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Ruling

Subject: GST financial supplies and reduced input tax credits

Question 1

Can you claim input tax credits for expenses you incur in share and option trading, such as brokerage, internet expenses, professional journal subscriptions, maintenance of accounts, maintaining a work environment to undertake the administrative and portfolio management of the business and reporting requirement expenses?

Answer

The supply of shares and options through trading are input taxed financial supplies. Where a supply is input taxed, no GST is payable on that supply and no input tax credits can be claimed in respect of expenses incurred to make that supply.

However, you are entitled to claim 75% of the input tax credits for brokerage expenses. You are not entitled to claim input tax credits in respect of any other expenses.

Relevant facts and circumstances

Our records show:

· you are registered for GST

· You conduct a business

Your accounting and administration tasks consume the majority of your time and expenses of management of the portfolios.

You incur the general expenses in relation to your share and option trading business:

· Associated incidental expenses such as reporting requirement expenses.

Your reporting expenses relate to reporting on a spreadsheet for management purposes.

You incur brokerage expense in the course of your share and option trading.

You do not operate a superannuation fund or an investment fund, and you do not prepare auditing records or account for the purpose of preparing tax returns.

The amount of input tax credits to which you are entitled for all the financial acquisitions you have made will not exceed $50,000 in a financial year.

You are seeking advice to interpret the GST law in relation to input taxed supplies, (financial supplies), how the financial acquisitions threshold works and your possible entitlement to reduced input tax credits.

Assumptions

Your only business activity is share and option trading.

Relevant legislative provisions

Section 9-5 A New Tax System (Goods and Services Tax) Act 1999

Subsection 9-10(1) A New Tax System (Goods and Services Tax) Act 1999

Section 9-40 A New Tax System (Goods and Services Tax) Act 1999

Section 11-5 A New Tax System (Goods and Services Tax) Act 1999

Subsection 11-15(2) A New Tax System (Goods and Services Tax) Act 1999

Section 11-20 A New Tax System (Goods and Services Tax) Act 1999

Subsection 29-10(2) A New Tax System (Goods and Services Tax) Act 1999

Section 29-80 A New Tax System (Goods and Services Tax) Act 1999

Section 40-5 A New Tax System (Goods and Services Tax) Act 1999

Subsection 70-5(1) A New Tax System (Goods and Services Tax) Act 1999

Paragraph 9-30(2)(a) A New Tax System (Goods and Services Tax) Act 1999

Subsection 189-5(1) A New Tax System (Goods and Services Tax) Act 1999

Subsection 189-10(1) A New Tax System (Goods and Services Tax) Act 1999

70-5 A New Tax System (GST) Regulations 1999

40-5 A New Tax System (GST) Regulations 1999

Reasons for decision

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that you pay GST on any taxable supplies you make.

Section 9-5 of the GST Act states that, among other things, a supply is not a taxable supply to the extent that it is input taxed.

Subsection 9-10(1) of the GST Act states that a supply is any form of supply whatsoever. Therefore, the supply of shares is a supply for the purposes of the GST Act.

Paragraph 9-30(2)(a) of the GST Act states that a supply is input taxed if it is input taxed under Division 40.

Section 40-5 of the GST Act states that financial supplies are input taxed and that the meaning of financial supplies is given by the regulations.

Under subregulation 40-5.09(1) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations), the provision, acquisition or disposal of an interest in or under securities is a financial supply under item 10 of subregulation 40-5.09(3) of the GST Regulations,(item 10) provided:

(a) the provision, acquisition or disposal is:

(i) for consideration; and

(ii) in the course or furtherance of an enterprise; and

(iii) connected with Australia; and

(b) the supplier is:

(i) registered or required to be registered; and

(ii) a financial supply provider in relation to the supply of the interest.

You have satisfied all the requirements of subregulation 40-5.09(1) of the GST Regulations.

Shares are listed as one of the examples for item 10 under Part 8 of Schedule 7 to the GST Regulations. Therefore, your selling of shares is an input taxed financial supply.

Similarly, the provision, acquisition or disposal of an interest in or under a derivative is a financial supply under item 11 of subregulation 40-5.09(3) of the GST Regulations (item 11).

Options have been listed as one of the examples for item 11 under Part 9 of Schedule 7 to the GST Regulations. Therefore, your selling of options is also an input taxed financial supply.

Under section 11-20 of the GST Act, you are entitled to claim input tax credits in respect of any creditable acquisition that you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

Under paragraph 11-15(2)(a) of the GST Act, you do not acquire a thing for a creditable purpose if the acquisition relates to making input taxed supplies.

Therefore, you will generally not be entitled to claim input tax credits in respect of the shares/options you purchase (as they are not taxable supplies being made to you) or the expenses you incur in respect of selling shares/options (as these expenses are related to making input taxed supplies).

However, you may be entitled to claim input tax credits if you do not exceed the financial acquisitions threshold set out in Division 189 of the GST Act or that your purchase is a reduced credit acquisition set out in Division 70 of the GST Act.

If you make financial supplies and you do not exceed the financial acquisitions threshold, you may be entitled to a full input tax credit for your acquisitions that relate to making financial supplies under the exceptions to the general rule provided by subsection 11-15(4) of the GST Act.

Sections 189-5 and 189-10 of the GST Act set out when an entity will exceed the financial acquisitions threshold.

Subsection 189-5(1) of the GST Act states:

'You exceed the financial acquisitions threshold at a time during a particular month if, assuming that all the *financial acquisitions you have made, or are likely to make, during the 12 months ending at the end of that month were made solely for a *creditable purpose, either or both of the following would apply:

(a) the amount of all the input tax credits to which you would be entitled for those acquisitions would exceed $50,000 or such other amount specified in the regulations;

(b) the amount of the input tax credits referred to in paragraph (a) would be more than 10% of the total amount of the input tax credits to which you would be entitled for all your acquisitions and importations during that 12 months (including the financial acquisitions). '

Subsection 189-10(1) of the GST Act states:

'You exceed the financial acquisitions threshold at a time during a particular month if, assuming that all the *financial acquisitions you have made, or are likely to make, during that month and the next 11 months were made solely for a *creditable purpose, either or both of the following would apply:

(a) the amount of all the input tax credits to which you would be entitled for those acquisitions would exceed $50,000 or such other amount specified in the regulations;

(b) the amount of the input tax credits referred to in paragraph (a) would be more than 10% of the total amount of the input tax credits to which you would be entitled for all your acquisitions and importations during those months (including the financial acquisitions). '

In short, you will exceed the financial acquisitions threshold if you make or are likely to make financial acquisitions where the input tax credits related to making those acquisitions would exceed the lesser of either:

· $50,000 or such other amount specified in the regulations; or

· • 10% of the total amount of input tax credits to which you would be entitled.

The amount of input tax credits you are entitled to from those financial acquisitions is not likely to exceed $50,000 in respect to share and option trading.

Your only enterprise activity is share and option trading which make only input taxed financial supplies. Therefore, the input tax credits relating to making financial acquisitions would have exceeded 10% of the total amount of input tax credits to which you would be entitled.

Consequently, you have exceeded the financial acquisitions threshold for the purposes of Division 189 of the GST Act. Therefore, you are not entitled to input tax credits in respect of acquisitions relating your share and option trading as the exclusion requirements to the general rule under subsection 11-15(4) of the GST Act are not met.

Under Division 70 of the GST Act, you may be able to claim a reduced input tax credit in respect of acquisitions related to the making of financial supplies.

Section 70-5(1) of the GST Act states:

(1) The regulations may provide that acquisitions of a specified kind that relate to making *financial supplies can give rise to an entitlement to a reduced input tax credit. These are reduced credit acquisitions. ...

(2) For each kind of *reduced credit acquisition specified, the regulations must specify a percentage to which the input tax credit is reduced.

Brokerage is a reduced credit acquisition under item 9 of subregulation 70-5.02(2) of the GST Regulations. Accordingly, there is an entitlement to reduced input tax credit of 75% of the GST paid for the acquisition of brokerage services.

The amount of reduced input tax credit is 75% of the GST paid as mentioned at regulation 70-5.03 of the GST Regulations.

Therefore, you are entitled to claim an input tax credit equal to 75% of the GST paid in respect of the brokerage fees. You are not entitled to claim input tax credits in respect of your other expenses, This is because they do not fall within any of the items listed as reduced credit acquisitions in subregulation 70-5.02(2) of the GST Regulations.