Edited version of private ruling

Authorisation Number: 1011777006386

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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)?

Answers:

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 a registered managed investment scheme.

Entity A is registered for GST and its principal activities are raising capital from the public and investment in a broad range of securities in Australian and overseas 'infrastructure investments'.

Its assets currently comprise a variety of shares in Australian companies and trusts and overseas companies and trusts.

Management fee

Entity A pays Entity B a management fee as consideration for the supply of its services as the Responsible Entity and Manager. In summary, Entity B provides the service of operating Entity A and carrying out the duties set out in Entity A's Constitution and Management Agreement. This includes:

· Investing Entity A's trust assets directly in infrastructure investments;

· Raising funds on behalf of Entity A;

· Arranging for and managing the maintenance of the registry of unit holders;

· Issuing and redeeming Entity A's units, options or other instruments;

· Valuing the assets of Entity A;

· Determining trust income and making distributions to or on behalf of Entity A's unit holders; and

· On-going management and administration of Entity A in accordance with its statutory obligations, such as preparing accounts and financial reports, and preparing prospectus and product disclosure requirements of the Corporations Act 2001.

Applicable Methodology

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 options, units, or other securities (collectively '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, Entity A 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, Entity A will not claim a full input tax credit.

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

'Investment' means investment in an asset Entity A is permitted to acquire or hold under the terms of its Trust Deed and Management Agreement (as amended from time to time). For example Investments may include, but are not limited to securities or other interests in Portfolio Investments (as defined in Entity A's Trust Deed and Management Agreement), and loans or other financial accommodation provided by Entity A to other entities.

7. For acquisitions that relate wholly to the making of what would be or is a particular Entity A Investment and the relevant supply or acquisition-supply of that Investment is or would be input taxed Entity A 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), the Entity 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:

8.1 Entity A will determine that part of the responsible entity 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 a particular ration.

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 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.

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 in Entity A, Entity A will determine the extent of creditable purpose in accordance with step 10 below.

9. Entity A 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), Entity A will determine the extent of creditable purpose by applying a particular ratio:

10.1 For Investments comprising Securities held by Entity A, various definitions were provided to the Tax Office.

10.2 For Investments comprising loans or other financial accommodation by Entity A, various definitions were provided to the Tax Office.

10.3 For investments comprising cash or cash equivalents, various definitions were provided to the Tax Office.

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

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

11. Entity A 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, Entity A will consider any entitlements to reduced input tax credits under Regulation 70 of the GST regulations.

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

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 its 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.