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Ruling

Subject: GST & Entitlement To Reduced Input Tax Credits (RITC) by Incapacitated Entities

Questions

1. Were the debt collection services acquired by you from X during receivership constitute a reduced credit acquisition (RCA) under Item 17 in subregulation 70-5.02(2) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) and therefore, entitled to a reduced input tax credit (RITC) at the rate of 75%?

2. Were the arranging services acquired by you from Y during the receivership constituted a RCA under Item 9 in subregulation 70-5.02(2) of the GST Regulations and therefore, entitled to a RITC at the rate of 75%.

Decisions

1. Yes, the debt collection services acquired by you from X during your receivership constitute an RCA under Item 17 in subregulation 70-5.02(2) of the GST Regulations and therefore, you are entitled to a RITC at the rate of 75%.

2. Yes, the arranging services acquired by you from Y during your receivership constitute an RCA under Item 9 in subregulation 70-5.02(2) of the GST Regulations and therefore, you are entitled to a RITC at the rate of 75%.

Relevant facts and circumstances

You carried on an enterprise in relation to securities lending, borrowing and money lending activities as follows:

· you received cash and/or securities from clients, which in turn provided by you to a number of financiers in return for cash collateral payments;

· you then provided the cash collateral payments to your clients for the purpose of acquiring additional securities under the securities lending arrangements;

· your clients included both Australian residents and non-residents. The financiers included a number of banks;

· you also provided cash loans to a variety of entities and individuals;

In conducting these activities, you made input taxed supplies to Australian resident clients and financiers and GST-free supplies to non-resident clients.

Appointment of receivers and managers

A few years ago, one of your secured creditors appointed two individuals as your receivers and managers.

You were registered for GST prior to the appointment of receivers and managers. Following the appointment of receivers and managers, you were registered for GST by the receivers and managers in their capacity as your representative. You are not a member of a GST group.

You were owed debts, predominantly consisting of loans to different clients and securities lent under a securities lending agreement.

The loans included loans made to clients, associated companies and individuals, banks and childcare centres.

Client account balances were determined at the closure of the client accounts as a result of:

· clients requesting their accounts be closed following the appointment of receivers and managers;

· debtor clients failing to meet margin calls issued by the receivers and managers within the appropriate time; or

· creditor clients accounts being closed upon the appointment of liquidators.

Whether a client account balance was in debit or credit at the time of closure of the account was dependant on whether the client was your debtor or creditor. To the extent that a client had a debit balance, the client was your debtor.

Securities lent under the securities lending arrangement included shares in ASX listed companies and shares in unlisted companies.

Representatives of incapacitated entities

It is common practice for registered receivers and managers who act as external administrators to be owners and/or managers of a business. This is the case in relation to your external administration, with the receivers and managers also being partners of a major accounting firm. However, it is the individuals and not the businesses with which they may be associated, that are appointed as external administrators of a company. Therefore, the two individuals rather than the accounting firm were your receivers and managers.

Acquisition of services by you during the receivership

Pursuant to the powers under section 420(p) of the Corporations Act 2011, various services have been acquired by the receivers and managers acting in their capacity as your receivers and managers, in respect of which goods and services tax (GST) has been incurred.

Service providers

X was retained to pursue and collect your outstanding debts.

Y was retained in relation to the sale of shares held by you in a number of unlisted companies.

Services provided by X - debt collection services

The debt collection services supplied by X to you included:

· preparation and analysis of accounts, reports and other documentation in order to identify and quantify debts owed to you;

· review and investigation of a variety of loan documentation to determine amounts owed to you in respect of loans made;

· calling and writing to debtors to seek to recover debts;

· meeting with debtors to seek to recover debts;

· preparation and lodgement of statutory demands, letters of demand, caveats, mortgages and other related documents in the course of the debt recovery process;

· preparation and lodgement of various documentation, including proof of debt forms;

· undertaking informal and formal negotiations and mediations to recover debts;

· drafting and executing settlement agreements with debtors and collection under the same;

· preparation of reports and meetings with the secured creditor to discuss the progress of the recovery of debts and to decide on appropriate courses of action in relation to the same; and

· Initiating insolvency proceedings against debtors.

Litigation services

The following services supplied by X to you are litigation services directed towards the collection of debts:

(a) preparation and lodgement of various documents including proof of debt forms;

(b) initiating and conducting insolvency proceedings;

(c) preparation of statutory demands, letters of demand and other related documents to invoke the debt recovery process;

(d) meetings and conferences with the receivers and managers and a legal firm with respect to litigation proceedings for the recovery of debts; and

(e) providing assistance to the legal firm with the conduct of litigation proceedings undertaken in respect of recovery of debts, including the preparation and execution of affidavits and document discovery.

Document lodgement services

The following services provided by X to you are document lodgment services directly connected to the collection of debts:

· preparation and lodgment of various debt-related documentation, including proof of debt forms;

· lodgment of insolvency documentation; and

· assistance with the preparation and lodgement of court documents ie. affidavits, statements of claim etc.

Services provided by Y - arranging services

You engaged Y to arrange for the disposal of certain securities held by you. These securities are thinly traded and professional service providers with the relevant expertise are required to assist your receivers and managers with the realisation of the securities for an optimal value.

Recently, a partner of Y confirmed that Y was the broker that arranged the share disposal. In particular, the services provided by Y included:

· the evaluation of potential counterparties to the transaction and the likely acquisition rationales to be employed in the transaction;

· assistance with the preparation of key selling documents;

· advice and dealings with potential buyers during the negotiation and in anticipation of completion of a sale transaction;

· assistance with the preparation and pre-marketing of the proposed sale, including preparing a strategic work plan, making early stage contact with potential buyers, identification of potential issues in the divestment process and the minimisation of these and the preparation of an information memorandum for the sale process; and

· assistance with the marketing of the transactions including conducting the negotiations and execution of confidentiality agreements with potential buyers, agreeing a shortlist of potential buyers, distribution of information memoranda alluded to above, review of the draft sale and purchase contracts and the facilitation of the provision of final offers from short-listed potential buyers.

General

You are over the financial acquisition threshold (FAT).

No input tax credits (ITC) or RITCs have been claimed by you on services acquired from the service providers after appointment of the receivers and managers.

Relevant legislative provisions

Section 58-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act);

Subsection 40-5 of the GST Act;

Subsection 11-5 of the GST Act;

Sub-regulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Sub-regulation 70-5.02 of the GST Regulations

Reasons for the decisions

Division 58 of the GST Act ensures that a transaction by a representative of an incapacitated entity has the same consequences under the GST Act, as if the incapacitated entity had no representative. Subsections 58-5(1) and (2) of the GST Act confirms this rule and state:

(1) Subject to this Division, any supply, acquisition or importation by an entity in the capacity of a *representative of another entity that is an *incapacitated entity is taken to be a supply, acquisition or importation by the other entity.

(2) Subject to this Division, any other act or any omission of an entity in the capacity of a *representative of another entity that is an *incapacitated entity is taken to be an act or omission of the other entity, but only for the purposes of determining, for the purposes of the *GST law:

(a) whether a supply or importation is a *taxable supply or *taxable importation, or the amount of GST payable on the supply or importation; or

(b) whether an acquisition or importation is a *creditable acquisition or *creditable importation, or the amount of the input tax credit for the acquisition or importation; or

(c) …….

* indicates a term defined in section 195-1 of the GST Act.

However, in most cases, the representative is responsible for the GST, input tax credit (ITC) or adjustments that would otherwise arise to the entity (or the representative member of its group) from a supply, acquisition or importation that falls within the scope of the representative. This is confirmed in section 58-10 of the GST Act.

Section 195-1 of the GST Act defines an incapacitated entity as an entity that is in liquidation or receivership or that has a representative.

Claiming input tax or reduced input taxed credits

In order to be entitled to an input tax credit, an entity must make a creditable acquisition. To be a creditable acquisition under section 11-5 of the GST Act, the thing must be acquired solely or partly for a creditable purpose. Subsection 11-15(1) of the GST Act provides that an entity acquires a thing for a creditable purpose to the extent that it is acquired in carrying on its enterprise. However, under paragraph 11-15(2)(a) of the GST Act, you do not acquire a thing for a creditable purpose to the extent that it relates to making supplies that would be input taxed.

Financial supplies

Subsection 40-5(1) provides that a financial supply is input taxed.

The provision, acquisition or disposal of something is a financial supply where it satisfies the relevant requirements of subregulation 40-5.09 of the GST Regulations.

The table in subregulation 40-5.09(3) contains eleven categories of interests, the provision, acquisition or disposal of which would constitute a financial supply where the requirements of subregulation 40-5.09(1) are satisfied.

Item 2 (debt and credit arrangements) and item 10 (securities) of subregulation 40-5.09(3) are relevant in your case. You made loans to various debtors and also disposed your shareholdings. Therefore, if you meet the conditions in subregulation 40-5.09(1), you would make financial supplies. We have not been asked to rule on this issue and therefore, our analysis will assume that you have made the relevant financial supplies and the acquisitions from X and Y were directly related to making these financial supplies.

In this case, the acquisition of services from X and Y related to making input taxed financial supplies. Furthermore, you are over the financial acquisitions threshold (FAT). Therefore, the acquisition of the respective services from X and Y did not have a creditable purpose. However, section 70-5 of the GST Act provides that specified acquisitions that relate to making input taxed financial supplies, known as reduced credit acquisitions, can give rise to a reduced input tax credit. The percentage of the reduced input tax credit is 75%. Subregulation 70-5.02(2) of the GST Regulations provides a table of 31 items. The acquisition of something that is covered by an item in this table will be a reduced credit acquisition and you will be entitled to a reduced input tax credit accordingly.

Therefore the issues to be determined are if the listed acquisitions from X and Y are debt collection and arranging services respectively.

Debt collection services

Item 17 of subregulation 70-5.02(2) of the GST Regulations (item 17) allows a RITC for certain specified debt collection services. Item 17 states:

'Debt collection services'

(a) debt recovery;

(b) litigation;

(c) lodgment of documents;

(d) by financial supply facilitator, managing the recovery of sums due by borrowers

The Commissioner's view on item 17 is provided at paragraph 425 of Goods and Services Tax Ruling GSTR 2004/1 - Goods and Services Tax: Reduced Credit Acquisitions (GSTR 2004/1) which states that:

425. Item 17 provides an exhaustive list of debt collection services, the acquisition of which may be reduced credit acquisitions under that item. Debt collection in this context, refers to taking action to recover overdue debts. The acquisition of services not mentioned in items 17(a) to 17(d) is not a reduced credit acquisition unless it is covered by another item in subregulation 70-5.02(2).

Furthermore, the Commissioner at paragraphs 426, 432 and 433 of GSTR 2004/1 elaborates the boundaries of a debt collection service for the purpose of a RITC and states:

426. Before the acquisition of a particular service can be a reduced credit acquisition mentioned in item 17, the service must do more than merely relate, or contribute, to the service mentioned.

Example 51 - not a debt recovery service

432. Moodcool Pty Ltd, a motor vehicle finance company, repossesses motor vehicles as part of its recovery activities for overdue debts. Moodcool Pty Ltd engages Tony's Towing to tow the vehicles being repossessed to Moodcool's holding yard.

433. The service acquired from Tony's Towing is a towing service to recover the vehicles, and is not a debt recovery service under item 17(a).

434. If the service acquired from Tony's Towing was part of a complete debt recovery service supplied by Tony, it would be a component of a service, the acquisition of which would be a reduced credit acquisition.

In applying the principles outlined in paragraph 426 of GSTR 2004/1, it is unlikely that the following services would be debt collection services:

· preparation and analysis of accounts, reports and other documentation in order to identify and quantify debts owed to you;

· review and investigation of a variety of loan documentation to determine amounts owed to you in respect of loans made.

This is because these services are more likely to relate or contribute to debt collecting. However, by virtue of the principle outlined in paragraph 434 of GSTR 2004/1, it would be possible to argue that these services were part of a complete debt recovery service supplied by X and therefore, all the services listed under debt collection services in the facts fall within the scope of debt collection services and/or debt recovery services under item 17(a).

Litigation services

The Commissioner at paragraph 435 of GST 2004/1 states:

Item 17(b) - litigation

435. Acquisitions of litigation services that make up the litigation process for the purposes of debt collection are reduced credit acquisitions.

436. It is not enough that an acquisition relates to litigation in some way, or that the activity is preliminary to or follows from litigation. Specifically, the litigation must be a debt collection service, that is, it must be directed towards collection of a debt. Litigation, in this context, is 'the conduct of legal proceedings by parties before a court'.

The litigation services acquired by you are clearly incurred to ensure the collection of the respective debts. Therefore, they fall within item 17(b) of subregulation 70-5.02(2) of the GST Regulations.

Document lodgment services

The Commissioner at paragraph 439 of GSTR 2004/1 in relation to lodgment of documents states:

Item 17(c) lodgment of documents

439. There are two broad classes of document lodgments commonly undertaken as debt collection services. One is the lodgment of documents at court to start legal action. This class also includes all subsequent documents, such as enforcement warrants. The second class includes documents lodged at titles offices. These documents are to register writs on land. Where these services are carried out as part of a debt collection service, the acquisition of those services is a reduced credit acquisition. For example, where a creditor engages a solicitor to lodge documents at the relevant titles office, the acquisition of the solicitor's service is a reduced credit acquisition if the lodgment of documents is directly connected to the collection of a debt.

The services acquired from X fall within the scope of document lodgement services as they are for the commencement and progression of legal action to collect the respective debts.

Therefore, in conclusion, the respective services acquired from X are within the scope of item 17 and you will be entitled to claim a RITC provided you hold a valid tax invoice.

Arranging Services

The term 'arrangement' is discussed in paragraphs 287 to 291 of GSTR 2004/1 as involving the preparation, planning and settlement of the details of the acquisition of an interest in a security. It is a term that connotes an active, as opposed to passive or minor role in relation to the acquisition of the security in order for it to have arranged the acquisition.

Further, arrangement typically requires the financial supply facilitator to play a significant, if not dominant, role in all three elements of the preparation, planning and settlement of the acquisition of an interest in a security. Thus, the entity providing the service of arrangement of the supply being made by the financial supply provider must have substantial control over the necessary acquisitions and processes and be charged with the responsibility of facilitating the transaction from formation to completion.

Paragraph 291 of GSTR 2004/1 further notes that it is the nature of the services undertaken that will determine whether a service is the arrangement of a transaction, not the name applied to those services.

Under item 9 in subregulation 70-5.02(2) of the GST Regulations, the acquisitions of arrangement, by a financial supply facilitator, of the provision, acquisition or disposal of an interest in a security, include the following are RITCs:

(a) order placement and trade execution;

(b) clearance and settlement of trades;

(c) management of the issue of securities, including rights and bonus issues;

(d) arranging flotation and privatisations;

(g) performing a settlement, including issue of drafts and encashment;

(h) other securities transactions, including lodgement, withdrawal and exchange control;

(i) underwriting, except a matter that is described in the table in regulation 40-5.09

A 'financial supply facilitator' is defined in regulation 40-5.07 of the GST Regulations to be an entity facilitating the supply of an interest for a financial supply provider.

The word 'facilitates', as evidenced by paragraphs 30 - 35 of GSTR 2004/1, requires that an entity have an active, rather than a passive or minor role.

A financial supply facilitator facilitates the acquisition of an interest, where its activities have the effect of helping forward or assist a particular financial supply, rather than where those activities simply assist the financial supply provider.

It follows that the activities of a financial supply facilitator must have a sufficient nexus with the acquisition of an interest by a financial supply provider.

A sufficient nexus requires that there be an identifiable association with the acquisition that goes beyond a mere general association. An identifiable association does not mean that the activities have to be directly linked to the acquisition. However, it does require that there be a substantial connection so as to exclude activities that are only generally related. The activities must relate to and assist a particular supply, not merely contemplated supplies. In the absence of this identifiable association, an entity will not be a financial supply facilitator of the supply of an interest.

It follows that it is only when an entity is carrying out activities that are sufficiently or substantially identifiable with the actual financial supply being made, such that they help forward or assist the financial supply, that the entity can be said to be a financial supply facilitator.

In analysing the arranging services provided by Y, we are satisfied that it takes an active, rather than a passive role in assisting you with the disposal of your securities. Therefore, we are of the view that Y constitutes a financial supply facilitator as per the explanation in paragraphs 30-35 of GSTR 2004/1.

The next issue therefore, is to determine if Y is an arranger. Y took a significant role in the disposal of the respective securities. The activities it undertook clearly fall within the realm of planning, preparing and settling of the disposal of the respective securities. We are therefore, satisfied that you qualify in principle for RITCs under item 9 of the GST Regulations.