolidation and netting and reporting.

The MDAS generates commercial benefits for Clients by conducting trading on a daily aggregate basis across all Portfolios to take advantage of scale and netting opportunities. This has the potential to reduce transaction costs for all Clients.

Entity A also provides certain record keeping and online reporting services to all of the Clients in accordance with the Class Order. The Clients benefit by being provided with details of every investment held in the investment portfolio. By using the MDAS, the administrative costs that would otherwise be incurred by each Client if they were to procure the services individually from other service providers, is reduced.

We have essentially agreed with your reasons and conclusions in relation to submissions you made for these four questions with a minor variation to the reasoning in our last response.

(1) Is the Managed Discretionary Account Service (MDAS) which invests in and manages portfolios of securities and cash securities for Clients an 'entity' for the purposes of Division 184 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Whether or not an MDAS is an entity within the meaning given by the GST Act is dependent on an assessment of the surrounding facts of each case.

For GST purposes, the term 'entity' is defined by section 195-1 of the GST Act to have the meaning given by section 184-1 of the GST Act.

Based on the facts, the most relevant entity is that of a trust. The meaning of 'entity' includes a trust under paragraph 184-1(1)(g) of the GST Act.

In recognition of the fact that a right or obligation cannot be conferred or imposed on a trust because it is not a separate legal person under the common law, subsection 184-1(2) of the GST Act indicates that the trustee of a trust, who is a legal person, is to be recognised as an entity. This is because a trustee may create rights and have obligations in relation to trust property.

Subsection 184-1(3) of the GST Act confirms that a legal person including a trustee, can act in a number of capacities and is taken to be a different entity in respect of those capacities. Therefore, an entity acting as a trustee of a trust can be an entity in its own right as well as a different entity in respect of its trustee capacity.

These concepts are further confirmed at paragraphs 68 and 71 to 83 of Miscellaneous Tax Ruling MT 2006/1: The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1).

In summary, while the terms 'trust' and 'trustee' are not defined in the GST Act, the Commissioner considers that a trust will necessarily exist where the following elements are evident in a particular relationship:

· an intention to create a trust (in the case of an expressed trust);

· one or more beneficiaries;

· property to which the trust obligations attach;

· a trustee, that is, the entity having the obligation to hold property on the terms of the trust; and

· a personal obligation attaching to the property to deal with the property on the terms of the trust.

In this case:

· Each MDA has a trustee being Entity A and is established under the relevant MDAS contract;

· each client has a beneficial entitlement to the assets;

· Entity A holds legal title to the assets notwithstanding that it has the right to appoint a custodian under an MIS. Therefore, given that each client is absolutely entitled to all income and amounts standing to their credit in the MDA, subject to any liabilities, this indicates that potentially separate individual trust exists between Entity A and each MDAS client.

· The assets are capable of being held in trust ;and

· Under the MDAS contract there is an obligation to deal with the trust property for the benefit of the beneficiaries.

Furthermore, the MDAS is governed by the Class Order. The Class Order defines an MDAS as a Managed Investment Scheme (MIS).

The benefits of such a scheme are outlined in the facts above. In addition to these benefits, there is also the requirement that all investors' cash contributions are processed through a single trust account held with an authorised deposit-taking institution (ADI).

This pooling of funds provides Entity A with the practical means by which the activities of the MDAS can be facilitated. That is, when investments are bought and sold this account would be debited and credited respectively. This indicates the existence of a trust relationship in respect of this single bank account.

The existence of a trust in respect of the single bank account held with the ADI, together with the above mentioned collectively provided benefits indicates a separate overall trust in existence for carrying on the MDAS activities.

Therefore, in substance, the individual trusts co-exist with an overall trust relationship that practically facilitates the operation of the MIS activities. This overall trust relationship is regarded as a trust entity for the purposes of the GST Act.

(2) Do the activities of the MDAS constitute an 'enterprise' for the purposes of section 9-20 of the GST Act?

The term 'enterprise' is defined in subsection 9-20 (1) of the GST Act to include an 'activity, or series of activities, done in the form of a business'.

In this regard, 'an activity or series of activities' is essentially any act or series of acts that an entity chooses to do. The acts can range from a single transaction to groups of related transactions or to entire operations of the entity. With regard to the words 'in the form of', they have the effect of extending the meaning of 'enterprise' beyond entities carrying on a business. Accordingly, an enterprise will include entities that carry out activities that, while they are not sufficient to meet the criteria of being regarded as a business, have the appearance or characteristics of business activities.

As indicated above, there is an overall trust relationship facilitating the operation of the MDAS activities. In the context of this overall trust relationship, Entity A as Operator would undertake a series of activities such as exercising its investment discretion, acquiring and disposing of investments, managing the investments and pooled monies and various other associated activities.

These activities are of a commercial nature and therefore, done in the form of a business. As such, the activities of the overall trust relationship are considered an enterprise.

(3) Is Entity A as the Operator of the MDAS entitled to register for GST under Division 23 of the GST Act?

Subsection 23-10(1) of the GST Act provides that you may be registered under the GST Act if you are carrying on an enterprise (whether or not your GST turnover is at, above or below the registration turnover threshold').

Section 195-1 of the GST Act provides that when the expression 'you' is used in the GST Act, it applies to entities generally.

As outlined above the MDAS constituted an entity namely, a trust.

As it is the operation of the overall trust relationship which gives rise to cost reductions through carrying out transactional and administrative functions on a collective basis, it is the overall trust relationship that should be recognised for registration purposes.

As such, it is the entity in its capacity of Operator of the MDAS namely, Entity A that should be registered for GST purposes in respect of the overall trust relationship.

(4) Do the fees paid for the respective acquisitions by Entity A as the Operator of the MDAS constitute 'reduced credit acquisitions' under section 70-5 of the GST Act?

Division 11 of the GST Act deals with entitlement to input tax credits. Section 11-20 of the GST Act provides for an entitlement to an input tax credit for any 'creditable acquisition' made by an entity. Section 11-5 indicates that an entity makes a creditable acquisition if:

· it acquired anything solely or partly for a creditable purpose; and

· the supply to it is a taxable supply; and

· it provides, or is liable to provide, consideration for the supply, and

· it is registered or required to be registered for GST.

Creditable purpose is provided for in section 11-15 of the GST Act. Relevantly, that section provides:

(3) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

(4) 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;

Entity A as Operator of the MDAS will acquire services from Entity A in its own or corporate capacity for the purposes of carrying on the MDAS enterprise.

However, these acquisitions are related to financial supplies that are input taxed, namely dealings with an interest in the MDAS (which is essentially an MIS) and other security interests mentioned in item 10 in the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

As a consequence, most acquisitions made by Entity A would be denied creditable purpose and no input tax credits would arise under Division 11 of the GST Act.

However, in some cases, acquisitions that relate to making financial supplies may attract a reduced input tax credit if these acquisitions are listed, relevantly, in regulation 70-5.02 of the GST Regulations. These acquisitions are termed 'reduced credit acquisitions'. In the case of these acquisitions, Entity A will be entitled to claim reduced input tax credits (RITC) equivalent to 75% of the GST included in them.

You submit that the services provided by Entity A in its own or corporate capacity consist of responsible entity services such as transaction processing services, portfolio management services, administration services, investment management services and adviser services and that they fall within the meaning of 'reduced credit acquisitions' in the GST Regulations.

You then submit these fees should not be broken down for each of these heads because they fall within the genus of single responsible entity fees.

However, as advisory services do not attract a RITC, you submit that such financial advisory services are ancillary or incidental to the services generally provided as a single responsible entity, and no part of the fees received by Entity A need to be separately allocated to this service.

In addition and in the alternative you submit that the acquisitions also fall within the following relevant items in subregulation 70-5.02(2) of the GST Regulations:

· Item 23(a), (b), (c) and/or (d);

· Item 24;

· Item 9; and

· Item 31.

Notwithstanding that the acquisitions fall within the above items and also possibly other items, your main submission rests on item 23(d), which deals with single responsible entity services for funds management services. The reason for this is because overall Entity A is providing an investment portfolio management function for fees in respect of funds under administration with the MDAS.

We agree that Entity A is acquiring investment portfolio management functions from Entity A in its own capacity.

Therefore, it is our view that item 23(d) best characterises this acquisition as the acquisition is made to enable Entity A to discharge its responsible entity responsibilities.

Support for this view can be found in paragraphs 520 to 528 of GSTR 2004/1. The paragraphs are in the following terms (footnotes omitted):

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.

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 obligations owed by an entity as a consequence of having scheme property vested in them, on behalf of the scheme members.

527. A single responsible entity can act in a number of capacities (such as, funds manager, administrator or trustee). The services of the single responsible entity acting in each capacity may be acquired as a separate and distinct service. In reality, the entity may act in all of these capacities within a single supply of services.

528. Consequently, a fee charged for acting as a single responsible entity need not be broken down into the parts relating to funds management, administration or trustee services for the purpose of determining an entitlement to reduced input tax credits under item 23. However, where the services rendered by the single responsible entity are beyond the scope of funds management, administration and trustee services, the acquirer must objectively determine whether the services are ancillary, incidental or integral to those of acting as a single responsible entity.

We also agree with you in principle that Adviser Services provided in the context of discharging a single responsible entity function may be ancillary or incidental to the single responsible entity function and may need not be separated. However, we advise that you should self assess this issue based on the principles outlined in Goods and Services Tax Ruling GSTR 2001/8 Goods and Services Tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8).