Edited version of private ruling

Authorisation Number: 1011772952138

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Ruling

Subject: GST and apportionment

Question

Is the apportionment methodology set out in steps 1 to 11 fair and reasonable for calculating the amount of input tax credits Entity A is entitled to for its acquisitions for the purposes of Division 11 and 15 of the A New Tax System (Goods And Services Tax) Act 1999 (the GST Act)?

Answer

The Commissioner confirms that the apportionment methodology set out in steps 1 to 11 is fair and reasonable for calculating the amount of input tax credits Entity A is entitled to for its acquisitions for the purposes of Division 11 and 15 of the GST Act.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity A is registered for GST and its principal activities are raising capital from the public and investment in Australian and overseas infrastructure and related assets.

Entity A's assets currently include investments in Australia and overseas.

Entity A pays performance and base management fees to Entity B as consideration for the supply of its services as a manager. Largely, these fees are paid in respect of investment management and asset enhancement activities. Entity B provides the service of operating Entity A and carrying out the duties set out in Entity A's management agreement with Entity B. This includes:

· Advice on proposed investment or divestment;

· If the Entity A Board approves an investment, acquisition and management of the investment on behalf;

· Provision of executives as nominees to act as directors of subsidiary entities that hold investments, and where appropriate, making recommendations to appoint nominees to these boards;

· Capital management and financial management recommendations (included but not limited to advice on the issue of securities);

· Recommendations to the Board in respect of various matters (included but not limited to changes to the Constitution, any capital reductions, appointment and dismissal of staff and consultants, and the payment of dividends and interim dividends);

· General fund administration;

· Asset valuations;

· Assistance with financial reporting and budgeting;

· Board reporting in connection with matters on which it provides advice;

· Assistance with litigation management;

· Investor communications and meetings; and

· Provision of suitably qualified personnel to perform the CEO, and CFO roles and the company secretary role.

Methodology

References to Entity A are references to the GST group of which Entity A is the representative member.

Where Entity A exceeds the financial acquisitions threshold, the methodology to be used by Entity A to determine the amounts of input tax credits on acquisitions made for a creditable purpose is as follows:

1. For acquisitions that relate wholly to the making of what would be or are taxable supplies (or would be taxable supplies, but in respect of which section 38-190 of the GST Act applies) Entity A will claim a full input tax credit.

2. For acquisitions that relate wholly to the making of what would be or are particular supplies from time to time consisting of the issue, disposal or redemption of securities which constitute input taxed or GST-free supplies, Entity A will determine the extent of creditable purpose by applying a ratio which, based solely on those securities to be issued, disposed of or redeemed, is determined by the number of securities issued, disposed of or redeemed which are treated as GST-free to the total number of securities issued, disposed of or redeemed.

For the purposes of the above, securities issued, disposed of or redeemed are to be treated as GST-free where the address of the holder recorded on the security (or other) register of Entity A, is a place outside Australia. However, if it is known, or ought reasonably to be known that the security holder has sufficient connection with Australia, further enquiries will be made to determine if the supplies are GST-free under section 38-190 of the GST Act.

3. Entity A will determine the input tax credit entitlement on acquisitions referred to in step 2 by applying the extent of creditable purpose in step 2 to the total GST paid on those acquisitions.

4. For acquisitions that relate wholly to the making of what would be or are input taxed financial supplies consisting of a 'borrowing' which relate to making supplies that are not input taxed, you will claim a full input tax credit.

5. For acquisitions that relate wholly to the making of what would be or are input taxed financial supplies consisting of a 'borrowing' which relates to making supplies that are input taxed, you will not claim a full input tax credit.

For acquisitions that relate wholly to the making of what would be or is a particular Investment (as defined below) and the relevant supply or acquisition-supply of that Investment is or would be GST-free, you will claim full input tax credits.

6. 'Investment' means investment in an asset permitted to acquire or hold under the terms of its Investment Policy. For example, Investments may include (but are not limited to) securities or other interests in Infrastructure Assets, and loans or other financial accommodation provided by you to other offshore entities.

7. For acquisitions that relate wholly to the making of what would be or is a particular Investment and the relevant supply or acquisition-supply of that Investment is or would be input taxed you will claim no input tax credits for GST paid.

8. For the acquisition of that part of manager services relating to the making of what would be or are particular supplies from time to time consisting of the issue, disposal or redemption of Securities in Entity A (which constitute input taxed or GST-free supplies) you will determine the extent of the creditable purpose by applying a ratio which is determined by the number of Securities on issue at the end of the relevant tax period which are treated as GST-free to the total number of Securities on issue at the end of the relevant tax period.

For the purpose of the above:

You will determine that part of the manager services relating to the making of what would be or are particular supplies from time to time consisting of the issue, disposal or redemption of Securities by applying the following ratio:

A / B

Where:

(a) is the number of Australian based employees who work predominantly on Investor Relations, Corporate Communications and/or Compliance & Risk; and

(b) is the number of Australian based employees excluding those employees whose role is predominantly centred on the other operations of the group

The ratio will initially be determined, based on headcount numbers at 1 April 2010 and thereafter, the ratio will be determined annually, based on headcount numbers as at 30 June of each year.

8.2 Securities issued, disposed of or redeemed are to be treated as GST-free where the address of the holder recorded on the security (or other) register, is a place outside Australia. However, if it is known, or ought reasonably to be known that the security holder has sufficient connection with Australia, further enquiries will be made to determine if the supplies are GST-free under section 38-190 of the GST Act.

8.3 This step 8 shall only apply to the acquisition of management services to the extent the consideration for such services comprises base management fees and any direct reimbursement of expenses. It does not apply to the acquisition of management services to the extent the consideration for such services comprises a performance fee or any non-monetary consideration in lieu of a performance fee (in respect of which step 10 below shall apply).

8.4 Further, to the extent management services paid by way of base management fees and any direct reimbursement of expenses do not relate to the making of what would be or are particular supplies from time to time consisting of the issue, disposal or redemption of securities will determine the extent of creditable purpose in accordance with step 10 below.

On 2X March 20XX you confirmed that employees are employed by entities in the Group and some are made available through formalised secondment arrangements. However, not all employees work for another entity. At X April 20XX, the number of employees working predominately on Investor Relations, Corporate Communications and/or Compliance & Risk was XX and the number of other employees was XXX which gave a ratio of 8.57%.

9. You will determine the input tax credit entitlement on acquisitions referred to in step 8 by applying the extent of creditable purpose in step 8 to the total GST paid on those acquisitions.

10. For all other acquisitions (being acquisitions in respect of which the above steps do not apply including but not limited to the acquisition of management services not referred to in step 8), you will determine the extent of creditable purpose by applying the following ratio:

Value of offshore Investments x 100

Value of all Investments

For the purposes of applying the formula:

10.1 For Investments comprising redeemable preference shares, units, shares, stapled securities and any other securities or interests held:

(c) the value of the Investment is per the books and records; and

(d) 'offshore' Investments are taken to be securities or other interests in an entity that either:

(i) does not have a registered office in Australia for the purposes of the Corporations Act 2001 (Cth), or

(ii) does have a registered office in Australia for the purposes of the Corporations Act 2001 (Cth), but it is known that the entity does not carry on any business or activities in Australia at or through a fixed and definite place of its own for a sufficiently substantial period of time or through an agent at a fixed and definite place for a sufficiently substantial period of time.

However, if either paragraph (i) or (ii) above applies to the entity but it is known, or ought reasonably to be known, that the securities have sufficient connection with Australia, further enquiries must be made to determine if the supplies are GST-free under section 38-190 of the GST Act, before including such supplies as offshore investments.

10.2 For Investments comprising loans or other financial accommodation to third parties:

c) the value of the Investment is the amount of the principal outstanding on the loan or other financial accommodation at the end of the relevant tax period, or where you intends to provide a loan or other financial accommodation in accordance with paragraph 10.4(b), the principal amount of the intended loan or other financial accommodation; and

d) 'offshore' Investments are taken to be loans or other financial accommodation made or intended to be made to an entity that either:

(iii) does not have a registered office in Australia for the purposes of the Corporations Act 2001 (Cth), or

(iv) does have a registered office in Australia for the purposes of the Corporations Act 2001 (Cth), but it is known that the entity does not carry on any business or activities in Australia at or through a fixed and definite place of its own for a sufficiently substantial period of time or through an agent at a fixed and definite place for a sufficiently substantial period of time.

However, if either paragraph (i) or (ii) above applies to the entity but it is known, or ought reasonably to be known that the recipient of the supply of the interest in the loan has sufficient connection with Australia, further enquiries will be made to determine if the supplies are GST-free under section 38-190 of the GST Act before including such loans as offshore investments.

10.3 For investments comprising cash or cash equivalents:

(c) the value of the Investment is the amount of the cash or cash equivalent per the books and records of entity A and

(d) "offshore" Investments are taken to be cash or cash equivalent assets held in the accounts of off-shore banks or other financial institutions.

10.4 For a particular tax period, the value of Investments includes:

(c) all Investments made in that period and all previous tax periods, other than Investments that were disposed of in the immediately preceding tax period or any earlier tax period (which are excluded from the formula); and

(d) all Investments that you intend to make in that period or any future period. For these purposes, you will be taken to have the requisite intention where:

(i) the Investment has been approved by the board on or before the last business day of the relevant tax period; and

(ii) in respect of which there is a known date for payment, or where the Investment comprises a loan or other financial accommodation, where there is a known date for provision of the loan or other financial accommodation.

10.5 The formula should exclude any transactions which would unnecessarily distort the resultant ratio.

12. You will determine the input tax credit entitlement on acquisitions referred to in step 10 by applying the extent of creditable purpose in step 10 to the total GST paid on these acquisitions.

To the extent that any input tax credits are not for a creditable purpose, you will consider any entitlements to reduced input tax credits under Regulation 70 of the GST regulations.

On XX March 20XX you also advised us that the group manages other funds and that employees that are included in the numerator 'A' work on other entities. You also provided us with the following practical example:

The April quarterly management fee of $X (inclusive of GST of $X) is used to apportion on the following basis.

At X April 20XX, using the A/B ratio of XX/XXX (employees) results in 8.57% of the management fee applying to issues of securities and the remaining 91.43% are for services not in relation to the issuing of securities.

The 8.57% is further split into foreign ownership of 35.74% and domestic ownership 64.26%.

The proportion of the GST on the management fee relating to investor relations, compliance, etc would be calculated as: XX/XXX x $XXX,000 = $XX,XXX.XX.

The amount of GST would then be recovered with reference to the unitholders and therefore full recovery of GST for the non-resident unitholder related component of $6,126.01 (35.74% of $17,142.86) and a Reduced Input Taxed Credit (RITC) in respect of $11,016.85 (64.26% of $17,142.86) recovered for the resident unitholder related component. Note that input tax credits are claimed on the remaining portion of GST that is not relating to the issue of shares of $182,857.14 under step 10 of the methodology.

Reasons for Decision

Under section 11-20 of the GST Act, an entity is entitled to an 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; and

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

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

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

Subsection 11-15(1) of the GST Act 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) of the GST Act 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 Entity A 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 Entity A is not entitled to input tax credits. The exceptions to subsection 11-15(2) of the GST Act outlined in subsections (4) or (5) of the GST Act have been taken into consideration in the methodology. The exception in subsection 11-15(3) of the GST Act are not relevant for present purposes.

Section 11-25 of the GST Act provides that the amount of input tax credit is equal to the GST payable on the supply of the thing acquired (unless the acquisition made is partly creditable).

Entity A makes GST-free and input taxed supplies. It has provided us with an apportionment methodology that consists of direct and indirect methods for acquisitions made by it in order to separate such acquisitions that are used either wholly for a creditable purpose or a non-creditable purpose. A major acquisition it makes from the manager, namely the services outlined as 'management services', relates to GST-free and input taxed supplies and thus prima facie has a partly creditable purpose as provided for in section 11-30 of the GST Act.

Acquisitions that are partly creditable are 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.

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) outlines the Commissioner's views on apportionment and the methods of calculating the extent of creditable purpose of an entity's acquisitions or importations.

Paragraphs 33 and 73 of GSTR 2006/3 make it clear that the method chosen to allocate or apportion acquisitions between creditable and non-creditable purpose needs to:

· be fair and reasonable;

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

· be appropriately documented in your individual circumstances.

Methods of calculating the extent of creditable purpose are discussed in paragraphs 80 and 81 of GSTR 2006/3:

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 best accords with the basic principles explained above … . 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.

Therefore, the apportionment method adopted must be fair and reasonable in the circumstances of entity A's enterprise and must appropriately reflect the intended or actual use of its acquisitions or importations.

You provided us with a flow chart depicting an actual example of how this method works. Based on the information provided, including this example, we are of the opinion that the apportionment methodology submitted provides a fair and reasonable basis for calculating the extent of creditable purpose for acquisitions of entity A under Division 11 of the GST Act.

The methodology is considered to be fair and reasonable in the circumstances applying at the time of issuing this ruling. If those circumstances should change you may be required to review this methodology to determine if it remains fair and reasonable.